With explanation

1. The overall cost of long-term financing for the firm is called the:

a. Weighted average cost of capital

b. Cost of preferred stock

c. Retained earnings breakpoint

d. None of the given choices

2. The overall weighted average cost of capital is used instead of costs for specific sources of funds because

a. The use of the cost for specific sources of capital would make investment decisions inconsistent

b. A project with the highest return would always be accepted under the specific cost criteria

c. An investment funded by equity or debt is not relevant to this question

d. None of the given choices

3. Which of the following is not a component used in calculating the cost of capital?

a. Cost of short-term debt

b. Cost of long-term debt

c. Cost of common stock

d. Cost retained earnings

4. the most expensive source of financing for a firm is

a. Debt

b. Preferred stock

c. Retained earnings

d. New common stock

5. The cost of capital at the retained earnings breakpoint is the

a. Weighted average cost of capital

b. Marginal cost of capital

c. Cost of new stock

d. None of the given choices

6. Which of the following is not associated with the cost of capital concept?

a. Minimum rate of return on new projects

b. Weighted average of cost of new funds raised

c. The required rate of return of investors

d. The historical cost of funds

7. Which of the following is likely to increase a firm’s cost of capital?

a. Increasing the proportion of equity in the firm

b. Increasing the proportion of debt in the firm

c. The consideration of a below-average risk project

d. Expectation of lower inflation in the future

8. If a firm uses the same company cost of capital for evaluating all projects, which of the following is likely?

a. Rejecting good low-risk projects

b. Accepting poor high-risk projects

c. Both choices are correct

d. Neither of the choices is correct

9. The use of the company’s cost of capital as the discount rate for a capital budgeting proposal is inappropriate if

a. It calculates a negative NPV for the proposal

b. The proposal has a different degree of risk

c. The company has unique risk

d. The company expects to earn more than the risk-free rate

10. In general, it is more expensive for a company to finance with equity than with debt because

a. Long-term bonds have a maturity data and must, therefore, be repaid in the future

b. Investors are exposed to greater risk with equity capital

c. The interest on debt is a legal obligation

d. Equity capital is in greater demand than debt capital

11. If nominal interest rates increase substantially but expected future earnings and dividend growth for a firm over the long run are not expected to change, the firm’s stock price will

a. Increase

b. Decrease

c. Stay constant

d. Change, but in no determinable direction

12. In practice, dividends

a. Usually exhibit greater stability than earnings

b. Fluctuate more widely than earnings

c. Tend to be a lower percentage of earnings for mature firms

d. Are usually changed every year to reflect earnings changes

With explanation

1. The overall cost of long-term financing for the firm is called the:

a. Weighted average cost of capital

b. Cost of preferred stock

c. Retained earnings breakpoint

d. None of the given choices

2. The overall weighted average cost of capital is used instead of costs for specific sources of funds because

a. The use of the cost for specific sources of capital would make investment decisions inconsistent

b. A project with the highest return would always be accepted under the specific cost criteria

c. An investment funded by equity or debt is not relevant to this question

d. None of the given choices

3. Which of the following is not a component used in calculating the cost of capital?

a. Cost of short-term debt

b. Cost of long-term debt

c. Cost of common stock

d. Cost retained earnings

4. the most expensive source of financing for a firm is

a. Debt

b. Preferred stock

c. Retained earnings

d. New common stock

5. The cost of capital at the retained earnings breakpoint is the

a. Weighted average cost of capital

b. Marginal cost of capital

c. Cost of new stock

d. None of the given choices

6. Which of the following is not associated with the cost of capital concept?

a. Minimum rate of return on new projects

b. Weighted average of cost of new funds raised

c. The required rate of return of investors

d. The historical cost of funds

7. Which of the following is likely to increase a firm’s cost of capital?

a. Increasing the proportion of equity in the firm

b. Increasing the proportion of debt in the firm

c. The consideration of a below-average risk project

d. Expectation of lower inflation in the future

8. If a firm uses the same company cost of capital for evaluating all projects, which of the following is likely?

a. Rejecting good low-risk projects

b. Accepting poor high-risk projects

c. Both choices are correct

d. Neither of the choices is correct

9. The use of the company’s cost of capital as the discount rate for a capital budgeting proposal is inappropriate if

a. It calculates a negative NPV for the proposal

b. The proposal has a different degree of risk

c. The company has unique risk

d. The company expects to earn more than the risk-free rate

10. In general, it is more expensive for a company to finance with equity than with debt because

a. Long-term bonds have a maturity data and must, therefore, be repaid in the future

