Question 1
Please read the following carefully. For each question on the midterm exam, unless the question expressly provides to the contrary, you should assume that: 1. all events occurred in ?the current taxable year;? 2. all persons are United States citizens; 3. there is no tax avoidance purpose for any transaction, and that with respect to any mortgage on any property, there was a bona fide business purpose for incurring the debt; 4. there is only one class of stock issued and outstanding in any corporation, and that is common voting stock, unless the question expressly states to the contrary; 5. with respect to each partnership question on the midterm, the partnership has no hot assets, has no debts or other liabilities, and has no Section 754 election in effect; and 6. with respect to any entity, there is no special election (other than an S election for any corporation stated to be an S corporation) made unless the facts specifically state that there an election has been made and is in effect. Choose the letter that best answers the question or completes the sentence. 1. Jack owns 60 percent of Corporation. Corporation had acquired land known as the Parcel in January of 2000 for $68,000 and held the Parcel for investment purposes. During the current taxable year, Corporation sold the Parcel to Jack for $65,000 which amount was equal to the fair market value of the Parcel. Shortly after receiving the Parcel, Jack, never having made any gifts before, gave the Parcel to his friend Tom from college when the property was worth $70,000. Tom sold the Parcel two years later to Sue, a person not related to Corporation, Jack or Tom, for $75,000. How much gain or loss is realized and recognized as a result of these three transfers? a. Corporation realizes a loss of $3,000 and recognizes a loss of 3,000 on the sale; Jack realizes a gain of $8,000 and recognizes a gain of 5,000 on the transfer to Tom; Tom realizes a gain of $5,000 and recognizes a gain of $2,000 on the transfer to Sue. b. Corporation realizes a loss of $3,000 and recognizes a loss of 3,000 on the sale; Jack realizes a gain of $5,000 and recognizes a gain of 5,000 o the transfer to Tom; Tom realizes gain of $5,000 and recognizes a gain of $2,000 on the transfer to Sue. c. Corporation realizes a loss of $3,000 and recognizes a loss of 0 on the sale; Jack does not realize or recognize any gain or loss on the transfer to Tom; Tom realizes a gain of $10,000 and recognizes a gain of $10,000 on the transfer to Sue. d. Corporation realizes a loss of $3,000 and recognizes a loss of 0 on the sale; Jack realizes a gain of $5,000 and recognizes a gain of $5,000 on the transfer to Tom; Tom realizes a gain of $5,000 and recognizes a gain of $5,000 on the transfer to Sue. 2. Corporations had the following income and expenses during the current taxable year: Income from operations $250,000 Expenses from operations $120,000 Dividends received (from a 70 percent-owned corporation)) $ 80,000 Cash charitable contributions $ 30,000 How much is Corporation?s charitable contribution deduction for the current taxable year? a. $14,600. b. $21,000. c. $26,000. d. $30,000. 3. For the current taxable year, Corporation?s gross income from operations was $1,000,000 and its expenses from operations were $1,500,000. Corporation also received a $600,000 dividend from a 25 percent-owned corporation. How much is Corporation?s dividends-received deduction? a. 0. b. $70,000. c. $480,000. d. $600,000. 4. Ben and John formed BCD, Inc., a corporation, in 2011. Ben received 80% of the voting common stock, the only class of stock and John received the remaining 20% of the stock. In 2012, Ben transferred additional property to BCD Inc. The property had an adjusted basis to Ben of $40,000 and a fair market value of $50,000 on the date of the transfer. On the same day, and in exchange for the property he transferred to BCD Inc., Ben received cash of $15,000 and additional stock worth $35,000. How much gain was recognized by Ben as a result of this transaction? a. 0. b. $10,000. c. $15,000. d. $25,000 . 5. Sandra transferred property to her newly formed corporation, SDA Inc. The property had an adjusted basis to Sandra of $60,000 and a fair market value of $100,000 on the date of the transfer and the corporation assumed an $80,000 liability on the property. On the same day, and in exchange for the property she transferred to SDA Inc., Sandra received a payment of $10,000 and 100 percent of SDA Inc.?s only class of stock. How much gain was recognized by Sandra as a result of this transaction? a. 0. b. $10,000. c. $20,000. d. $30,000. e. $40,000. 6. Sue transferred a building to her newly formed corporation, SUECO, Inc. The building had an adjusted basis to Sue of $75,000 and a fair market value of $150,000 on the date of the transfer. The building was encumbered by a mortgage of $100,000, which SUECO Inc. assumed. On the same day, and in exchange for the building she transferred to SUECO Inc., Sue received 100 percent of SUECO?s only class of stock. How much gain was recognized by Sue as a result of this transaction? a. 0. b. $25,000. c. $50,000. d. $75,000. 7. Bob created MNO Inc. several years ago and has owned all 10 outstanding shares of MNO Inc. since the creation of MNO Inc. The fair market value of those shares is now $50,000. Bob?s friend, Lee, owns a building having a fair market value of $450,000 and an adjusted basis to Lee of $100,000. The building is encumbered by a $130,000 mortgage. Earlier this month, Bob and Lee discussed Lee?s becoming involved in the business of MNO Inc., and as a result of these discussions, Lee transferred the building to MNO Inc. and in exchange for the building, MNO Inc. transferred to Lee 90 shares of authorized but not previously issued stock of MNO Inc. How much gain does Lee realize and recognize as a result of these transfers? a. Realized gain of 0 and recognized gain of 0. b. Realized gain or $350,000, none of which is recognized. c. Realized gain of $350,000 and recognized gain of $340,000. d. Realized gain of $350,000 and recognized gain of $30,000 of gain. 8. Tom owned all of the outstanding stock of NEWCO3 Corporation. Tom transferred a building, cash, and publicly traded stock to NEWCO3 Corporation. The adjusted basis and the fair market value of the assets transferred to NEWCO3 Corporation, and the amount remaining on the mortgage on the building transferred, were as follows: Basis Value Amount Building $20,000 $55,000 Mortgage on building $40,000 Cash $5,000 $5,000 Publicly traded stock $15,000 $12,000 In exchange for the assets transferred to NEWCO3 Corporation, Tom received additional stock of NEWCO3 Corporation. How much gain did Al recognize as a result of this transaction: a. 0. b. $5,000. c. $25,000. d. $27,000. Fact Pattern for Questions 9 and 10: Sandra owned an equipment rental business in her sole name for four years. After her business advisors suggested that she conduct her equipment rental activity in corporate form, she promptly transferred the equipment to ABC Rental Corporation, a newly formed corporation. Sandra received all of the stock of ABC Rental Corporation in exchange for the equipment. At the time of the transfer of the equipment to ABC Rental Corporation, Sandra?s adjusted basis in the equipment was $50,000, the fair market value of the building was $150,000, the equipment was subject to a security agreement and note assumed by the corporation of $70,000, and there was depreciation recapture potential of $12,000. Sandra received stock of ABC Rental Corporation worth $80,000. 9. How much gain did Sandra recognize as a result of the transaction, and what was the character of the gain? a. Sandra recognized $12,000 of gain, all of which was ordinary income. b. Sandra recognized $20,000 of gain, at least $12,000 of which was ordinary. c. Sandra recognized $30,000 of gain, at least $12,000 of which was ordinary income. d. Sandra recognized $100,000 of gain, all of which was ordinary income. 10. As a result of the transaction, what is the corporation?s basis in the equipment? a. $50,000. b. $70,000. c. $150,000. d. $170,000. 11. NEWCO Inc. had current earnings and profits of $50,000 when it made a nonliquidating distribution to an individual shareholder of land that NEWCO Inc. held for use in its business. On the date the land was distributed, NEWCO Inc.?s adjusted basis in the land was $20,000, the fair market value of the land was $60,000, and the land was encumbered by a $40,000 mortgage, which liability was assumed by the shareholder. After the distribution, how much are NEWCO Inc.?s earning and profits? a. $30,000. b. $50,000. c. $60,000. d. $70,000. 12. Big Corporation distributed land to its sole shareholder, Little Corporation, in a liquidating distribution. At the time of the distribution, the land had a fair market value of $240,000 and Big Corporation?s adjusted basis in the land was $200,000. The land was encumbered by a $250,000 mortgage. How much gain did Big Corporation recognize as a result of the distribution? a. 0. b. $10,000. c. $40,000. d. $50,000. 13. Medium Inc. had one class of stock outstanding. The one class of stock was owned 50 percent by Linda and 25 percent by each of Linda?s parents. In the current taxable year, Medium Inc. redeemed 25 percent of Linda?s 50 percent, and in exchange for the stock, Medium Inc. distributed to Linda a building that had an adjusted basis to Medium Inc. of $10,000 and a fair market value of $50,000. Assume that Medium Inc.?s current earnings and profits were $200,000, there were no accumulated earnings and profits, and Linda?s total basis in her stock before the redemption was $20,000. How much is Linda?s basis in her remaining stock after the redemption, and what is her basis in the building? a. Stock basis: $10,000; building basis: $10,000. b. Stock basis: $10,000; building basis: $50,000. c. Stock basis: $20,000; building basis: $10,000. d. Stock basis: $20,000; building basis: $50,000. e. None of the above. 14. A tract of land was distributed by MNO Inc. to its sole shareholder, Martha, as a dividend. At the time of the distribution, MNO Inc.?s adjusted basis in the land was $40,000, the fair market value of the land was $80,000, and the land was encumbered by a $55,000 mortgage. Which of the following statements is accurate? a. MNO Inc.?s earnings and profits must be increased by $15,000 (liability less basis), decreased by $40,000 (adjusted basis), and increased by $55,000 (the amount of the liability). b. The net adjustment to MNO Inc?s earnings and profits is $40,000, the amount of the realized gain. c. The distributing corporation?s realized gain of $40,000 is recognized to the extent of the $15,000. d. The shareholder?s basis in the land is $80,000, its fair market value. 