Question 11

In practice, dividends

		Fluctuate more widely than earnings
		Tend to be a lower percentage of earnings for mature firms
		Usually exhibit greater stability than earnings
		Are usually set as a fixed percentage of earnings

Question 12

10: DQZ Telecom is considering a project for the coming year that will cost $50,000,000. DQZ plans to use the following combination of debt and equity to finance the investment: Issue $15,000,000 of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 1.5% of par. The after flotation cost yield is 8.08%. Use $35,000,000 of funds generated from earnings. The equity market is expected to earn 12%. US Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%. Assume that the after-tax cost of debt is 7% and the cost of equity is 12%. Determine the weighted-average cost of capital.

	a.	10.50%
	b.	8.50%
	c.	9.50%
	d.	6.30%

Question 13

31: Light Company has 2,000 obsolete light fixtures that are carried in inventory at a manufacturing cost of $30,000. If the fixtures are reworked for $10,000, they could be sold for $18,000. Alternately, the light fixtures could be sold for $3,000 to a jobber located in a distant city. In a decision model analyzing these alternatives, the opportunity cost would be

	a.	$ 3,000
	b.	$10,000
	c.	$13,000
	d.	$30,000

Question 14

30: In the past, four direct labor hours were required to produce each unit of product Y. Material costs were $200 per unit, the direct labor rate was $20 per hour, and factory overhead was 3 times direct labor cost. In budgeting for next year, management is planning to outsource some manufacturing activities and to further automate others. Management estimates these plans will reduce labor hours by 25%, increase the factory overhead rate to 3.6 times direct labor costs, and increase material costs by $30 per unit. Management plans to manufacture 10,000 units. What amount should management budget for cost of goods manufactured?

	a.	$4,820,000
	b.	$5,060,000
	c.	$5,200,000
	d.	$6,500,000

Question 15

7: Newman Products has received proposals from several banks to establish a lockbox system to speed up receipts. Newman receives an average of 700 checks per day averaging $1,800 each, and its cost of short-term funds is 7% per year. Assuming that all proposals will produce equivalent processing results and using a 360-day year, which one of the following proposals is optimal for Newman?

	a.	A $0.50 fee per check.
	b.	A flat fee of $125,000 per year.
	c.	A fee of 0.03% of the amount collected.
	d.	A compensating balance of $1,750,000.

Question 16

38: Division Z of a company produces a component that it currently sells to outside customers for $20 per unit. At its current level of production, which is 60% of capacity, Division Z s fixed cost of producing this component is $5 per unit and its variable cost is $12 per unit. Division Y of the same company would like to purchase this component from Division Z for $10. Division Z has enough excess capacity to fill Division Y s requirements. The managers of both divisions are compensated based upon reported profits. Which of the following transfer prices will maximize total company profits and be most equitable to the managers of Division Y and Division Z?

	a.	$18 per unit.
	b.	$12 per unit.
	c.	$20 per unit.
	d.	$22 per unit.

Question 17

40: A forward contract involves

	a.	A commitment today to purchase a product on a specific future date at a price determined today.
	b.	A commitment today to purchase a product only when its price increases above its current exercise price.
	c.	A commitment today to purchase a product some time during the current day at its present price.
	d.	A commitment today to purchase a product on a specific future date at a price to be determined some time in the future.

Question 18

21: Which of the following is not a limitation on the use of ROI as a performance measure?

	a.	It could cause managers to postpone critical expenditures.
	b.	It could cause managers to not accept projects that would be advantageous to the firm.
	c.	It could be affected arbitrarily by allocation of indirect costs.
	d.	It is unrelated to shareholder value.

Question 19

32: Koby Co. has sales of $200,000 with variable expenses of $150,000, fixed expenses of $60,000, and an operating loss of $10,000. By how much would Koby have to increase its sales in order to achieve an operating income of 10% of sales?

	a.	$400,000
	b.	$251,000
	c.	$231,000
	d.	$200,000

Question 20

35: A multiperiod project has a positive net present value. Which of the following statements is correct regarding its required rate of return?

	a.	Less than the company's weighted-average cost of capital.
	b.	Less than the project's internal rate of return.
	c.	Greater than the company's weighted-average cost of capital.
	d.	Greater than the project's internal rate of return.