Theory Exam Flashcards
Cost accounting is mainly concerned with
A) making a financial plan for implementing management decisions
B) cost accumulation for inventory valuation to meet the requirements of external reporting and internal profit measurement
C) the provision of information to parties that are external to the organization
D) the provision of information to people within the organization to aid decision-making and improve the efficiency and effectiveness of existing operations
C)
A semi-variable cost would be
A) a fixed amount when output was zero and would not increase in direct proportion to output
B) zero when output is zero and would increase in direct proportion to output
C) more than zero if no products were made and would then increase in direct proportion to output
D) zero if output is zero and would change erratically as output increased
C)
Absorption costing refers to the process of
A) absorbing direct costs of production into products
B) absorbing the overhead costs of departments into products
C) absorbing service department costs into production department costs
D) absorbing the direct costs of production and service departments into products
B
- Sold Inc., which produces and sells a single product, recently experienced an increase in
fixed costs relating to depreciation on new equipment. If variable costs and sales price
remain unchanged, what will happen to contribution margin and the break-even point?
A) Contribution margin will be unchanged and the break-even point will decrease.
B) Contribution margin will be unchanged and the break-even point will increase.
C) Contribution margin will increase and the break-even point will decrease.
D) Contribution margin will decrease and the break-even point will increase.
B
In a Modigliani andMiller (MM) world with perfect capital markets, which of the following statements is FALSE?A)Leverage increases the risk of equity even when there is no risk that the firm will default.
B)The cost of capital of levered equity increases with the firm’s market value debt-equity ratio.
C)A firm’s weighted average cost of capital (WACC) is equal to its equity cost of capital if it is unlevered, which matches the cost of capital of its assets.
D)The levered equity return is unaffected by the performance of the firm and is therefore equal to the unlevered equity return
D
In a Modigliani and Miller (MM) world with perfect capital markets, which of the following statements is FALSE?
A)On the market value balance sheet, the total value of all securities issued by the firm must equal the total value of the firm’s assets.
B)The market value balance sheet shows that changing the firm’s capital structure does not alter how the value of the assets is divided across the securities issued to investors.
C)When a firm uses a leveraged recapitalization to change its capital structure, then the firm’s share price will not change.
D)According to MM Proposition I, with perfect capital markets homemade leverage is a perfect substitute for firm leverage.
B
Which of the following statements is FALSE?
A)Because interest expense is tax deductible, leverage increases the total amount of income available to all investors.
B)If the interest expense of the firm is well above its taxable income, the firm does not fully exploit the tax advantage of debt.
C)The optimal fraction of debt, as a proportion of a firm’s capital structure, declines with the growth rate of the firm.
D)Personal taxes offset some of the corporate tax benefits of leverage
B
Which of the following statements regarding the agency cost of leverage is FALSE?
A)Agency cost of leverage can arise in the form of a cashing out problem -that is, shareholders have an incentive to liquidate assets at their market values and retain the proceeds within the firm.
B)Agency cost of leverage can arise in the form of an asset substitution problem -that is, shareholders can gain by making negative-NPV investments that sufficiently increase the firm’s risk.
C)Agency cost of leverage can arise in the form of a debt overhang problem -that is, shareholders are unwilling to finance new, positive-NPV projects.
D)Agency cost of leverage can arise in the form of a debt overhang problem, which ultimately leads to a leverage ratchet effect -that is, shareholders will not have an incentive to decrease leverage by buying back debt, even if it will increase the value of the firm.
A
Which of the following statements regarding the agency benefits of leverage is FALSE?
A)Leverage has agency benefits and can improve incentives for managers to run a firm more efficiently and effectively due to reduced free cash flow.
B)Leverage has agency benefits and can improve incentives for managers to run a firm more efficiently and effectively due to an increased interest tax shield.
C)Leverage has agency benefits and can improve incentives for managers to run a firm more efficiently and effectively due to reduced managerial entrenchment and increased commitment.
D)Leverage has agency benefits and can improve incentives for managers to run a firm more efficiently and effectively due to increased ownership concentration
B
Which of the following statements is FALSE?
A)The lemons principle states that when a seller has private information about the value of a good, buyers will discount the price they are willing to pay due to adverse selection.
B)The credibility principle states that claims in one’s self-interest are credible only if they are supported by actions that would be too costly to take if the claims were untrue.
C)When securities are fairly priced, the original debt holders of a firm pay the present value of the costs associated with bankruptcy and financial distress.
D)According to the trade-off theory, the total value of a levered firm equals the value of the firm without leverage plus the present value of the tax savings from debt, less the present value of financial distress costs.
C
Which of the following statements is FALSE?
A)The first step in the FTE method is to determine the project’s free cash flow to equity (FCFE).
B)In the WACC and APV methods, we value a project based on its free cash flow, which is computed ignoring interest and debt payments.
C)In the FTE method, the free cash flows to equity holders are discounted using the weighted average cost of capital.
D)In the FTE method, we explicitly calculate the free cash flow available to equity holders taking into account all payments to and from debt holders.
C
How do do you calculate the equity cost of capital?
Re = Ru + (D/E) x (Ru - Rd)
Which of the following statements regarding the APV method and its implementation is FALSE?
A)With a constant interest coverage policy, the value of the interest tax shield is proportional to the project’s unlevered value.
B)When the firm keeps its interest payments to a target fraction of its free cash flow, we say it has a constant interest coverage ratio.
C)When we relax the assumption of a constant debt-equity ratio, the APV method is difficult to implement and is therefore not the preferred method with alternative leverage policies.
D)When debt levels are set according to a fixed schedule, we can discount the predetermined interest tax shields using the debt cost of capital, rD.
C
Which of the following best describes a costpool?
A)Anything for which costs can be measured
B)A location to which costs are assigned
C)A cost that does not vary
D)A cost that does vary
B
If raw material prices are rising and managers are rewardedbased on firm performance, which of the following is true in the short run?
A)Managers prefer weighted average over FIFO
B)Both managers and shareholders are indifferent between FIFO and weighted average
C)Both managers and shareholders prefer FIFO over weighted average
D)Managers prefer FIFO over weighted average
D
