In 1990, Amber Corp., a closely held corporation, was formed by Adams, Frank, and Berg as
incorporators and stockholders. Adams, Frank, and Berg executed a written voting agreement which
provided that they would vote for each other as directors and officers. In 1994, stock in the corporation
was offered to the public. This resulted in an additional 300 stockholders. After the offering, Adams holds
2 5%, Frank holds 15%, and Berg holds 15% of all issued and outstanding stock. Adams, Frank, and Berg
have been directors and officers of the corporation since the corporation was formed. Regular meetings of
the board of directors and annual stockholders meetings have been held.
For this question refer to the formation of Amber Corp. and the rights and duties of its stockholders,
directors, and officers. Amber Corp.'s day-to-day business ordinarily would be operated by its:

• A. Stockholders.
• B. Directors.
• C. Officers.

In order to increase production capacity, Gunning Industries is considering replacing an existing
production machine with a new technologically improved machine effective January 1, 1997. The
following information is being considered by Gunning Industries.
. The new machine would be purchased for $160,000 in cash. Shipping, installation, and testing would
cost an additional $30,000.
. The new machine is expected to increase annual sales by 20,000 units at a sales price of $40 per unit.
Incremental operating costs are comprised of $30 per unit in variable costs and total fixed costs of
$ 40,000 per year.
. The investment in the new machine will require an immediate increase in working capital of $35,000.
. Gunning uses straight-line depreciation for financial reporting and tax reporting purposes. The new
machine has an estimated useful life of five years and zero salvage value.
. Gunning is subject to a 40 percent corporate income tax rate.
Gunning uses the net present value method to analyze investments and will employ the following factors
and rates.

Gunning Industries' net cash outflow in a capital budgeting decision would be:

• A. $225,000
• B. $195,000
• C. $190,000
• D. $204,525

Which of the following may not own shares in an S corporation?

• A. Trusts.
• B. Estates.
• C. Corporations.
• D. Individuals.

The internal rate of return (IRR) is the:

• A. Rate of return generated from the operational cash flows.
• B. Rate of interest where the net present value is equal to zero.
• C. Rate of interest where the net present value is greater than 1.0.
• D. Hurdle rate.

DQZ Telecom is considering a project for the coming year, which will cost $50 million. DQZ plans to use
the following combination of debt and equity to finance the investment.
. Issue $15 million of 20-year bonds at a price of 101, with a coupon rate of 8 percent, and flotation costs
of 2 percent of par.
. Use $35 million of funds generated from earnings.
The equity market is expected to earn 12 percent. U.S. treasury bonds are currently yielding 5 percent.
The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax
rate of 40 percent.
The before-tax cost of DQZ's planned debt financing, net of flotation costs, in the first year is:

• A. 7.92 percent.
• B. 8.08 percent.
• C. 11.80 percent.
• D. 10.00 percent.