15. XYZ Corporation made a nonliquidating distribution to its sole shareholder of $30,000 in cash plus real property that had a fair market value of $80,000 and a basis of $60,000. The corporation?s earnings and profits were $100,000 on the last day of the year in which the distribution was made after taking into effect any impact of the distribution on the corporation?s earnings and profits. How much was the total dividend income received by the shareholder as a result of the distributions made by XYZ Corporation and what is the shareholder?s basis in the real property received in the distribution? a. $80,000 dividend; basis of $60,000. b. $80,000 dividend; basis of $60,000. c. $100,000 dividend; basis of $80,000. d. $110,000 dividend; basis of $60,000. e. $100,000 dividend; basis of 110,000. 16. MJJM Inc. has four equal shareholders who are unrelated. Each shareholder owns 300 shares of the common stock of MJJM Inc. representing all of the stock of MJJM Inc. During the taxable year, as part of a single transaction, MJJM Inc. redeemed stock from three of the shareholders. Specifically, MJJM Inc. redeemed 150 shares from Michael, 75 shares from Joseph, and 40 shares from John. Who will receive exchange treatment as a result of the redemption? a. Michael and Joseph, as the transaction was not essentially equivalent to a dividend. b. Joseph only, because the redemption was substantially disproportionate as to Joseph. c. Michael only, because the redemption was substantially disproportionate as to Michael. d. No one, and each of Michael, John, and Joseph will receive dividend treatment. Fact Pattern for Questions 17 and 18. Happy Inc. is a calendar year corporation. Happy Inc. had accumulated earnings and profits of $100,000 and no current earnings and profits when it distributed a total of $160,000 to its two equal shareholders, Betty and Bob as well as on the last day of the year. On the date of the cash distribution, Betty?s basis in her Happy Inc. stock was $20,000 and Bob?s basis in his Happy Inc. stock was $30,000. 17. How much does Betty include in her gross income for the current taxable year with respect to the distribution to her? a. $50,000 dividend income and $10 capital gain. b. $80,000 dividend income and 0 capital gain. c. $0 dividend income and $70,000 capital gain. d. $50,000 dividend income and $20,000 capital gain. 18. What is Bob?s adjusted basis in his EFG Inc. stock after the distribution? a. 0. b. $5,000. c. $15,000. d. none of the above. 19. Mary received a liquidating distribution from ABC Corporation as part of the complete liquidation of ABC Corporation. Mary?s basis for her ABC Corporation stock was $10,000. In exchange for her stock, Mary received a payment of $15,000 and real property that had an adjusted basis to ABC Corporation of $10,000, a fair market value of $25,000, and that was encumbered by a $12,000 mortgage which Mary assumed. How much gain did Mary recognize as a result of this transaction and what is Mary?s basis in the real property ? a. $3,000 gain recognized, and basis of $40,000. b. $18,000 gain recognized, and basis of $40,000. c. $30,000 gain recognized, and basis of $10,000. d. $42,000 gain recognized, and basis of $25,000. e. none of the above. 20. Michael owns stock in an S corporation. The corporation sustained a net operating loss this year. Michael?s pro rata share of the loss is $5,000. Michael?s adjusted basis in his S corporation stock is $1,000 without regard to the loss. In addition, Michael has a loan outstanding to the corporation in the amount of $2,000. Without regard to any passive loss limitation or any at risk rule limitation, what amount, if any, is Michael entitled to deduct with respect to the loss under the subchapter S rules? a. $1,000. b. $2,000. c. $3,000. d. $5,000. e. None of the above. 21. Beth, who died in January 2012, was survived by her husband, Ben. Beth?s federal gross estate was equal to $6,000,000 on the date of her death. When Beth died, Beth?s assets included an undeveloped parcel of real estate in Jacksonville in the names of ?Beth and Ben, as joint tenants with right of survivorship.? The fair market value of the land on the date of Beth's death was $750,000. Ben provided all of the consideration for the purchase of the land, paying $200,000 for it in 2009. Alternate valuation is not available to Beth?s estate as all assets owned by Beth will pass, either under Beth?s last will and testament or by operation of law, to Ben and hence, no estate tax will be due because of the marital deduction. What is Ben?s basis in the real estate after Beth?s death? a. $200,000. b. $375,000. c. $750,000. d. none of the above. 22. Under Carl's will, Carl (a widower) created a testamentary trust to be funded with $700,000 worth of assets. All of the income of the trust is payable to Carl?s child, Jane, for her life, and thereafter, the remaining assets of the trust will pass to The Public Charity. Jane is serving as the trustee. In addition, the trustee has the discretion to distribute all or such portion of the principal as the trustee shall determine for Jane?s heath, support, and maintenance. Jane?s father, Carl, died during the current taxable year with a gross estate of $5,350,000. (Carl?s spouse died in 1985 and no estate tax return was due at her death). Which of the following statements is accurate with respect to the federal estate tax? a The estate tax charitable deduction is available to Carl?s estate for the assets passing to The Public Charity. b. Jane?s powers with respect to the assets of the trust constitute a general power of appointment. c. Carl?s estate is not required to file Form 706, the Federal Estate and Generation-Skipping Tax Return. d. When Jane dies, her right to trust income for life will not cause inclusion of the assets in her gross estate. 23. At the time of his death, Nick owned the following property: ? Land held by Nick and his sister Ellen, as joint tenants with right of survivorship. The fair market value of the land on the date of Nick?s death was $600,000, and the land was purchased by Nick for himself and his sister 20 years before his death for $150,000. ? Land held by Nick and Amy as tenants by the entirety. The fair market value of the land on the date of Nick?s death was $800,000, and the land was purchased by Amy for Nick and Amy five years before Nick?s death for $450,000. ? A one-half undivided interest in land held with Lance as tenant in common. The fair market value of the land on the date of Nick?s death was $400,000, and the land was purchased by Lance for Nick and Lance four years before Nick?s death for $300,000. ? City of Dayton bonds worth $500,000 purchased by Nick five years before his death, and titled in Nick?s sole name. What amount is includible in Nick?s gross estate assuming alternate valuation is not available to Nick?s estate? a. $800,000. b. $1,100,000. c. $1,200,000. d. $1,700,000. 24. If an election is available and is made to use alternate valuation for federal estate tax purposes, then if a parcel of real estate owned by the decedent is sold within six months after the decedent?s death, the parcel of real estate is valued for federal estate tax purposes as of which date? a. The date of the decedent?s death. b. The date that is six months after the decedent?s of death. c. The date of sale of the property. d. The date the property is distributed to the beneficiaries. 25. Leslie died on October 31, 2011. Prior to 2009, Leslie had never made any gifts, but in 2010 she made some transfers. Specifically, on January 10, 2010, Leslie gave her vacation beach house to her five children as tenants in common. The fair market value of the vacation beach house on the date of the transfer was $50,000. The fair market value of the vacation beach house at the date of Leslie's death was $100,000. When Leslie died on October 31, 2011, she owned a vacant lot jointly with her sister, Melissa, as joint tenants with right of survivorship. Leslie and her sister each contributed $10,000 toward the $20,000 purchase price. The basis of the property did not change subsequent to the purchase, and at Leslie's death, the fair market value of the property was $60,000. There is $90,000 of life insurance on the life of Leslie, and her estate is named as the beneficiary. (Assume all assets have the same value on the alternate valuation date as on the date of death). What is the amount of Leslie?s gross estate for federal estate tax purposes? a. $120,000. b. $170,000. c. $220,000. d. $250,000. 26. Assume for 2012 that Don made one transfer involving his granddaughter as follows: Don opened a joint checking account with his granddaughter, with right of survivorship, for her college expenses. Don made an initial deposit of $100,000. During 2012, granddaughter wrote checks on the account to the school for tuition of $15,000 and living expenses of $20,000. What is the amount of the taxable gift for federal gift tax purposes? a. 0. b. $20,000. c. $22,000. d. $35,000. e. none of the above. 27. Oliver gave his wife $5,100,000 worth of publicly traded stock in August 2012, outright. Oliver's basis in the stock was $50,000. What is the amount of the taxable gift for federal gift tax purposes? (Oliver made no other gifts to anyone in 2011). a. 0. b. $87,000. c. $100,000. d. $5,087,000. 28. For 2013, what is the amount of the maximum gift tax annual exclusion per donor from the value of a gift of a future interest made to any one donee? a. 0. b. $14,000. c. $26,000. d. $5,000,000. 29. Facts for Questions 29 and 30. Mr. Grey died on January 1, 2012. Mr. Grey made no gifts during his life. Under his will, Mr. Grey devised all of his probate assets to his wife. Mr. Grey owned the following assets, probate and nonprobate, at the date of his death: Asset 1. Home in Mr. Grey's and Mrs. Grey's (his surviving spouse) names as tenants by the entireties that was purchased in 2005. The home was had a fair market value of $2,000,000 both at the date of Mr. Grey's death and six months after the Mr. Grey's death. Asset 2. Publicly traded stocks and bonds solely in , Mr. Grey?s name that had a fair market value of $3,000,000 on the date of Mr. Grey?s death and a fair market value of $2,000,000 six months after Mr. Grey's death. Asset 3. Undeveloped real estate in Mr. Grey's name and the name of his daughter, Sue Smith, jointly with right of survivorship that Mr. Grey purchased in 2005 for $100,000. The property had a fair market value of $2,500,000 at the date of Mr. Grey?s death and a fair market value of $1,000,000 x months after the date of Mr. Grey's death. Asset 4. A condominium in the decedent's name alone purchased in 2001 and used as a vacation home that had a fair market value of $500,000 on the date of Mr. Grey?s death. The condominium was sold by the personal representative of the decedent's estate for $250,000 four months after Mr. Grey?s death. Based on the facts for questions 29 and 30, which of the following options are available to Mr. Grey?s estate for valuation of the assets includible in the gross estate? a. The estate may use date of death values or it may elect alternate valuation. b. The estate must use date of death values. c. The estate must elect alternate valuation. d. Valuation is not required as no Federal Estate Tax Return is required to be filed. 