June2017SupportPackage.pdf

# B salary and wage costs c opportunity costs d state

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b. salary and wage costs. c. opportunity costs. d. state and local tax costs.

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177 75. CSO: 2A4e LOS: 2A4e Which of the following costs, when subtracted from total revenue, yields economic profit? a. Variable costs. b. Recurring operating costs. c. Fixed and variable costs. d. Opportunity costs of all inputs. 76. CSO: 2A4e LOS: 2A4e Williams makes \$35,000 a year as an accounting clerk. He decides to quit his job to enter an MBA program full-time. Assume Williams doesn’t work in the summer or hold any part-time jobs. His tuition, books, living expenses, and fees total \$25,000 a year. Given this information, the annual total economic cost of Williams’ MBA studies is a. \$10,000. b. \$35,000. c. \$25,000. d. \$60,000. 77. CSO: 2A4e LOS: 2A4e The financial statements of Lark Inc. for last year are shown below. Income Statement (\$000) Revenue \$4,000 Cost of sales 2,900 Gross margin 1,100 General & administrative 500 Interest 100 Taxes 150 Net income \$ 350 Balance Sheet (\$000) Current assets \$ 800 Current liabilities \$ 500 Plant & equipment 3,200 Long-term debt \$1,000 Common equity 2,500 Totals \$4,000 Totals \$4,000 If Lark’s book values approximate market values and if the opportunity costs of debt and equity are 10% and 15%, respectively, what was the economic profit for Lark last year? a. (\$125,000). b. (\$25,000). c. \$0. d. \$350,000.
178 Section B: Corporate Finance 78. CSO: 2B1b LOS: 2B1b The systematic risk of an individual security is measured by the a. standard deviation of the security’s rate of return. b. covariance between the security’s returns and the general market. c. security’s contribution to the portfolio risk. d. standard deviation of the security’s returns and other similar securities. 79. CSO: 2B1b LOS: 2B1c Which one of the following provides the best measure of interest rate risk for a corporate bond? a. Duration. b. Yield to maturity. c. Bond rating. d. Maturity. 80. CSO: 2B1a LOS: 2B1h Frasier Products has been growing at a rate of 10% per year and expects this growth to continue and produce earnings per share of \$4.00 next year. The firm has a dividend payout ratio of 35% and a beta value of 1.25. If the risk-free rate is 7% and the return on the market is 15%, what is the expected current market value of Frasier’s common stock? a. \$14.00. b. \$16.00. c. \$20.00. d. \$28.00. 81. CSO: 2B1a LOS: 2B1g Which one of the following would have the least impact on a firm’s beta value? a. Debt-to-equity ratio. b. Industry characteristics. c. Operating leverage. d. Payout ratio.

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179 82. CSO: 2B1a LOS: 2B1g If Dexter Industries has a beta value of 1.0, then its a. return should equal the risk-free rate. b. price is relatively stable. c. expected return should approximate the overall market. d. volatility is low. 83. CSO: 2B4g LOS: 2B4ee Buying a wheat futures contract to protect against price fluctuation of wheat would be classified as a a. fair value hedge. b. cash flow hedge. c. foreign currency hedge. d. swap. 84. CSO: 2B2b LOS: 2B2c The call provision in some bond indentures allows a. the issuer to exercise an option to redeem the bonds.
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