AICPA CPA-Business Exam - 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

Rose

3 months ago

Isn't it surprising they have $28k in fixed costs?

upvoted 0 times

...

Maryrose

3 months ago

Totally agree with A, financial leverage is key here!

upvoted 0 times

...

Maira

3 months ago

Wait, how does removing preferred stock affect leverage?

upvoted 0 times

...

Bernardo

4 months ago

I think the answer is A. Makes sense to me.

upvoted 0 times

...

Rose

4 months ago

Carlisle sells 400k bottles a year!

upvoted 0 times

...

Elina

4 months ago

I think if there's no preferred stock, it might decrease total leverage, but I’m not certain if it’s proportional or not.

upvoted 0 times

...

Carin

4 months ago

I feel like the answer could be C, but I'm a bit confused about how the decrease in financial leverage affects total leverage.

upvoted 0 times

...

Noelia

4 months ago

This question seems similar to one we practiced about the effects of fixed costs on leverage. I think if preferred stock is removed, total leverage might decrease.

upvoted 0 times

...

Chauncey

5 months ago

I remember studying how financial leverage impacts total leverage, but I'm not sure how preferred stock fits into that.

upvoted 0 times

...

Stephen

5 months ago

This seems straightforward enough. If the preferred stock is removed, the financial leverage should decrease, and the degree of total leverage should decrease proportionally. I'll double-check my work, but I'm feeling pretty good about this.

upvoted 0 times

...

Ronald

5 months ago

I've got a good handle on leverage calculations, so I think I can tackle this one. The key will be isolating the impact of the preferred stock dividends and how that changes the total leverage equation.

upvoted 0 times

...

Karrie

5 months ago

I'm a bit confused by the different leverage formulas here. I'll need to make sure I fully grasp the relationship between financial leverage and total leverage before I can confidently answer this.

upvoted 0 times

...

Shanice

5 months ago

Okay, let me think this through step-by-step. I need to understand how the preferred stock dividends impact the financial leverage, and then determine how that would affect the total leverage if the preferred stock was removed.

upvoted 0 times

...

Alana

5 months ago

Hmm, this looks like a tricky one. I'll need to carefully work through the formulas and leverage calculations to figure out how the degree of total leverage would change without the preferred stock.

upvoted 0 times

...

Mammie

9 months 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

Georgiann

8 months ago

I wonder if Carlisle Company will consider changing their capital structure to optimize their leverage.

upvoted 0 times

...

Reynalda

9 months ago

Definitely, it's all about understanding the different factors at play.

upvoted 0 times

...

Tresa

9 months ago

It's interesting how different components can affect leverage in different ways.

upvoted 0 times

...

Fernanda

9 months ago

I agree, without the preferred stock, the total leverage would decrease but not in direct proportion to the financial leverage.

upvoted 0 times

...

Nan

10 months 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

10 months 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

Winifred

8 months ago

Definitely, financial analysis can be tricky but it's important to grasp the concepts.

upvoted 0 times

...

Franchesca

8 months ago

Yeah, I agree. It's all about understanding the different types of leverage.

upvoted 0 times

...

Giovanna

9 months ago

I think you're right, C sounds like the correct answer.

upvoted 0 times

...

Virgie

10 months 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

Marica

8 months ago

Yeah, C sounds like the most logical option. It's always interesting to see how different factors can impact leverage ratios.

upvoted 0 times

...

Loreta

9 months ago

I agree, C makes sense. It's important to consider all the components of leverage when making these calculations.

upvoted 0 times

...

Wai

9 months ago

I think you're right, C seems like the best choice. Without preferred stock, the total leverage would decrease but not necessarily in proportion to the decrease in financial leverage.

upvoted 0 times

...

Annett

10 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