30. Facts for Questions 29 and 30. Mr. Grey died on January 1, 2011. Mr. Grey made no gifts during his life. Under his will, Mr. Grey devised all of his probate assets to his wife. Mr. Grey owned the following assets, probate and nonprobate, at the date of his death: Asset 1. Home in Mr. Grey's and Mrs. Grey's (his surviving spouse) names as tenants by the entireties that was purchased in 2005. The home was had a fair market value of $2,000,000 both at the date of Mr. Grey's death and six months after the Mr. Grey's death. Asset 2. Publicly traded stocks and bonds solely in , Mr. Grey?s name that had a fair market value of $3,000,000 on the date of Mr. Grey?s death and a fair market value of $2,000,000 six months after Mr. Grey's death. Asset 3. Undeveloped real estate in Mr. Grey's name and the name of his daughter, Sue Smith, jointly with right of survivorship that Mr. Grey purchased in 2005 for $100,000. The property had a fair market value of $2,500,000 at the date of Mr. Grey?s death and a fair market value of $1,000,000 six months after the date of Mr. Grey's death. Asset 4. A condominium in the decedent's name alone purchased in 2001 and used as a vacation home that had a fair market value of $500,000 on the date of Mr. Grey?s death. The condominium was sold by the personal representative of the decedent's estate for $250,000 four months after Mr. Grey?s death. Based upon the facts presented in the fact pattern for questions 32 and 33, what is the amount of Mr. Grey?s gross estate for federal estate tax purposes? a. 0. b. $2,500,000. c. $3,500,000. d. $4,250,000. e. $7,000,000. 31. Jennie purchased 50 percent of the shares of SJ Corporation, a calendar year S corporation, for $7,000. She also guaranteed a corporate loan of $6,000. For 2011, SJ Corporation had an operating loss of $22,000. What is the amount of SJ Corporation?s loss that Jennie may deduct on her individual income tax return for 2011? a. $11,000. b. $10,000. c. $7,000. d. 0. 32. Which of the following trusts is eligible to be an S corporation shareholder? a. Electing small business trust. b. Eligible foreign trust. c. Qualified subchapter S trust. d. Only a and c. e. All of the above trusts are eligible to be S corporation shareholders. 33. Which of the following count as a single S corporation shareholder? a. A husband and wife. b. A spouse and a spouse?s estate. c. Members of a family with a common ancestor (who meet the six generations test). d. All of the above. 34. Ellen is a 25 percent partner in EFGH Partners, a general partnership. Ellen?s adjusted basis in her partnership interest is $18,000. During the current taxable year, Ellen received a non-liquidating distribution of land from EFGH Partners that had an adjusted basis to the partnership of $23,000 and a fair market value of $45,000 on the date of distribution. What is Ellen?s basis in the land received in the non-liquidating distribution? a. 0. b. $18,000. b. $23,000. c. $45,000. 35. On which of the following grounds may an S corporation lose its S status? a. it issues a second class of stock. b. it has a nonresident alien shareholder. c. the number of shareholders exceeds 100. d. all of the above. 36. A shareholder?s adjusted basis in the shareholder?s stock is used to make determinations with respect to which of the following? a. the extent to which a distribution made by the corporation to the shareholder is taxable. b. the amount of losses that shareholders may deduct in a given year. c. the shareholder?s realized gain or loss upon the sale or exchange of the stock. d. all of the above. 37. In the current year, Sue received a liquidating distribution of real estate from UTSRQ Partnership, a general partnership. The real estate had an adjusted basis to the partnership of $35,000 and a fair market value of $90,000 on the date of the distribution. Sue?s adjusted basis in her 20 percent interest in UTSRQ Partnership was $50,000. How much gain or loss did Sue recognize on receipt of the distribution and what is her basis in the real estate? a. 0 gain or loss recognized and a $50,000 basis in the real estate. b. ($15,000) loss recognized and a $35,000 basis in the real estate. c. 0 gain or loss recognized and a $35,000 basis in the real estate. d. $40,000 gain recognized and a $90,000 basis in real estate. e. $15,000 gain recognized and a $50,000 basis in real estate. 38. On January 1 of the current taxable year, Sam and Barbara form an equal partnership. Sam makes a cash contribution of $60,000 and a contribution of property with an adjusted basis to him of $160,000 and a fair market value of $140,000 in exchange for his interest in the partnership. Barbara contributes property with an adjusted basis to her of $120,000 and a fair market value of $200,000in exchange for her partnership interest. Which of the following statements is accurate regarding the income tax consequences of this transaction? a. Sam?s adjusted basis in his partnership interest is $200,000. b. The partnership?s adjusted basis in the property contributed by Sam is $140,000. c. Barbara recognized a gain of $80,000 with respect to her contribution of property. d. Barbara?s adjusted basis in her partnership interest is $120,000. 39. Tina and Betty formed a partnership. Tina received a 40 percent interest in the partnership in exchange for land with an adjusted basis to her of $60,000 and a fair market value of $80,000. Betty received a 60 percent interest in the partnership in exchange for $120,000 of cash. Three years after the date of contribution, the land contributed by Tina was sold by the partnership to an unrelated third party for $90,000. How much gain was required to be allocated to Tina as a result of the sale by the partnership? a. $4,000. b. $12,000. c. $24,000. d. $30,000. 40. When inventory that was contributed to a partnership in exchange for a partnership interest is eventually sold by the partnership, how will the character of the income or loss be determined? a. The character of any income or loss will be ordinary regardless of when the contributed property is sold by the partnership and regardless of the character of the asset in the hands of the partnership. b. The character of any income or loss will be ordinary if the contributed property is sold by the partnership within five years after the date of contribution regardless of the character of the asset in the hands of the partnership c. The character of any income or loss will be based on the character of the asset in the hands of the partnership regardless of when the contributed property is sold by the partnership. d. The character of any income or loss will be ordinary to the extent of the contributing partner?s built-in gain or loss in the property at the time of the contribution regardless of when the contributed property is sold, and any balance will based on the character of the asset in the hands of the partnership. 41. Barbara and Bill formed an equal partnership, B&B, a general partnership, on January 1, 2012. Barbara contributed $100,000 in exchange for her one-half interest. Bill contributed land worth $100,000 that had an adjusted basis to him of $30,000 in exchange for his one-half interest. Which of the following statements is accurate with respect to this transaction? a. None of Barbara, Bill, or B&B recognized any gain or loss. b. Bill recognized gain of $70,000 , but Barbara and B&B did not recognize any gain or loss. c. B&B recognized gain or $70,000 , but Barbara and Bill did not recognize any gain or loss. d. Bill and B&B each recognized $70,000 of gain, but Barbara did not recognize any gain or loss. 42. Ten years ago, Lisa acquired a one-third interest in Dee Associates, a general partnership. In the current taxable year, when Lisa?s entire interest in the partnership was liquidated, Dee Associates? assets consisted of cash of $20,000 and tangible property with an adjusted basis to the partnership of $46,000 and a fair market value of $40,000 on the date of distribution. Dee Associates had no liabilities. Lisa?s adjusted basis in her one-third interest in the partnership was $22,000. Lisa received cash of $20,000 in complete liquidation of her entire interest. How much loss will Lisa recognize upon receipt of the liquidating distribution? a. 0. b. $2,000 short-term capital loss. c. $2,000 long-term capital loss. d. $2,000 ordinary loss. 43. Jim, one of two equal partners of the JJ Partnership, a general partnership, contributed business property with an adjusted basis to him of $15,000 and a fair market value of $10,000 to the JJ Partnership. Jim?s capital account was credited with $10,000. The property later was sold for $12,000. As a result of this sale, how much gain or loss must Jim report on his personal income tax return? a. $1,000 gain. b. $1,500 loss. c. $2,000 gain. d. $3,000 loss. 44. Ronald and Roy formed an equal partnership, R&R Partnership, a general partnership, on January 1, 2012. Ronald contributed $100,000 in exchange for his one-half interest in R&R partnership. Roy contributed land worth $100,000 and with an adjusted basis to Roy of $30,000 in exchange for his one-half interest in the partnership. Roy is a real estate developer, and at the time of the contribution, the land was inventory in his hands. The land is a capital asset in the hands of R&R Partnership. If R&R Partnership sells the land in 2018 to an unrelated taxpayer for $180,000,how much gain will be recognized by R&R Partnership and what will be the character of the gain? a. $80,000, all of which gain will be ordinary income b. $150,000, all of which gain will be capital gain. c. $150,000, all of which gain will be ordinary income. d. $150,000, consisting of $80,000 capital gain and $70,000 ordinary income. 45. At the beginning of 2012, Margaret?s adjusted basis in her 30 percent interest in MP Partnership, a general partnership, was $3,000. During 2012, Margaret did not make any additional contributions to MP Partnership, and Margaret?s share of MP Partnership liabilities did not change. During 2012, MP Partnership distributed $5,000 to Margaret, and MP Partnership had the following items of partnership income, deduction, gain and loss for 2012: Taxable income $15,000 Tax-exempt interest $6,000 Section 1231 loss ($10,000) What is Margaret?s adjusted basis in her partnership interest in MP Partnership at the end of 2012? a. 0. b. $1,300. c. $9,000. d. $2,700.
