1994 MISSOURI YOUNG FARMERS ASSOCIATION FARM BUSINESS MANAGEMENT CONTEST Columbia, Missouri February 12, 1994 The Farm Business Management Contest is designed to test understanding of the application of economic principles in farm management. Please place your answers in the appropriate box on the answer sheet provided. There is only one correct answer to each question. 1. Fred Brown raises corn and feeds it to his hogs. This type of business structure is an example of A. vertical integration. B. horizontal integration. C. supply company. D. marketing cooperative. E. None of the above 2. You are having a good business year and it looks as if taxable income is going to be a lot more than it was last year. Which of the following steps would be the best tax management before the end of the tax year? A. Buy $20,000 of feeder steers B. Postpone buying the $45,000 tractor until next year C. Buy $15,000 worth of fertilizer for the next crop year D. Sell 5,000 bushels of corn right now E. Put up a $15,000 pole barn this year 3. A soybean producer decides to store his soybeans in the local elevator for six months. The price at harvest is $6.50 per bushel and the elevator charges 1.5› per bushel per month for storage plus a 5› per bushel handling charge. He has 4,000 bushels to sell and must borrow $26,000 at 8% annual interest while he stores the soybeans. What price must he receive for his soybeans to break even and cover his storage and opportunity costs? A. $6.83 B. $6.85 C. $6.90 D. $7.16 E. None of the above Farmer Jones has received the following information for his tillage practices from the Soil Conservation Service: Estimated erosion Cash returns Crop (tons/acre/year) ($/acre) Corn after soybeans 8 T. $100 Soybeans after corn 3 T. $110 Soybeans after soybeans 12 T. $110 Wheat after soybeans 6 T. $80 Corn after wheat 4 T. $95 4. Which of the following crop rotations will average 5 tons or less of soil loss per acre per year? A. Corn-soybeans-wheat B. Corn-soybeans C. Corn-soybeans-soybeans D. Continuous soybeans E. None of the above 5. What will be the average annual cash returns for a corn- soybean-wheat crop rotation? A. $90 B. $95 C. $97 D. $100 E. None of the above 6. Which crop rotation would have the highest average annual cash returns? A. Corn-soybeans-wheat B. Corn-soybeans C. Corn-soybeans-soybeans D. Continuous soybeans E. Corn-soybeans-soybeans-wheat 7. In 1993, Pat Parker had net farm income of $35,000. Pat had total business assets of $600,000 and total liabilities of $350,000. Pat paid $32,000 in interest. Rate of return on equity for 1993 would be: A. 5.8% B. 11.2% C. 12.8% D. 14.0% E. None of the above 8. Which of the following would produce a change in the quantity of beef supplied? A. An increase in the average cost of production of beef B. A shift in the demand for chicken C. A shift in the demand for beef D. A change in consumer incomes E. All of the above 9. The total consumer demand and producer supply of leechynuts were equal to 1 million nuts when the price was $1 per nut last year. This year the price is $1.25. Which of the following statements is true? A. More than 1 million leechynuts will be supplied. B. Less than 1 million leechynuts will be supplied. C. More than 1 million leechynuts will be demanded. D. Less than l million leechynuts will be demanded. E. Not enough information given to determine quantity supplied or demanded. 10. A farmer purchases 500-pound feeder steers for 105› per pound and plans to sell the steers at 750 pounds. The farmer estimates the total cost of gain to be 50› per pound. The nearest breakeven price when the steers are sold at 750 pounds is A. 60.7›/pound B. 64.7›/pound C. 74.3›/pound D. 86.7›/pound E. None of the above 11. At the beginning of last year, a farmer had an outstanding loan for $100,000. The interest rate was 10% APR. If the farmer made one loan payment at the end of the year of $25,400, what was the outstanding balance at the end of the year? A. $74,600 B. $84,600 C. $90,000 D. $95,400 E. None of the above 12. The nearby hog futures contract closed at $49.80 with a local basis of $1.85 over the board. The local cash market was A. $47.95 B. $49.80 C. $50.00 D. $51.65 E. None of the above 13. A farmer has total assets of $500,000 of which land is $300,000. The farmer's debt:equity ratio is 1.0. What will the farmer's debt:equity ratio be if the lender devalues the land by 25%? A. .64 B. .70 C. 1.43 D. 1.56 E. None of the above 14. Return to management is net cash farm income A. minus debt payments. B. minus the value of unpaid labor, depreciation, interest on equity capital, and net inventory changes. C. minus the value of operator's labor and interest on debt payments. D. minus the interest on equity capital, depreciation, and adjustments for inventory changes. E. None of the above 15. Specialization in crops or livestock in a farm business tends to A. increase income and increase risk. B. decrease income and increase risk. C. decrease risk and increase income. D. decrease risk and decrease income. 