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1. Based on the corporate tax table below, what is the average tax rate for a firm with $120,000 taxable income? Taxable Income Marginal Tax Rates $0 - 50,000 15% 50,001 - 75,000 25% 75,001 - 100,000 34% 100,001 - 335,000 39% 335,001 - 10,000,000 34% 10,000,001 - 15,000,000 35% 15,000,001 - 18,333,333 38% 18,333,334 + 35%

2. When is it appropriate to include sunk costs in the evaluation of a project?

Include sunk costs if they are considered to be overhead costs

It is never appropriate to include sunk costs

Include sunk costs if they improve the project’s NPV

Include sunk costs when they are relatively large

3. A firm has a piece of land that was unused, but plans to build a new office complex on it in a new capital project. The market value of the land should be considered as a component of project cash flows provided that the land:

has been fully depreciated as the market value a sunk cost.

can be depreciated going forward.

has the same market value as the book value.

has identifiable market value as it is an opportunity cost.

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Irving Heathcote
Irving HeathcoteLv2
28 Sep 2019

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1. Which of the following would result in a decrease in cash flow and a use of cash? A. A decrease in notes payable B. An increase in long-term debt C. A decrease in inventory D. A decrease in common stock

2. In the United States, for the 2007 tax year, federal corporate income tax rates never exceeded an average rate of A. 15%. C. 39%. B. 35%. D. 34%.

3. A firm has assets of $60,000 and owners’ equity of $33,000. Which of the following is the correct balance of the firm’s liabilities? A. $33,000 C. $93,000 B. $27,000 D. $60,000

4. Which of the following would result in an increase in cash flow and a source of cash? A. A decrease in notes payable B. A decrease in long-term debt C. An increase in inventory D. An increase in common stock

5. A firm has current assets of $10,000 and current liabilities of $7,000. Which of the following is the correct net working capital for the firm? A. $10,000 C. $3,000 B. $7,000 D. $13,000

6. If a firm has an accounts receivable balance of $18,800 at the end of 2007 and $16,500 at the end of 2008, which of the following statements about accounts receivable is correct? A. Accounts receivable decreased by $2,300 and represented a use of cash. B. Accounts receivable increased by $2,300 and represented a source of cash. C. Accounts receivable decreased by $2,300 and represented a source of cash. D. Accounts receivable increased by $2,300 and represented a use of cash.

7. If a firm has revenues of $15,090 and expenses of $8,850, what is the firm’s taxable income? A. $15,090 C. $6,240 B. $8,850 D. $23,940

8. Which of the following statements about the issuance of an initial public offering (IPO) is correct? A. IPOs may be either underpriced or overpriced. B. IPOs are never overpriced. C. IPOs are never underpriced. D. IPOs are always correctly priced.

9. If a firm has revenues of $15,090, operating expenses of $8,850, and a tax expense of $2,120, what is the firm’s net income? A. $8,850 C. $6,240 B. $4,120 D. $8,360

10. When you’re preparing a common-sized balance sheet, which of the following measures is set to equal 100 percent? A. Total liabilities C. Total owners’ equity B. Total assets D. Cash Examination, Lesson 1 35

11. Suppose that a corporation has a taxable income of $200,000. What is the firm’s corporate income tax for the current tax year? (You can use the following table to calculate the firm’s U.S. federal corporate tax.) Taxable Income More Than Taxable Income Less Than Tax Rate $0 $50,000 15% $50,001 $75,000 25% $75,001 $100,000 34% $100,001 $335,000 39% $335,001 $10,000,000 34% $10,000,001 $15,000,000 35% $15,000,001 $183,333,334 38% $18,333,334 35% A. $78,000 C. $39,000 B. $6,250 D. $61,250

12. Using the same table and information provided in Question 11, what is the firm’s average tax rate? A. 39% C. 34% B. 30.625% D. 31.625%

13. Using the same table and information provided in Question 11, what is the firm’s marginal tax rate? A. 39% C. 34% B. 30.625% D. 31.625%

14. Dilution refers to the loss of shareholder value, and may be represented by all of the following except dilution of A. ownership percentage. B. market value. C. the firm’s current ratio. D. book value per share.

15. If a firm has $6,940 in earnings before interest and taxes, $650 in depreciation expense, and $2,120 in taxes, what is the firm’s operating cash flow? A. $4,120 C. $6,240 B. $5,470 D. $9,710

16. The type of financial statement that summarizes the sources and uses of cash over a specified period of time is called the A. statement of cash flows. B. income statement. C. balance sheet. D. inventory ratio statement.

17. The current ratio falls within which of the following classifications of financial ratios? A. Long-term solvency measures B. Asset management or turnover measures C. Short-term solvency or liquidity measures D. Profitability measures

18. If a firm has an accounts payable balance of $34,400 at the end of 2007 and $31,200 at the end of 2008, which of the following statements about accounts payable is correct? A. Accounts payable decreased by $3,200 and represented a use of cash B. Accounts payable increased by $3,200 and represented a source of cash C. Accounts payable decreased by $3,200 and represented a source of cash D. Accounts payable increased by $3,200 and represented a use of cash

19. Which of the following is not one of the six costs of issuing securities? A. Rights offering C. Green Shoe option B. Abnormal returns D. Gross spread 20. In the United States, for the 2007 tax year, federal corporate income tax rates never exceeded a marginal rate of A. 15%. C. 39%. B. 35%. D. 34%.

20. In the United States, for the 2007 tax year, federal corporate income tax rates never exceeded a marginal rate of A. 15%. C. 39%. B. 35%. D. 34%.