Question 2
Hi, Attached is a set of general journal entries for the following transactions/problem. I am struggling with them and know I am in need of help, please check to see what I could be misunderstanding or simply missing. Included in the instructions are the correct balances, which are very different than what I have come to. I am also not sure on how the month end closings entries should be handled. Thank you very much for your help with this!!!!!! Introduction The transactions in this practice set were completed by Bath Designs Inc. during January, the first month of the company?s fiscal year. The company designs and manufactures a limited variety of custom bathroom storage cabinets and sauna units, and it maintains a job-order cost system. You have accepted a position with Bath Designs Inc. as assistant controller, and you will begin your duties on January 1 of the current year. In your review of the previous assistant controller?s records, you notice some jobs were incomplete as of December 31 of the previous year. These jobs are contained in the Job Cost Records. You plan to complete most of these jobs in January and to accept new jobs from builders and contractors. You are responsible for the daily accounting operations, preparation of interim financial statements, and end-of-month adjusting and closings entries. Bath Designs Inc. manufactures all products in a single production department. An individual job-order cost sheet is maintained for each job. The job-order cost sheet contains accumulated costs for each job, including actual direct materials, actual direct labor, and applied factory overhead. Gross pay for direct labor is recorded by a debit to Work in Process. Salaries for all other factory personnel are recorded by a debit to Factory Overhead. Salaries of non-factory personnel are recorded at the end of each month by a debit to the appropriate salary expense accounts. Deductions for FICA tax at 7.65% of gross pay (this includes the Medicare Tax deduction) and employees? income tax at 18% of gross pay are recorded whenever gross pay is recorded. All wages are paid on the last day of the month. All employer payroll taxes are recorded at the end of the month. Payroll taxes related to factory personnel are debited to Factory Overhead. Payroll taxes related to all other company personnel are debited to Payroll Taxes Expense?General. Bath Designs Inc. maintains two materials accounts, one for Direct Materials and one for Indirect Materials and Factory Supplies. Factory overhead is applied to each job based on 125% of direct labor cost for that job. Bath Designs Inc. maintains only one factory overhead account. Remember that debits to Factory Overhead represent actual overhead and credits to Factory Overhead represent applied overhead. Since the difference between actual factory overhead and applied factory overhead is insignificant, the over-applied or under-applied balance is closed out to Cost of Goods Sold as an adjusting entry at the end of each month. Bath Designs Inc. marks up all work by 35% of the job cost. Refer to the individual Job Cost Record for the total cost of the job and multiply the total cost by 135% to determine the selling price for each job. Since Bath Designs Inc. sells to builders and contractors, sales are exempt from state sales tax. All sales are on account and are subject to terms of 1/10, net 30 days, FOB shipping point. Accounts Payable is used solely for the purchase of direct materials and indirect materials and factory supplies. All vendors except full payment within 30 days. Operating expenses, with the exception of any accrued salaries, payroll taxes, property taxes, and income taxes, are paid when incurred. All cash received is deposited in the bank, and all payments are made by check. When dealing with an accounts receivable or accounts payable item, be sure to record the company name in the General Ledger and post to Accounts Receivable or Accounts Payable Ledger. It is January 1, and you are ready to assume your new responsibilities. General Instructions 1. Journalize the entries for the month of January in the General Journal. When using the Work in Process account, be sure to post to the appropriate Job Cost Record. 1. Post the General Journal entries to the General Ledger, the Accounts Payable Ledger, and the Accounts Receivable Ledger. 2. Prepare Schedules of Accounts Receivable and Accounts Payable. 3. Prepare the Trial Balance section of the work sheet. 4. Complete the work sheet using the adjusting entries data for the Adjustment columns. 5. Prepare the following statements: A. Income Statement B. Retained Earnings Statement C. Balance Sheet 6. Journalize and post the adjusting entries 7. Journalize and post the closing entries. (It is acknowledged that this step is not performed until year end; this is for instructional purposes only.) 8. Prepare a Post-Closing Trial Balance. NARRATIVE OF TRANSACTIONS Note: Certain transactions, such as those dealing with payroll, require detailed computational work before preparing the journal entry. These transactions are explained initially in the narrative as they occur. Please refer to the original transaction when preparing a subsequent similar transaction. Jan. 2 Paid Berkeley Road Properties $3,600 for January rent. Of this amount, 30% is for office Facilities and 70% is for factory facilities. Jan. 2 Paid Pierce Advertising Agency $490 for preparing advertisements in local newspapers. Jan. 3 Paid Liberty Wood Products Company $8413.12 in payment of December 31 balance. Jan. 3 Received a check from Kian Corporation for the amount due within the discount period. Jan. 4 Paid State National Bank $25,681.41 for December payroll taxes payable as follows: Employee?s Income Tax Payable, $15,812.27; FICA Tax Payable, $9143.73; Federal Unemployment Tax, $319.19; State Unemployment Tax, $406.22. Jan. 4 Paid $7,423.36 for Income Tax Payable. Jan. 4 Paid Ohio Plastics Company $10,714.00 in payment of the December 31 balance. Jan. 4 Applied $3,624.00 of direct materials (requisition No. 670) and $8,120 of direct labor (time ticket No. 129) to Job No. 403, which will complete the job. The FICA rate is 7.65% of gross pay and the employees? income tax rate is 18% of gross pay. When preparing the entry for applying direct labor, debit Work in Process for the gross pay, and credit Employees? Income Tax Payable and FICA Tax Payable for the appropriate amounts and Salaries Payable for net pay. Remember that employees are paid on the last day of each month. Applied factory overhead to Job No. 403 is based upon 125% of direct labor cost. Transferred the completed job to the finished goods account. Jan. 5 Sold and shipped Job No. 403 to the appropriate customer. All sales are on account 1/10, net 30 days, FOB shipping point. Bath Designs Inc. marks up all work by 40% of the job cost (NOTE IN THE ORIGINAL INSTRUCTION SHEET IT SAYS BY 35%, SO NOT SURE WHICH TO USE). Refer to the individual Job Order Cost Sheet for the total cost of the job and multiply the total cost by 140% to determine the selling price for each job. Bath Designs, Inc. maintains a perpetual inventory system. Each time a sale is made to a customer, you must debit Cost of Goods Sold and credit Finished Goods for the cost of the job. Jan. 8 Requisitioned $1,241.27 of indirect materials and factory supplies to be used in the manufacture of all jobs currently in process. (Materials requisition No. 680) Jan. 9 Paid Bob Davis, County Tax Collector, $6321.00 for property taxes accrued as of December 31. Jan. 9 Purchased from Glory Container Corporation $2,243.26 of indirect factory supplies, credit terms net 15 days. Jan. 9 Accepted a job for the manufacture of 17 closet units for Bloomingdale Engineering. The promise date is Feb. 14. Began the job today by applying $5,914.00 of direct materials to Job. No. 406. (Materials requisition No. 681.) Jan. 10 Received a check from Tarara Design Corporation for the amount due within the discount period. Jan. 11 Paid Rorick Hardware Inc. $9,100.00 in payment of the December 31 balance. Jan. 11 Applied $1,327.14 of direct materials to Job. No. 402 (No. 682) Jan. 12 Received a check from Ryan Sales Company for the amount due after the discount period has expired. Jan. 15 Applied $2,214.06 of direct materials to Job No. 404 (No. 683) Jan. 16 Purchased $503.00 of factory supplies from Samantha Supplies, Inc. and paid cash. Jan. 16 Applied $3,216.50 of direct labor to Job. No. 405, which will complete the job. (Time ticket No. 130) Applied factory overhead using the appropriate rate. Transferred the completed job to the finished goods account. Jan. 16 Sold four standard vanity units to a cash customer for $1,400. The cost of the goods shipped from finished goods inventory was $1,000.00. Jan. 17 Requisitioned $614.50 of indirect materials and factory supplies to be used in all factory jobs currently in process (Materials requisition No. 684) Jan. 17 Signed a contract with Elliana Interiors for the manufacture of 120 counter units. The promise date is Feb. 15. Began the job today by applying $4,220.00 of direct materials to Job. No. 407 (Materials requisition No.685) Jan. 17 Paid the sales manager of Bath Designs Inc. $142.62 for customer entertaining. Jan. 18 Received a report from the treasurer that Pickens Contractors, one of our customers, has declared bankruptcy. Wrote off the balance owed to Bath Designs Inc. by Pickens Contractors. Jan. 18 Sold and shipped Job. No. 405 to the appropriate customer. Refer to that job?s Cost Record for the total cost of the job to determine the selling price. Jan. 22 Purchased $10,232.16 of direct materials from Neola Supply Company, credit terms net 30 days. Jan. 22 Accepted a job for the manufacture of 12 sauna units for Maplewood Designers. The promise date is Jan. 31. Began the job today by applying $2,468.10 of direct materials to Job No. 408 (Materials requisition No. 686) Jan. 24 Paid Glory Container Corp. the amount due today from the Jan. 9 purchase. Jan. 25 Applied $1,660 of direct labor to Job. No. 402, which will complete the job. (Time ticket No.131) Applied factory overhead using the appropriate rate. Transferred the completed job to the finished goods account. Jan. 26 Sold and shipped Job No. 402 to the appropriate customer. Refer to that job?s Cost Record for the total cost of the job to determine the selling price. Jan. 26 Ap0plied $3,640 of direct labor to Job. No. 408, which will complete the job. (time ticket No 132) Applied factory overhead using the appropriate rate. Transferred the completed job to the finished goods account. Jan. 29 Sold and shipped Job No 408 to the appropriate customer. Refer to that job?s Cost Records for the total cost of the job for billing purposes. Jan. 29 Paid Foley Tool Company amount due in payment of the Jan. 1 balance. Jan. 29 Received a check from Powell Contractors Inc. for the amount due after the discount period has expired. Jan. 29 Paid Post Office $500.00 for postage added to postage meter. Expense this amount. Jan. 29 Paid Telephone Company $250.00 for Jan. phone service. Jan. 29 Paid Owen Advertising Company $1,000.00 for designing ads for our new Internet website. Jan. 29 Paid Allied Power and Light company $4,216.00 for heat, power, and light. Allocate 25% of this amount to Electricity Expense and 75% to Factory Overhead. Jan. 31 Applied $1,000.00 of direct labor to Job 404 (time ticket No. 133) Applied factory overhead using the appropriate rate. This job will not be completed until Feb. Jan. 31 Applied $4,220.00 of direct labor to Job 407 (time ticket No. 134) Applied factory overhead using the appropriate rate. This job will not be completed until March. Jan. 31 Applied $1,160.00 of direct labor to Job 406 (time ticket No. 135) Applied factory overhead using the appropriate rate. This job will not be completed until Feb. Jan. 31 Received the following data on the monthly payroll from the payroll clerk: Direct Labor (already recorded): $23,016.50 New payroll data (to be recorded): Indirect $11,220.00 Superintendent?s Salary 3,100.00 Sales salaries 11,975.00 Officers? salaries 7,140.00 Office salaries 6310.10 Record the monthly payroll in the general journal. Remember that direct labor payroll already has been recorded as it was incurred in Jan. Salaries for indirect labor are recorded only at the end of the month. Debit Factory Overhead for Indirect Labor and Superintendent?s salaries, debit other salary expense account for the appropriate amounts, credit FICA Tax Payable for 7.65% of gross pay, credit Employees? Income Tax Payable for 18% of gross pay, and credit Salaries Payable for the net pay. All payroll taxes relating to factory personnel are debited to Factory Overhead; all payroll taxes related to non-factory personnel are debited Payroll Taxes Expense ? General. The FICA tax is 7.65% of gross pay, state unemployment. Tax is 5.4% of gross pay and federal unemployment. Tax is 0.8% of gross pay. Since this is the first month in the current year, no employee has reached the ceilings on the payroll taxes. Round the charge to Factory Overhead down to the next cent. Jan. 31 Received a check from Seng Contractors for the amount due after the discount period has expired. Jan. 31 Received a check from Ruth Builders for the amount due after the discount period has expired. Jan. 31 Paid all employees for wages earned in Jan. Jan. 31 Purchased $8,214.00 of direct materials on account from Rorick Hardware Inc. (Take a trial balance at this point.) According to the book, the total for the debit and credit columns on the general journal BEFORE adjusting and closing entries are made should be $921,436.06. The total for adjusting entries is $18,635.08. Note: The figure for Factory Overhead and Cost of Goods Sold is rounded. Adjusting Entries: Jan. 31 Insurance expired during January: Factory 1,314.00 Selling 61.25 General 268.80 Jan. 31 Office supplies inventory as of Jan. 31 is $1,650 Jan. 31 Depreciation for the month: Factory equip 642.00 Office equip. 