b. Investors are exposed to greater risk with equity capital

c. The interest on debt is a legal obligation

d. Equity capital is in greater demand than debt capital

11. If nominal interest rates increase substantially but expected future earnings and dividend growth for a firm over the long run are not expected to change, the firm’s stock price will

a. Increase

b. Decrease

c. Stay constant

d. Change, but in no determinable direction

12. In practice, dividends

a. Usually exhibit greater stability than earnings

b. Fluctuate more widely than earnings

c. Tend to be a lower percentage of earnings for mature firms

d. Are usually changed every year to reflect earnings changes

Why can the computation of cost of goods sold be problematic in process costing?

Are the product costs accounted for the same way in process costing as they are in job order costing?

The cost of equipment purchased by Service, Inc., on July 1, 2017 was $200,000. It is estimated that the machine will have no salvage value at the end of its service life. Its service life is estimated at 5 years, and its total production is estimated at 500,000 units. During 2017, the machine produced 55,000 units. During 2018, the machine produced 48,000 units.

Instructions:

Compute depreciation expense on the machine for the year ending December 31, 2017, and the year ending December 31, 2018, using the following methods.

(a) Straight-line

(b) Units-of-output

The Vice-Chancellor of the University of the Sunshine Coast claimed that the average cost of rental accommodation in the area close to campus was $155 per week. The Student Guild, being sceptical about the validity of this claim, took a random sample of 35 quotes and found that the average rental was $149.25 per week. On the basis of advice given to them by a local real estate agent, it could be assumed that the standard deviation of rental prices in the area was $22.50 per week.

1. State the direction of the alternative hypothesis used to test the Vice-Chancellor's claim. Type the letters gt (greater than), ge (greater than or equal to), lt (less than), le (less than or equal to) or ne (not equal to) as appropriate in the box.

2. Use the tables in the text to determine the critical value used to conduct the test, assuming a 5% level of significance. If there are two critical values, state only the positive value.  

3. Calculate the test statistic, reporting your answer to two decimal places.

4. Is the null hypothesis rejected for this test? Type yes or no.

5. If it is shown later that the average rental price is $150 per week, determine the nature of the decision made in the test. Type cd (correct decision), 1 (a Type I error was made) or 2 (a Type II error was made) as appropriate.

6. Regardless of your answer for 4, if the null hypothesis was rejected, could we conclude that the Vice-Chancellor's claim is valid? Type yes or no.

Equipment was acquired on January 1, 2014, at a cost of $170,000. The equipment was originally estimated to have a salvage value of $10,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2016, using the straight-line method. On January 1, 2017, the estimated salvage value was revised to $16,000 and the useful life was revised to a total of 8 years.
Determine the depreciation expense for 2017.

Boston Corp. purchased equipment with a cost of $70,000 at the beginning of 2016. The equipment has an estimated life of 25 years or 25,000 units of product. The estimated residual value is $7,500. During 2016, 1,100 units of product were produced with this machinery. Determine the following:

a. Amount of total accumulated depreciation at December 31, 2016, using units-of-production depreciation.

$

b. Book value at the end of 2016 using straight-line depreciation.

$

c. A company may choose units-of-production depreciation instead of straight-line,

What is a method of reducing cost by identifying parts in different products that are common and interchangeable?

6)   Which of the following is a problem when using the CAPM to estimate the cost of capital for equity?

A. The risk-free rate of return fluctuates.

B. The market return fluctuates.

C. The beta fluctuates.

D. The beta is calculated using historical data.

7)   You are trying to determine the appropriate price to pay for a share of common stock. If you purchase this stock, you plan to hold it for 1 year. At the end of the year you expect to receive a dividend of $5.50 and to sell the stock fro $154. The appropriate rate of return for this stock is 16 percent. What should be the current price of this stock?

A. $137.50

B. $150.22

C. $162.18

D. $98.25

8)   Let’s suppose that you are considering investing in two investments (“A” and “B”), which have exactly the same expected future cash flows measured as a percentage of the initial investment, however investment A is cheaper. Which of these investments is more risky?

      A. Investment A.

      B. Investment B.

      C. They have exactly the same risk.

      D. Cannot tell from the information provided.

9)   If the rate of return for preferred stock goes up, for example because the market has become more risky, the price of preferred stock goes down.

      True/False

10) When a firm has a negative beta it means that it has a very low cost of capital.

True/False