Question

35. Which of the following is TRUE about the threat of substitutes?

		When threatened by substitutes, existing competitors will increase their prices.
		Innovation makes an existing product or service more attractive to its customers.
		If there are numerous substitutes, the firm's profit margins and revenues will decline.
		If the competitors are strong, existing competitors will not react strongly to the threat of substitutes.

36. When a firm needs to raise money via a bond issue, one of the quickest ways is through a ________. This activity involves the purchase of a large block of securities by a large institutional investor such as a pension fund, an endowment fund, or an insurance company.

		private placement
		public placement.
		secondary offering.
		none of the above

37

Which of the following is NOT a disadvantage of a sole proprietorship as a form of business organization compared to the corporate form of business organization?

		Access to the capital markets
		Unlimited liability of the owners
		Subject to the double taxation
		Limited liability of the shareholders

43 To estimate the after-tax cost of preferred stock you must:

		multiply the cost of preferred by (1 - the tax rate).
		multiply the cost of preferred by (1 + the tax rate).
		multiply the cost of preferred by (the tax rate).
		None of the above because preferred dividend payments are not tax deductible for the firm

Answer 1

35. Which of the following is TRUE about the threat of substitutes?

Answer-> If there are numerous substitutes, the firm's profit margins and revenues will decline.

If there are a large number of substitutes available for a given product, then the customers will be willing to buy those substitutes in place of that product. So this can reduce the profit margin of the firm and revenue will decline.

36. When a firm needs to raise money via a bond issue, one of the quickest ways is through a private placement. This activity involves the purchase of a large block of securities by a large institutional investor such as a pension fund, an endowment fund, or an insurance company.

Answer-> Private Placement

37. Which of the following is NOT a disadvantage of a sole proprietorship as a form of the business organization compared to the corporate form of business organization?

Sole Proprietorship is not subjected to double taxation as the owner and the company are considered as one same entity and are taxed only once. They have a tax advantage.

Answer-> Subject to double taxation

38. To estimate the after-tax cost of preferred stock you must:

Answer -> None of the above because preferred dividend payments are not tax-deductible for the firm