369.70 Jan. 31 Amortization of patents for Jan (debit Factory Overhead) 225.00 Jan. 31 Property tax accrued for the month: Factory 485.00 General 137.26 Jan. 31 Close out under applied Factory Overhead of $1,427.24 to Cost of Goods Sold. Jan. 31 Based on past experience, Bath Designs estimates that $7,900.00 is a reasonable balance for the Jan. 31 balance in the Allowance for Doubtful Accounts. Jan. 31 Income tax is based on 40% of income before tax. Accrue income tax owed by debiting Income Tax Expense and crediting Income Tax Payable for $6,748.83. (Prepare all reports at this point and print general ledger NOW) Closing Entries: Jan. 31 Prepare closing entries to close revenue and expense accounts to Income Summary, and transfer net income to Retained Earnings. (It is acknowledged that this step is not performed until year end; this is for instructional purposes only.) Prepare a Post-Closing Trial Balance. Schedule of Accounts Receivable Bright Interior Systems ----------$13,275.44 Hughes Building Company ------$3,240.00 Kian Corp.----------------------------$8,431.00 Pickens Contractors ---------------$2,173.00 Powell Contractors Inc. ---------$22,941.61 Ruth Builders -----------------------$19,713.00 Ryan Sales Company -------------$7,214.97 Tarara Design Corp. ---------------$10,622.00 Schedule of Accounts Payable Foley Tool Company ------------$18,622.00 Liberty Wood Products --------$8,413.12 Ohio Plastics Company --------$10,714.00 Rorick Hardware Inc ------------$9,100.00
Question 3
1. SWOT analysis, a valuable analysis tool, stands for: (Points : 2) Strengths - Workability - Opportunities - Threats Strategies - Weaknesses - Opportunities - Threats Strengths - Weaknesses - Observations - Threats Strengths - Weaknesses - Opportunities - Threats Strategies - Weaknesses - Observations - Threats 2. Target costing determines the desired cost for a product upon the basis of a given competitive price such that the product will: (Points : 2) Earn at least a small profit. Earn a desired profit. Earn the maximum profit. Break even. Sell the highest volume. 3. In the current business environment, companies cannot survive without a long-term strategy. What exactly should an effective strategy include? (Points : 2) A set of policies, procedures, and approaches to business that will result in long-term success. A focus on accurate financial data, thus allowing the firm to effectively compete in any environment. A focus on long-term nonfinancial information that will provide the company with versatile management techniques capable of being used in a wide variety of situations. A clear, concise mission statement, naming every product and outlining the company's long-term goals of success. 4. Which of the following organizations presents awards to firms that excel at execution of strategy, based on criteria such as leadership, marketing, strategic planning and process management? (Points : 2) International Organization for Standardization. Malcolm Baldrige National Quality Program. Global Reporting Initiative. World Resources Institute. American Institute of Certified Public Accountants. 5. The change in total cost associated with each change in the quantity of the cost driver is: (Points : 2) Average cost. Controllable cost. Variable cost. Unit cost. 6. Which of the following could be considered part of the value chain in a service firm? (Points : 2) Inspection of product. Advertising. Raw materials. Customer service. Advertising and customer service. 7. Which of the following aspects of the contemporary business environment involves using statistical methods such as regression or correlation analysis to predict consumer behavior, to measure customer satisfaction, or to develop models for setting prices, among other uses? (Points : 2) Business Intelligence Target Costing Life Cycle Costing Benchmarking Business Process Improvement 8. Which of the following types of organizations can most benefit from value chain analysis? (Points : 2) Service firms. Not-for-profit organizations. Manufacturing firms. All types of organizations can benefit from value chain analysis. 9. Which of the following aspect of a contemporary management technique is a framework and process that organizations use to manage the occurrence of possible events that could negatively or positively affect the company's competitiveness and success? (Points : 2) Total quality management Lean accounting The theory of constraints Enterprise sustainability Enterprise risk management 10. JCH Company conducts business in the lumber and building products industry. Last week, JCH purchased 50 railcars of lumber from a mill in Oregon and sold all 50 to a Home Depot store in North Carolina. In this instance, JCH Company would most likely be classified as a: (Points : 2) Manufacturer. Retailer. Warehouse. Wholesaler. 11. After critical success factors (CSFs) have been identified, the next step in developing a competitive strategy is to develop relevant and reliable measures for these CSFs. These measures are important to help the organization: (Points : 2) Make profit for any extended period. Increase sales above previous year(s). Develop policies to enhance customer profitability. Improve productivity in selected product areas. Monitor progress toward achieving strategic goals. 12. The decline of the U.S. dollar relative to other currencies has caused firms outside the U.S., such as BMW and Volkswagen to: (Points : 2) Experience increasing sales in the U.S. Experience increasing sales worldwide. Locate plants in the U.S. to reduce overall manufacturing costs. Require dealers to make payments in the Euro. 13. The income statement for a merchandising company includes: (Points : 2) Direct Labor. Factory Overhead. Total Manufacturing Cost. Cost of Goods Sold. 14. The following problems have occurred at your company: management seems to be making decisions based on guesses and intuition, there's a lack of clarity concerning direction and goals, and profitable opportunities are being missed. What is your company suffering from? (Points : 2) A lack of strategic information; management has not determined its strategic competitive position. Managers have too much information. The company is not familiar with business reengineering and value chain analysis. The company has an inappropriate mission statement. 15. The cause and effect relationships among critical success factors are best captured in: (Points : 2) The balanced scorecard Business intelligence The value chain The strategy map SWOT analysis 16. Firms should use a process costing system when they produce products that: (Points : 2) Are semi-homogeneous. Pass through a series of manufacturing processes. Pass through only one department. Have small batch sizes. 17. Which of the following is most likely to be the cost driver for the packaging and shipping activity? (Points : 2) Number of setups. Number of components. Number of orders. Hours of testing. Number of production runs. 18. Normal spoilage is defined as: (Points : 2) Spoilage that occurs under efficient operations. Scrap. Uncontrollable waste as a result of a special production run. Spoilage that arises under inefficient operations. Controllable spoilage. 19. Freight charges based on number of units shipped to customers is a: (Points : 2) Customer unit-level cost. Customer batch-level cost. Customer-sustaining cost. Distribution-channel cost. Sales-level cost. 20. ABC Company listed the following data for 2010: Budgeted Factory Overhead $1,044,000 Budgeted Direct Labor Hours 72,000 Budgeted Machine Hours 24,000 Actual Factory Overhead 1,037,400 Actual Direct Labor Hours 72,000 Actual Machine Hours 23,000 Round calculations to two significant digits. Assuming ABC applied overhead based on machine hours, the company's predetermined overhead rate for 2010 is: (Points : 2) $43.50 per machine hour. $14.38 per machine hour. $44.24 per machine hour. $14.50 per machine hour. 21. Which one of the following is the amount of factory overhead applied that exceeds the actual factory overhead cost? (Points : 2) Factory overhead applied. Actual factory overhead. Overapplied overhead. Allocated factory overhead. Underapplied overhead. 22. The sum of units transferred out and ending inventory units, assuming no spoilage, determines the: (Points : 2) Units completed during the period. Units spoiled. Units transferred in during the period. Units accounted for. 23. Customer equity is a type of analysis used to: (Points : 2) Assess the ethical practices of each salesperson-customer relationship. Assess the current profit potential of a customer. Assess the long term profit potential of a customer. Assess the current profit potential of all the firm's customers. Assess the long term profit potential of all the firm's customers. 24. The journal entry to record incurred direct labor would include a credit to: (Points : 2) Work-in-Process Inventory. Accrued Payroll. Factory Overhead. Materials Inventory. Finished Goods Inventory. 25. With the increase in competition over the past several years, traditional cost accounting systems have become less common in product costing because (Points : 2) They use volume-based cost drivers. They use structural cost drivers. They use executional cost drivers. They use indirect cost drivers. 26. In regard to selling activities, which one of the following would be a cost driver for selling expense? (Points : 2) Number of invoices. Number of sales calls. Number of production runs. Number of shipments. 27. In an organization that makes furniture, which of the following is a high value-added activity? (Points : 2) Using direct materials in production. Inspecting production. Storing finished goods inventory. Moving work-in-process inventory between work stations. Reworking the product to repair defects. 28. Place the following Process costing steps in the correct order: 1 - Calculate equivalent units 2 - Determine the total costs to account for 3 - Analyze flow of physical units 4 - Assign total manufacturing costs 5 - Compute unit costs (Points : 2) 3,5,2,1,4. 2,1,5,4,3. 2,3,5,4,1. 3,1,2,5,4. 29. Conversion costs in a process cost system include: (Points : 2) Direct materials and direct labor. Direct labor and manufacturing overhead. Direct materials and manufacturing overhead. Manufacturing overhead and selling, general & administrative expenses. 30. In the context of ABC, cross-subsidization refers to: (Points : 2) Productions department subsidizing each other Costing inaccuracies which affect the relative profitability of products Cross-selling products lines, which affect customer profitability Efforts to increased coordination among department heads 31. The p-value measures: (Points : 2) The probability that the regression equation is reliable. The statistical significance of the dependent variable. The risk that a particular independent variable has only a chance relationship to the dependent variable. The confidence range around the regression prediction. 