AICPA Exam CPA-Business Topic 2 Question 87 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 87
Topic #: 2

Patents are granted in order to encourage firms to invest in the research and development of new products. Patents are an example of:

AMarket concentration.

BEntry barriers.

CExclusionary practices.

DCollusion.

Show Suggested Answer

Suggested Answer: A

Choice 'a' is correct. 7.0 percent cost of funds from retained earnings.

The cost of retained earnings is equal to the rate of return required by the firm's common shareholders (or, in effect, the return 'lost' by them when the firm chooses to fund with retained earnings). While oftentimes this rate is somewhat subjective, we are given the facts to exactly answer the question in this case. The stock is currently selling for $100/share, and the dividend is given at $7/share.

$7 / $100 = 7%

Choices 'b', 'c', and 'd' are incorrect, per the above Explanation:/calculation.

by Meghan at May 12, 2024, 11:15 AM

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2 months ago

Option B seems like the right answer here. Patents definitely create barriers to entry for new firms.

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Dorothy

16 days ago

That's true, patents give the firm exclusive rights to their product.

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Nan

1 months ago

I agree, patents make it harder for new firms to enter the market.

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Barney

2 months ago

But doesn't granting patents also lead to market concentration as only the patent holder can produce the product?

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Patrick

2 months ago

I agree with Vallie, patents encourage firms to invest in R&D by providing them with exclusive rights.

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Vallie

2 months ago

I think patents are an example of entry barriers.

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