16. An enterprise system of accounts A. separates taxable income from nontaxable income. B. differentiates between the value of the operator's labor, management, and capital. C. involves keeping separate records of receipts and expenses for each individual product or class of products. D. is required for income tax purposes. 17. The process of finding the future value of a dollar is known as A. compounding. B. discounting. C. forwarding. D. ratio analysis. 18. If the price of a commodity is too low, the demand will be greater than the supply resulting in a A. surplus. B. boycott. C. monopoly. D. shortage. 19. A farmer is purchasing a new baler at a cost of $26,000. His dealer will finance the baler under the following terms: 10% down payment with the balance repaid in equal payments over the next three years at 9% APR. The farmer expects the baler to last for 9 years and have a salvage value of $1,000. How much interest will the farmer pay the first year of the loan? A. $2,106 B. $2,340 C. $2,600 D. $4,680 E. None of the above 20. Corn and grain sorghum are substitutes for each other in many livestock feed rations. Assuming they are substitutes, a decrease in the supply of corn would cause the demand for grain sorghum to A. shift to the left. B. shift to the right. C. decrease. D. remain unchanged. 21. A new form of business organization approved by the Missouri legislature in 1993 is: A. Limited Partnership B. Family Corporation C. Limited Liability Company D. Individual Cooperative E. None of the above 22. On March 1, 1993, Lynn borrowed $25,000 to buy seed and fertilizer. On December 1, 1993, she repaid the $25,000 along with $1828.13 interest. What annual interest rate did she pay? A. 9.75% B. 11.25% C. 11.75% D. 12.25% E. None of the above 23. For 1993, the self-employment tax rate for Social Security is A. 4.58%. B. 7.65%. C. 15.30%. D. 25.00%. E. None of the above 24. A farmer who buys feeder pigs could use the options market to reduce his price risk by A. buying a hog Put option B. selling a hog Put option C. buying a hog Call option D. selling a hog Call option E. All of the above 25. A feedlot operator purchases a pen of 100 feeder steers with an average weight of 700 pounds and sells them at an average weight of 1050 pounds. Total feed cost for the pen is $15,000. Feed cost per pound of gain is equal to A. $0.429 B. $0.514 C. $0.600 D. $0.720 E. None of the above 26. The quantity of corn used decreases from 9 billion bushels to 7.5 billion bushels forcing a price increase from $2.10 to $2.85 per bushel. This indicates the demand for corn is A. inelastic. B. elastic. C. less than the quantity supplied. D. more than the quantity supplied. E. None of the above 27. A farmer placed too low a value on his calves in his closing inventory while all other records were accurate. Net capital ratio in his record summary is A. too high. B. too low. C. not affected. D. fixed. 28. A decrease in the value of the U.S. dollar relative to the currency of other countries should result in A. more costly imports. B. less costly imports. C. increased imports. D. no effect on imports or exports. 29. When the size of the soybean harvest exceeds locally available farm and elevator storage, what happens to the basis? A. Basis narrows B. Basis widens C. Basis goes out of existence D. Basis is usually the same all year long 30. How many total acres are included in "S 1/2 of NE 1/4 and NW 1/4 of SE 1/4 of Section 15, Twp. 10N, R4W of the 5th Principle Meridian"? A. 80 acres B. 120 acres C. 160 acres D. 320 acres E. None of the above 31. How much perimeter fence would be required to completely enclose the parcel of land described in question 30? A. 1.0 mile B. 1.5 miles C. 2.0 miles D. 2.5 miles E. None of the above 32. A grain farmer who normally store his soybeans at a local elevator has decided to use the options market to create a synthetic storage. To do so he will sell his beans at harvest and A. buy a put option. B. sell a put option. C. buy a call option. D. sell a call option. 