32. The independent variable in regression analysis is: (Points : 2) The cost to be estimated. The cost driver used to estimate the value of the dependent variable. Hard to define because of its independence. Usually expressed as a range of values. Not always necessary to perform regression analysis. 33. The process of examining how a change in a single item in a budget (e.g., sales volume) affects one or more items in the budget (e.g., budgeted sales revenue and budgeted operating income) is generally referred to as: (Points : 2) Flexible budgeting. Sensitivity analysis. Uncertainty programming. What-if analysis. Activity-based budgeting (ABB). 34. Data collected on the cost objects and cost drivers for cost estimation must be: (Points : 2) Brief and limited. Exhaustive. Concrete. Consistent and accurate. Varied. 35. Which one of the following is defined as the ratio of the contribution margin to profit? (Points : 2) Contribution margin ratio. Margin of safety ratio. Operating leverage. Breakeven point. Margin of safety. 36. Which one the following is a variable that takes on values of 1, 2, 3,? for each period in sequence? (Points : 2) Dummy variable. Outlier. Trend variable. Dependent variable. Independent variable. 37. All of the following are ways of setting the budget, except: (Points : 2) Negotiation-based budgeting. Two-stage budgeting. Participative budgeting. Authoritative budgeting. All of the above are ways of setting the budget. 38. The name for a variety of methods used to examine how an amount will change if factors involved in predicting that amount change is: (Points : 2) Sensitivity analysis. What-if analysis. Factor analysis. Cost analysis. Profit Analysis. 39. A plan that states the units or costs of merchandise to be purchased by a retailer or wholesaler during the budget period is called a: (Points : 2) Production budget. Merchandise purchases budget. Accounts payable budget. Cash payments budget. Cost of goods sold budget. 40. General Manufacturing expects to have 40,000 pounds of raw materials inventory on hand on June 30, the end of the current year. The company has budgeted the following production for the first four months of the coming year: July August September October Production Units 100,000 120,000 150,000 110,000 For the budgeting period, the firm desires each month's ending raw material inventory to be 20% of the next month's production needs. A finished unit requires two pounds of raw materials. The budgeted purchases of materials during September should be: (Points : 2) 60,000 lbs. 228,000 lbs. 248,000 lbs. 284,000 lbs. 300,000 lbs. 41. Which of the following factors is not involved in studying cost/volume/profit relationships? (Points : 2) Desired profit. Variable costs. Fixed costs. Product mix. Actual sales. 42. Becker Sofa Company expected to sell 12,000 leather sofas. Fixed costs were $8,400,000; unit sales price was $4,600; and unit variable costs were $2,200. Becker Sofa Company's margin of safety in units is calculated to be: (Points : 2) 8,800. 8,000. 9,900. 9,100. 8,500. 43. Which of the following is not a potential benefit of having a sound budgeting process? (Points : 2) Improved decision-making. Improved performance-evaluation process. Improved coordination of business activities. Improved motivation for company employees. Lower acceptance rate for capital budgeting projects. 44. OutlyTech Corp. expected to sell 24,000 telephone switches. Fixed costs were $12,144,000, unit sales price was $3,200, and unit variable costs were $1,440. OutlyTech's margin of safety ratio is: (Points : 2) 71.25%. 87.00%. 70.25%. 92.50%. 76.15%. 45. The equation method and the contribution margin method: (Points : 2) Can determine the breakeven point in units sold but not in sales dollars. Can determine the breakeven point in sales dollars but not in units sold. Cannot determine the breakeven point in units sold. Cannot determine the breakeven point in sales dollars. Can determine the breakeven point in units sold or sales dollars. 46. CVP analysis using activity-based costs will tend to shift cost from fixed to variable classifications, resulting in: (Points : 2) Lower breakeven sales. Higher breakeven sales. Breakeven sales can be higher or lower, depending on batch size. A higher contribution margin per unit. A lower contribution margin per unit. 47. Which of the following is the percentage by which average time (or total time) falls from previous levels as output doubles? (Points : 2) Learning speed. Learning curve. Learning analysis. Learning average. Learning rate. 48. Which of the following is not used for evaluating a regression analysis? (Points : 2) Correlation. t-value. R-Squared. F value Multicollinearity. 49. Cleaning Care Inc. expects to sell 10,000 mops. Fixed costs are $10,000, unit sales price is $12, and unit variable costs are $7. Cleaning Care's margin of safety in units is: (Points : 2) 1,000. 2,000. 4,000. 8,000. 9,000. 50. Becker Sofa Company expected to sell 12,000 leather sofas. Fixed costs were $8,400,000; unit sales price was $4,600; and unit variable costs were $2,200. Becker Sofa Company's margin of safety ratio is calculated to be: (Points : 2) 71.29%. 77.98%. 70.83%. 79.27%. 73.35%.
Question 4
1. Alicia, who is a divisional manager, complains bitterly that her division's required return for its projects is one percent higher than the return required for any other division of the firm. Management's knowledge of which of the following most likely contribute to the higher rate requirement for Alicia's division? I. Alicia tends to overestimate the projected cash inflows on her projects. II. Alicia tends to underestimate the variable costs of her projects. III. Alicia's division is the most efficiently managed division in the firm. IV. Alicia's division presents greater risk to the firm than any of the other divisions. A. IV only B. I and II only C. III and IV only D. I, II, and IV only E. I, II, III, and IV 2. Miller Industrial Tools has two separate divisions. Division X produces custom work on a pre-paid basis only for long-term customers and therefore, is subject to less risk than division Y. The company has assigned a discount rate equal to the firm's WACC minus 1.5 percent to division X and a rate equal to the firm's WACC plus 2 percent to division Y. The company has a debt-equity ratio of .40 and a tax rate of 32 percent. The cost of equity is 11.4 percent and the aftertax cost of debt is 4.8 percent. Presently, each division is considering a new project. Division Y's project provides a 10.2 percent rate of return and division X's project provides a 6.4 percent return. Which projects, if any, should the company accept? A. accept both X and Y B. accept X and reject Y C. reject X and accept Y D. reject both X and Y E. The answer cannot be determined without additional information. 3. Which one of the following is a correct statement regarding a firm's weighted average cost of capital (WACC)? A. The WACC can be used as the required return for all new projects. B. The WACC of a leveraged firm will decrease when the tax rate decreases. C. An increase in the market risk premium will tend to decrease a firm's WACC. D. The WACC is a starting point for the subjective approach to setting discount rates. E. A reduction in the risk level of a firm will tend to increase the firm's WACC. 4. If the risk-free rate of return decreases while the market rate of return remains constant, then the: A. slope of the security market line will decrease. B. slope of the security market line will increase. C. the beta of the market must increase. D. the vertical intercept of the security market line must increase. E. the market risk premium as measured on the vertical axis must decrease. 5. The New Look is a retail outlet selling the latest fashions to the general public through its outlets located in various neighborhood malls. The Textile Outlet is a clothing wholesaler that primarily buys from textile mills and sells to retail outlets. The New Look has a cost of capital of 12 percent, while the Textile Outlet's cost of capital is 10.75 percent. Both firms are considering opening a retail outlet in a gigantic new mall that is being built to service the greater Atlanta area. Both proposals are quite similar in design and have basically the following financial features: an initial cash outlay of $3.2 million, a projected 5-year life with no salvage value, and cash inflows of $875,000 a year for the life of the project. Which firm or firms, if either, should open a retail outlet in the new mall? A. Only the New Look should open in the new mall. B. Only the Textile Outlet should open in the new mall. C. Neither the New Look nor the Textile Outlet should open in the new mall. D. Both the New Look and the Textile Outlet should open a store in the new mall. E. The answer cannot be determined without additional information. 6. Hopewell Enterprises is a globally diverse conglomerate with interests in diverse retail, medical, and technology sectors. The firm has a beta of 1.4 and a cost of capital of 13.8 percent. Medical Associates is a specialty firm in the medical equipment field and has a beta of 1.6 and a cost of capital of 15.7 percent. With the aging of America, both firms recognize the opportunities that exist in the medical field and are considering expansion in this area. At present, there is an opportunity for multiple firms to be involved in a new medical devices project. The project will require an investment from each investor of $6.8 million. The project is expected to return $11.5 million to each investor in one lump sum payment at the end of year 4. Which firm or firms, if either, should accept this project? A. Only Hopewell Enterprises should accept this investment. B. Only Medical Associates should accept this investment. C. Both firms should reject this investment. D. Both firms should accept this investment. E. The answer cannot be determined without additional information. 7. Which of the following statements related to preferred stock are correct? I. A decrease in the market value of preferred stock will increase a firm's weighted average cost of capital. II. Preferred stock pays a constant dividend. III. Preferred stock is generally the cheapest source of capital for a firm. IV. An increase in the rating of a preferred stock will increase the cost of preferred. A. I and III only B. II and IV only C. I and II only D. III and IV only E. I, II, and III only 8. Sabrina's just paid an annual dividend of $1.79 per share. This dividend is expected to increase by 2.5 percent annually. Currently, the firm has a beta of .87 and a stock price of $31 a share. The risk-free rate is 4.5 percent and the market rate of return is 11.8 percent. What is the cost of equity capital for Sabrina's? A. 8.27 percent B. 8.43 percent C. 9.63 percent D. 10.86 percent E. 11.07 percent 9. Which one of the following is a correct statement? A. Current tax laws favor debt financing. B. A decrease in the dividend growth rate increases the cost of equity. C. An increase in the systematic risk of a firm will decrease the firm's cost of capital. D. A decrease in a firm's debt-equity ratio will usually decrease the firm's cost of capital. E. The cost of preferred stock decreases when the tax rate increases. 