Richmond Truck, Inc. is a manufacturer of trucks. Its current line of trucks are selling excellently. However, in order to cope with the foreseeable competition with other similar trucks, RT spent $1,550,000 to develop a new line of deluxe trucks that are more spacious. In addition, the deluxe truck will have built-in GPS and backup camera. The deluxe model is more fuel efficient and has higher MPG than the current model. The company had also spent a further $450,000 to study the marketability of this new model. HT is able to produce the new model at a variable cost of $9,750 each. The total fixed costs for the operation are expected to be $3,850,000 per year. HT expects to sell 25,000 trucks, 30,000 trucks, 20,000 trucks, 18,000 trucks and 13,000 trucks of the new deluxe model per year over the next five years respectively. They will be selling at a price of $22,000 each. To launch this new line of production, HT needs to invest $550,000,000 in equipment which will be depreciated on a seven- year MACRS schedule. The value of the used equipment is expected to be worth $8,950,000 as at the end of the 5 year project life. HT is planning to stop producing the existing model entirely in two years. Should HT not introduce the new deluxe model, sales per year of the existing model will be 18,000 trucks and 15,000 trucks for the next two years respectively. The existing model can be produced at variable costs of $8,260 each and total fixed costs of $2,450,000 per year. They are selling for $19,500 each. If HT produces the new deluxe model, sales of the existing model will be eroded by 4,000 trucks for next year and 8,000 trucks for the year after next. In addition, to promote sales of the existing model alongside with the new deluxe model, HT has to reduce the price of the existing model to $15,000 each. Net working capital for the new deluxe model will be 20 percent of sales and will vary with the occurrence of the cash flows. As such, there will be no initial NWC required. The first change in NWC is expected to occur in year 1 according to the sales of the year. HT is currently in the tax bracket of 35 percent and it requires a 15 percent returns on all of its projects. You have just been hired by HT as a financial consultant to advise them on this new deluxe truck project. You are expected to provide answers to the following questions to their management by their next meeting which is scheduled sometime next month.

What is/are the sunk cost(s) for this new deluxe truck project? Briefly explain. You have to tell what sunk cost is and the amount of the total sunk cost(s). In addition, you have to advise HT on how to handle such cost(s). (5 points)

Question 29 An opportunity cost: A. Is an unavoidable cost because it remains the same regardless of the alternative chosen. B. Requires a current outlay of cash. C. Results from past managerial decisions. D. Is the potential benefit lost by choosing a specific alternative course of action among two or more. E. Is irrelevant in decision making because it occurred in the past.

Question 30 A cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions, is called a(n): A. Uncontrollable cost. B. Incremental cost. C. Opportunity cost. D. Out-of-pocket cost. E. Sunk cost.

Question 31 A company paid $200,000 ten years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. The company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000. In analyzing the new project, the $200,000 original cost of the machine is an example of a(n): A. Incremental cost. B. Opportunity cost. C. Variable cost. D. Sunk cost. E. Out-of-pocket cost.

Question 32 Listmann Corp. processes four different products that can either be sold as is or processed further. Listed below are sales and additional cost data: Product Sales Value with no further Processing Additional Processing Costs Sales Value after further processing Premier $1,350 $900 $2,700 Deluxe 450 225 630 Super 900 450 1,800 Basic 90 45 180 Which product(s) should not be processed further? A. Premier. B. Deluxe. C. Super. D. Basic. E. Premier and Basic.

Question 33 Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the effect on net income will be: A. $45,000 increase. B. $11,250 increase. C. $33,750 increase. D. $7,500 decrease. E. $33,750 decrease.

Question 34 Bannister Co. is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units follows: Direct material $45,000 Direct labor 30,000 Factory overhead (30% is variable) 98,000 If Bannister can buy 1,000 units from a subcontractor for $100,000, it should: A. Make the product because current factory overhead is less than $100,000. B. Make the product because the cost of direct material plus direct labor of manufacturing is less than $100,000. C. Buy the product because the total incremental costs of manufacturing are greater than $100,000. D. Buy the product because total fixed and variable manufacturing costs are greater than $100,000. E. Make the product because factory overhead is a sunk cost.

Question 35 Granfield Company has a piece of manufacturing equipment with a book value of $40,000 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $22,000. Granfield can purchase a new machine for $120,000 and receive $22,000 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $19,000 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is: A. $22,000 decrease B. $76,000 increase C. $18,000 decrease D. $52,000 increase E. $22,000 increase

Question 36 A company has already incurred a $55,000 cost in partially producing its three products. Their selling prices when partially and fully processed are shown in the following table with the additional costs necessary to finish their processing. Based on this information, should any products be processed further? Product Unfinished Selling Price Finished Selling Price Further Processing Costs A $72 $108 $35 B 83 124 42 C 94 141 45 A. All of these products should be processed further. B. None of these products should be processed further. C. Products A and B should be processed further. D. Products B and C should be processed further. E. Products A and C should be processed further.

Question 37 Wheeler Company can produce a product that incurs the following costs per unit: direct materials, $10; direct labor, $24, and overhead, $16. An outside supplier has offered to sell the product to Axle for $45. If Wheeler buys from the supplier, it will still incur 45% of its overhead cost. Compute the net incremental cost or savings of buying. A. $4.00 savings per unit. B. $4.00 cost per unit. C. $2.20 cost per unit. D. $3.80 cost per unit. E. $2.20 savings per unit.

Question 38 An additional cost incurred only if a company pursues a particular course of action is a(n): A. Period cost. B. Pocket cost. C. Discount cost. D. Incremental cost. E. Sunk cost.

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