AICPA Exam CPA-Business Topic 2 Question 102 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 102
Topic #: 2

Carlisle Company presently sells 400,000 bottles of perfume each year. Each bottle costs $.84 to produce and sells for $1.00. Fixed costs are $28,000 per year. The firm has annual interest expense of $6,000, preferred stock dividends of $2,000 per year, and a 40 percent tax rate. Carlisle uses the following formulas to determine the company's leverage.

If Carlisle Company did not have preferred stock, the degree of total leverage would:

ADecrease in proportion to a decrease in financial leverage.

BIncrease in proportion to an increase in financial leverage.

CDecrease but not be proportional to the decrease in financial leverage.

DDecrease but not have an effect on financial leverage.

Show Suggested Answer

Suggested Answer: C

Choice 'c' is correct. Return on investment equals net income divided by average invested capital:

Choices 'a', 'b', and 'd' are incorrect, per the above calculation.

by Louann at Oct 19, 2024, 03:35 PM

Limited Time Offer

25%

Off

Get Premium CPA-Business Questions as Interactive Web-Based Practice Test or PDF

Contribute your Thoughts:

Submit Cancel

Mammie

15 days ago

Hah, talk about a perfume-y problem! Without that preferred stock, the total leverage is gonna drop, but not in direct proportion to the financial leverage. C's the way to go, folks. Now, if only I could leverage my way into a free bottle of that fancy perfume...

upvoted 0 times

...

Nan

21 days ago

Okay, let's think this through. If the preferred stock's gone, that's one less factor in the financial leverage equation. So C seems like the logical choice here. Although, I'm kind of hoping the exam question doesn't come with a bottle of perfume as a prize. That would be a real leverage on my wallet!

upvoted 0 times

...

Laurena

22 days ago

Ah, the joys of financial analysis. Without preferred stock, the degree of total leverage would decrease, but not be directly linked to the financial leverage. Gotta love these accounting brain teasers, am I right? C for the win!

upvoted 0 times

...

Virgie

29 days ago

If Carlisle doesn't have preferred stock, that's one less piece of the leverage puzzle. Let's see, financial leverage would decrease, but total leverage might not drop proportionally. I'll go with C, sounds about right.

upvoted 0 times

...

Annett

1 months ago

Hmm, this one's tricky. Gotta remember the difference between financial and total leverage. I think C might be the way to go, but I'll double-check my formulas just to be sure.

upvoted 0 times

...