10. The Rhodes Co. is considering a project with an initial cost of $5.8 million. The project will produce cash inflows of $1.64 million a year for five years. The firm uses the subjective approach to assign discount rates to projects. For this project, the subjective adjustment is -1.5 percent. The firm has a pre-tax cost of debt of 7.9 percent and a cost of equity of 11.8 percent. The debt-equity ratio is .60 and the tax rate is 34 percent. What is the net present value of the project? A. $672,403 B. $717,219 C. $777,445 D. $821,212 E. $854,008 11. Watertown Antiques has a pre-tax cost of debt of 8.7 percent and a cost of equity of 13.2 percent. The firm uses the subjective approach to determine project discount rates. Currently, the firm is considering a project to which it has assigned an adjustment factor of 1.5 percent. The firm's tax rate is 35 percent and its debt-equity ratio is .6. The project has an initial cost of $5.2 million and produces cash inflows of $1.48 million a year for 5 years. What is the net present value of the project? A. -$178,016 B. -$16,323 C. $128,407 D. $143,909 E. $152,212 12. Kathy's Quilts is a brick-and-mortar quilt and fabric retailer. The firm is considering expanding its operations to include Internet sales. Which one of the following would be the best firm to use in a pure play approach to this project? A. a national fabric store with both in-store and online sales B. a sewing machine manufacturer that sells only online C. a fabric store that sells primarily online D. an online wholesaler of crafts items E. Kathy's Quilts 13. Hybrid Motors has paid increasing dividends of $.42, $.50, $.55, $.65, and $.80 a share over the past five years, respectively. The firm estimates that future increases in its dividends will be comparable to the arithmetic average growth rate over these past five years. The stock is currently selling for $41.50 a share. The risk-free rate is 3.5 percent and the market risk premium is 8.6 percent. What is the cost of equity for Hybrid Motors if the firm's beta is 1.42? A. 12.49 percent B. 15.45 percent C. 17.78 percent D. 18.67 percent E. 19.24 percent 14. Which of the following will affect the capital structure weights of a firm? I. decrease in the book value of a firm's equity II. decrease in a firm's tax rate III. increase in the market value of the firm's common stock IV. increase in the firm's debt-equity ratio A. I and II only B. III and IV only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV 15. C&O, Inc. is considering a project that requires an initial cash outlay for equipment of $41.4 million. The equipment will be depreciated to a zero book value over the 4-year life of the project. At the end of the project, C&O expects to sell the equipment for $29.9 million. The project will produce cash inflows of $12.6 million a year for the first 2 years and $5.8 million a year for the following 2 years. C&O has a cost of equity of 14 percent and a pre-tax cost of debt of 9 percent. The debt-equity ratio is .60 and the tax rate is 38 percent. The company has decided that it will accept the project if the project's internal rate of return (IRR) exceeds the firm's weighted average cost of capital (WACC) by 1.5 percent or more. Should C&O accept this project and why or why not? A. accept; because the IRR is less than the required rate B. accept; because the IRR exceeds the required rate C. accept; because the IRR equals the required rate D. reject; because the IRR is less than the required rate E. reject; because the IRR exceeds the required rate 16. Temple Manufacturing has three divisions. Division A has been in existence the longest and has the most stable sales. Division B has been in existence for ten years and is slightly less risky than the overall firm. Division C is the research and development side of the business. When allocating funds, the firm should probably: A. require the highest rate of return from division A since it is the most stable. B. assign the highest cost of capital to division C because it is most likely the riskiest of the three divisions. C. allocate the least amount of funds to division C since it is involved only with research and development. D. use the firm's WACC as the cost of capital for divisions A and B. E. allocate capital funds evenly amongst the divisions to maintain the current capital structure of the firm. 17. A firm wants to create a weighted average cost of capital (WACC) of 9.5 percent. The firm's cost of equity is 11 percent and its pre-tax cost of debt is 9 percent. The tax rate is 35 percent. What does the debt-equity ratio need to be for the firm to achieve its target WACC? A. .28 B. .37 C. .41 D. .54 E. .59 18. Baker's Footwear has 8,000 shares of common stock outstanding at a price per share of $64 and a rate of return of 15 percent. The firm has 2,000 shares of 6 percent preferred stock outstanding at a price of $54 a share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $100,000 and a market price equal to 102 percent of face value. The yield-to-maturity on the debt is 9.36 percent. What is the firm's weighted average cost of capital if the tax rate is 35 percent? A. 12.34 percent B. 12.41percent C. 12.88 percent D. 13.16 percent E. 13.32 percent 19. Ziegler's Supply has a beta of 1.06, a variance of .0124, a dividend growth rate of 2.8 percent, a stock price of $27 a share, and an expected annual dividend of $1.10 per share next year. The market rate of return is 10.8 percent and the risk-free rate is 4.1 percent. What is the cost of equity for Ziegler's Supply? A. 6.89 percent B. 7.87 percent C. 8.48 percent D. 9.04 percent E. 11.19 percent 20. Which one of the following statements is correct concerning capital structure weights? A. Capital structure weights are constant over time. B. A new bond issue will not affect the weight of the firm's preferred stock. C. An increase in the debt-equity ratio will increase the weight of the common stock. D. The repurchase of preferred stock will not affect the weight of the debt. E. The issuance of additional shares of common stock will decrease the weight of the preferred stock. 21. You are comparing two possible capital structures for a firm. The first option is an all-equity firm. The second option involves the use of $1.5 million of debt. The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $230,000. Given this, you know that leverage is beneficial to the firm: A. whenever EBIT is less than $230,000. B. only when EBIT is $230,000. C. whenever EBIT exceeds $230,000. D. only if the debt is decreased by $230,000 to a total of $1.27 million. E. only if the debt is increased by $230,000 to a total of $1.73 million. 22. Webster's is an all-equity firm that has 20,000 shares of stock outstanding at a market price of $45 a share. The firm has earnings before interest and taxes of $60,000 and has a 100 percent dividend payout ratio. Ignore taxes. Webster's has decided to issue$200,000 of debt at a rate of 9 percent and use the proceeds to repurchase shares. Adam owns 100 shares of Webster's stock and has decided to continue holding those shares. Once Webster's issues the debt, Adam's total annual dividend income from these shares will: A. decrease from $300 to $215. B. increase from $200 to $315 . C. decrease from $300 to $270. D. increase from $200 to $270. E. remain constant. 23. Which one of the following statements is true concerning a bankruptcy? A. A Chapter 7 bankruptcy is a reorganization proceeding. B. A "prepack" is intended to shorten the time a firm spends in bankruptcy. C. The absolute priority rule applies to both Chapter 7 and Chapter 11 bankruptcy proceedings and must be adhered to by the courts. D. Creditors cannot force a firm into bankruptcy even though they might like to do so. E. A reorganization plan can only be approved if the firm's creditors all agree with the plan. 24. Which one of the following occurs if a firm files for Chapter 7 bankruptcy but does not generally occur if the firm files for Chapter 11 bankruptcy? A. a petition is filed in federal court B. administrative fees are incurred C. a list of creditors is compiled D. pre-bankruptcy shareholders tend to lose part, if not all, of their investment in the firm E. a trustee-in-bankruptcy is elected by the creditors 25. Treynor's is an all-equity development company that has 15,000 shares of stock outstanding at a market price of $40 a share. The firm's earnings before interest and taxes are $20,000. Treynor's has decided to issue $140,000 of debt at a rate of 7.5 percent and use the proceeds to repurchase shares. Courtney owns 300 shares of Treynor's stock and wants to use homemade leverage to offset the leverage being assumed by the firm. Courtney should: A. borrow money and buy an additional 23 shares. B. borrow money and buy an additional 70 shares. C. sell 23 shares and loan out the proceeds. D. sell 48 shares and loan out the proceeds. E. sell 70 shares and loan out the proceeds. 26. Hazelton Bakers is an all-equity firm with a total market value of $650,000. The firm has 130,000 shares of stock outstanding. Management is considering issuing $250,000 of debt at an interest rate of 8 percent and using the proceeds to repurchase shares. The projected earnings before interest and taxes are $60,000. What are the anticipated earnings per share if the debt is issued? Ignore taxes. A. $.31 B. $.50 C. $.69 D. $1.47 E. $2.00 27. Assume both corporate taxes and bankruptcy costs apply to a firm. Given this, the static theory of capital structure illustrates that: A. the value of a firm and the firm's weighted average cost of capital are unrelated. B. the maximum firm value occurs at the point where the weighted average cost of capital is minimized. C. the maximum firm value and the minimum weighted average cost of capital occur at a debt-equity ratio of .50. D. the maximum firm value occurs when the weighted average cost of capital is less than optimal. E. the weighted average cost of capital for a firm declines as long as the debt-equity ratio increases. 28. Webster's is an all-equity firm that has 20,000 shares of stock outstanding at a market price of $45 a share. The firm has earnings before interest and taxes of $60,000 and has a 100 percent dividend payout ratio. Ignore taxes. Webster's has decided to issue $100,000 of debt at a rate of 9 percent and use the proceeds to repurchase shares. Adam owns 100 shares of Webster's stock and has decided to continue holding those shares. By using homemade leverage to offset the leverage assumed by Webster's, Adam will receive annual income of: A. $270 from dividends and $30 from interest. B. $210 from dividends and $90 from interest. C. $160 from dividends and $140 from interest. D. $0 from dividends and $300 from interest. E. $300 from dividends and $0 from interest. 29. Which one of the following is correct based on the static theory of capital structure? A. A firm benefits most from debt financing when its tax rate is relatively low. B. There is an inverse relationship between the amount that a firm should borrow and the volatility of its earnings before interest and taxes. C. The costs of financial distress do not affect the value of a firm. D. The lower a firm's tax rate, the greater the firm's incentive to borrow. E. The benefit from the tax shield on debt is less than maximum at the optimal level of debt. 30. Which of the following statements correctly relate to M&M Proposition I, with taxes? I. Debt increases the value of a firm. II. The value of a firm unlevered is greater than the value levered. III. The weighted average cost of capital (WACC) is constant. IV. The interest tax shield is directly related to the debt-equity ratio for firms with positive net earnings. A. I only B. III only C. II and III only D. I and IV only E. I, III, and IV only 31. The static theory of capital structure demonstrates that a: A. firm loses value as soon as the first dollar of debt is incurred. B. firm's value is unaffected by the firm's debt-equity ratio. C. firm's value is linearly related to the firm's level of debt. D. firm maximizes its value by equating its business risks with its financial risks. E. firm needs to consider both the benefits and costs associated with debt financing. 32. The bankruptcy process has been utilized by firms as a means of: I. renegotiating labor contracts. II. reducing labor costs. III. avoiding payment of a legal judgment. IV. improving the firm's competitive position. A. I and II only B. III and IV only C. I, III, and IV only D. I, II, and III only E. I, II, III, and IV 33. Kalaway Importers is an all-equity firm with 16,000 shares of stock outstanding and a total market value of $280,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $31,000 if the economy is normal, $16,000 if the economy is in a recession, and $39,000 if the economy booms. Ignore taxes. Management is evaluating a $70,000 debt issue with a 7.5 percent coupon rate. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy booms? A. $2.11 B. $2.37 C. $2.81 D. $3.04 E. $3.16 34. Wes' Trucking just revised its capital structure from a debt-equity ratio of .25 to a debt-equity ratio of .40. The firm's shareholders who prefer the old capital structure should: A. sell some shares are hold the sale proceeds in cash. B. sell all of their shares and loan out the entire sale proceeds. C. do nothing. D. sell some shares and loan out the sale proceeds. E. borrow funds and purchase more shares. 35. Which one of the following statements concerning financial leverage is correct? A. The benefits of leverage are unaffected by the amount of a firm's earnings. B. The use of leverage will always increase a firm's earnings per share. C. The shareholders of a firm are exposed to greater risk anytime a firm uses financial leverage. D. Earnings per share are unaffected by changes in a firm's debt-equity ratio. E. Financial leverage is beneficial to a firm only when the firm has minimal earnings. 36. Hob-Nob is an all-equity firm that has 65,000 shares of stock outstanding. Kurt, the financial vice-president, is considering borrowing $240,000 at 8.5 percent interest to repurchase 15,000 shares. Ignoring taxes, what is the value of the firm? A. $.986 million B. $1.040 million C. $1.120 million D. $1.200 million E. $1.302 million 37. The Twin Sisters has a cost of equity of 18 percent, a return on assets of 14 percent, and a cost of debt of 7.5 percent. There are no taxes. What is the firm's weighted average cost of capital? A. 13.02 percent B. 14.00 percent C. 14.67 percent D. 14.93 percent E. 15.08 percent 38. A firm has a weighted average cost of capital of 9.6 percent and a cost of equity of 14.5 percent. The debt-equity ratio is .70. There are no taxes. What is the firm's cost of debt? A. 2.60 percent B. 3.18 percent C. 3.27 percent D. 3.33 percent E. 3.59 percent 39. Sylvester's has a 34 percent tax rate and an interest tax shield valued at $14,280 for the year. How much did the firm pay in annual interest? A. $4,855 B. $14,280 C. $42,000 D. $51,390 E. $55,400 40. Zeno Productions is comparing two separate capital structures. The first structure consists of 480,000 shares of stock and no debt. The second structure consists of 320,000 shares of stock and $12 million of debt. What is the price per share of equity? A. $48.00 B. $62.50 C. $67.50 D. $75.00 E. $87.50 41. Berwyn & Sons stock has a normal trading range of $21 to $29 a share. Recently, the firm hired a new CEO who has made dramatic, and effective, changes to the firm's operations. As a result, the stock has increased to $38 a share and is expected to increase at least another 25 percent. The firm's CFO is concerned about the stock price being so far above its normal trading range. Which one of the following actions should the firm take to address the CFO's concerns if the firm has no extra cash available to spend? A. declare a 10 percent stock dividend B. do a 1-for-2 reverse stock split C. do a 2-for-1 stock split D. declare a special dividend of $10 a share E. repurchase one-third of the outstanding shares 42. A stock repurchase: A. increases the number of shares outstanding. B. increases the earnings per share. C. increases the market price per share. D. does not affect the cash account. E. does not affect the book value of equity. 43. You own 300 shares of Dover Mills. The company just announced that it will pay a $.40 a share dividend next year. The following year, the firm is liquidating and expects to pay a final dividend of $14.20 a share. The required return on this stock is 18 percent. What will your homemade dividend per share be in year two if you only want a $.10 a share dividend next year? A. $14.39 B. $14.42 C. $14.47 D. $14.50 E. $14.55 44. Southern Fried Chicken is planning on paying a $1.30 a share dividend next year, a $1.40 per share dividend the following year, and a final liquidating dividend of $9.50 per share 3 years from now. The required return is 14.5 percent. How much will your homemade dividend be in three years if you opt to forego any dividend until then? A. $12.20 B. $12.47 C. $12.60 D. $12.81 E. $12.97 45. Macy Motors declared a dividend to holders of record on Monday, October 13, that is payable on Tuesday, October 21. Rosita purchased 100 shares of Macy Motors stock on Wednesday, October 8. Her brother, Raul purchased 100 shares of this stock on the following day. Which of the following statements are correct given this information? I. Rosita will receive the dividend that is payable on October 21. II. Raul will receive the dividend that is payable on October 21. III. Rosita purchased her shares on the ex-dividend date. IV. Raul purchased his shares on the ex-dividend date. A. I and III only B. II and IV only C. I and IV only D. I, II, and III only E. I, II, and IV only 46. A firm is considering spending $200,000 on either a stock repurchase or a cash dividend. Which one of the following will be the same whether the firm pays a dividend or repurchases stock? Assume there are no imperfections. A. number of shares outstanding B. price per share C. earnings per share D. price-earnings ratio E. tax effect on shareholders 47. Reverse stock splits are frequently done for which of the following reasons? I. to lower the stock price so that it returns to its normal trading range II. to eliminate small shareholders III. to meet the minimum price per share requirement of a stock exchange IV. to avoid delisting A. I and III only B. II and III only C. III and IV only D. II, III, and IV only E. I, II, III, and IV 48. Delta Cabinets has 13,000 shares of stock outstanding at a market price of $19 a share. The earnings per share are $1.34. The firm has current assets of $49,000, net fixed assets of $220,000, and total liabilities of $187,000. Today, the firm is paying a cash dividend of $.40 a share. Ignore taxes. After the dividend, the firm's: A. book value per share will be $6.31. B. price-earnings ratio will be 13.88. C. earnings per share will be $.94. D. stock price will be $19.00. E. shareholder value per share will be $18.60. 49. Morgantown Merchants is an all-equity firm with positive net income. Which one of the following will result if the firm pays a cash dividend? A. the number of shares outstanding will increase B. the earnings per share will decrease C. total assets will remain constant D. the price-earnings ratio will decrease E. total equity will increase 50. New England Fashions has 18,000 shares of stock outstanding at a market price of $29 a share. The earnings per share are $2.30. The firm has total assets of $280,000 and total liabilities of $136,000. Today, the firm is paying an annual cash dividend of $1.40 a share. Ignore taxes. After the dividend, the firm's: A. price-earnings ratio will be 12.61. B. earnings per share will be $.90. C. stock price will be $29. D. book value per share will be $6.60. E. shareholder value per share will be $27.60. 51. The common stock of Brook Myers, Inc. is selling for $38.50 a share and pays dividends annually. There are 15,000 shares outstanding. The firm has a target retention ratio of .7 and a tax rate of 35 percent. Dividend income is taxed at 15 percent. The company is paying a $1.06 per share dividend today. After the dividend, you would expect the stock price to be _____ and the price-earnings ratio to be _____. A. $37.60; 10.64 B. $37.60; 10.90 C. $37.60; 24.83 D. $38.50; 10.64 E. $38.50; 24.83 52. The Outlet is a specialty retail store that is on the decline. As such, the firm has decided to do an organized liquidation over the next two years. The firm is planning on paying a $2.10 a share dividend next year and projects that the final liquidating dividend the following year will be $15.50. The required return on this stock is 16 percent. How much will your liquidating dividend be if you decide to forego next year's dividend? A. $15.50 B. $17.60 C. $17.94 D. $18.27 E. $18.42 53. A stock dividend: A. reduces both the cash balance and the book value of equity. B. increases the number of shares outstanding, but does not affect shareholder wealth. C. is generally expressed as a ratio, such as 3-for-1. D. of 30 percent or less is called a small stock dividend. E. is basically the same as a stock repurchase. 54. Which of the following are goals of a compromise dividend policy? I. avoid dividend cuts II. avoid cutting back on positive NPV projects to pay a dividend III. maintain a target-debt equity ratio IV. avoid the need to sell equity A. I and II only B. III and IV only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV 55. Which one of the following is the best reason for a firm with a primarily individual investor clientele to consider a stock split? A. a preference by the investors to own more, rather than fewer, shares B. the lack of funds for a cash dividend C. an increase in the size and popularity of mutual funds and pension plans D. the improvement in the liquidity of a firm's shares that generally follows a stock split E. a current market price that exceeds the normal trading range 56. If a firm follows a residual dividend policy, it will give precedence to: A. paying a constant dividend over changing the debt-equity ratio. B. paying dividends over accepting positive investments. C. lowering its desired debt-equity ratio over paying dividends. D. maintaining a desired debt-equity ratio over paying dividends. E. avoiding dividend cuts over changing the debt-equity ratio. 57. Bruceton Mills Trucking pays out 30 percent of its quarterly earnings as a quarterly dividend. This firm has a(n) _____ dividend policy. A. residual B. special C. cyclical D. liquidating E. extra 58. Which one of the following situations is most apt to result in a liquidating dividend payment? A. Gulf Port Marina recently sold its facility and is closing down the company. B. San Francisco Tours currently has excess cash that it wishes to distribute to its shareholders. This occurs every so often and when it does, the firm prefers to pass the extra cash along to its shareholders. C. Northern Electric is planning to increase its quarterly dividend by two percent. D. F&D Florists is preparing to pay its first annual dividend of $.20 a share. E. Gibson Toys was fortunate this year in that it developed a new toy that broke all previous toy sale records. The profits from this toy were phenomenal but the company realizes that the odds of this type of luck reoccurring are slight, at best. 59. Which two of the following are the primary goals of a residual dividend policy? I. maintaining the desired debt-equity ratio II. paying a regular fixed dividend III. meeting the firm's investment needs IV. increasing the dividend at a constant rate A. I and II B. II and III C. III and IV D. I and III E. II and IV 60. The tax law changes in 2003 set the maximum tax rate on dividend income received by individuals at _____ percent. A. 10 B. 15 C. 20 D. 35 E. 39 61. Which one of the following statements concerning IPOs and underpricing is correct? A. IPO underpricing primarily benefits the issuing firm. B. IPO underpricing generally increases the spread per share earned by underwriters. C. The more an issue is underpriced, the more it tends to be oversubscribed. D. Underpricing tends to discourage investors from participating in the IPO market. E. Undersubscribed shares generally tend to also be underpriced shares. 62. Which of the following have been given as reasons for IPO underpricing? I. Young firms tend to be very risky. II. The best IPOs are oversubscribed. III. Underwriters like to avoid lawsuits. IV. Underpricing helps counter the winner's curse. A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV 63. Which one of the following statements concerning issue costs is correct? A. It costs more to issue debt securities than to issue equity securities. B. Economies of scale exist for the direct costs associated with both debt and equity issues. C. IPOs are less costly to issue than SEOs. D. Straight bonds are more costly to issue than convertible bonds. E. Total direct costs as a percentage of gross proceeds for IPOs averaged about 7 percent overall for the period 1990-2003. 64. The total direct costs of a debt issue, when expressed as a percentage of gross proceeds, tend to: A. increase as the quality of the debt increases. B. decrease as the size of the issue decreases. C. decrease when the bonds are convertible versus straight. D. decrease as the proceeds of the bond issue increase. E. currently average around 2.5 percent for investment grade, straight bonds. 65. Which one of the following statements is correct? A. The financial market tends to react the same whether a new issue of securities is a debt issue or an equity issue. B. The issuance of equity securities is always viewed as a positive event for the issuer. C. Informed managers tend to issue new securities when the existing securities are underpriced. D. An abnormal return of 5 percent is considered the norm. E. A firm's existing shareholders would prefer that new securities be issued when those securities are overpriced rather than underpriced. 66. Which of the following are qualifications that an issuer must meet to be eligible to use Rule 415 for shelf registration? I. issuer must have an investment grade rating II