33. A Subchapter S corporation can have no more than A. 10 shareholders. B. 15 shareholders. C. 25 shareholders. D. 35 shareholders. E. There is no limit on number of shareholders. 34. The money you must deposit with a broker to insure performance in order to trade in the futures market is called A. basis. B. margin. C. commission. D. spread. E. None of the above 35. A feeder cattle producer has 57 head of 750 pound steers and can sell them for $82 per cwt. or send them to a custom feedlot which guarantees the feeder 55› per pound cost of gain. What price per cwt. will the producer have to receive if he sends them to the feedlot in order to break even with the offer he has at $82 per cwt. when they weigh 750 pounds? Assume he plans to feed them to a weight of 1100 pounds. Disregard the opportunity cost of capital, death loss, and shrink. A. $70.55 per cwt. B. $72.05 per cwt. C. $73.41 per cwt. D. $79.25 per cwt. E. None of the above 36. If consumers buy more beef because beef prices have decreased and nothing else affects the market, there has been A. an increase in the demand for beef. B. a decrease in the demand for beef. C. no change in the demand for beef. D. a decrease in the supply of beef. 37. Sometime back you bought a $71.00 live cattle future Put for $3.00. It's now mid-September and October futures are $65. The option expires next week and the $71.00 Puts are selling for $6.00. Your cattle are ready for market and a buyer has offered you $64.00/cwt. What is your most likely course of action? A. Sell your cattle for $64 and let the option expire B. Hold the cattle until the cash price equals the futures price C. Sell both your cattle and your Put now D. Sell your cattle now and buy another Put 38. When borrowing money on the discount method, interest is A. charged on the unpaid principal balance. B. calculated on the total amount of the loan and then subtracted from the principal balance. C. charged on the original loan amount and added to the principal balance. D. calculated and paid at the end of the loan repayment period. Use the balance sheet information listed below to answer questions 39-43. Balance Sheet Current assets $109,214 Intermediate assets $166,000 Fixed assets $457,000 Short-term liabilities $ 58,500 Intermediate liabilities $ 22,500 Long-term liabilities $207,000 39.What is the farm's net worth? A. $247,000 B. $444,214 C. $485,214 D. $732,214 E. None of the above 40. What is the farm's net capital ratio? A. 1.50 : 1 B. 1.78 : 1 C. 2.54 : 1 D. 2.96 : 1 E. None of the above 41. What is the farm's percent equity? A. 33.7% B. 50.9% C. 60.7% D. 66.3% E. None of the above 42. What is the farm's current ratio? A. 1.50 : 1 B. 1.78 : 1 C. 1.87 : 1 D. 2.96 : 1 E. None of the above 43. What is the farm's dollars of working capital? A. $50,714 B. $157,500 C. $247,000 D. $485,214 E. None of the above 44. The capitalized value of land that yields $50 per year in net returns to land is $__________ if the interest rate is 10%. A. $5 B. $50 C. $500 D. $5,000 45. An advantage of making an estate the beneficiary of a life insurance policy is to A. reduce estate tax liabilities. B. decrease the size of the estate. C. provide insurance protection to heirs. D. provide liquid funds to satisfy tax liability. E. All of the above. 46. Corn has an expected yield of 95 bushels per acre and has a production cost of $140.00 per acre. Current market prices ar $2.50 per bushel for corn and $6.50 per bushel for soybeans. Soybeans can be raised at a production cost of $110 per acre. At what breakeven yield per acre would soybeans generate the same net return per acre as dryland corn? A. 29.1 bushels B. 31.9 bushels C. 34.2 bushels D. 38.7 bushels E. None of the above 47. The present value of a 5-year annuity ($1,000 a year at the end of each year for 5 years) is $4,000 using a particular interest rate. If you could borrow $10,000 today at the same interest rate to be paid back in 5 equal payments at the end of each year, what would your annual payment be? A. $2000 B. $2500 C. $4000 D. Not enough information to tell E. None of the above 48. The maximum amount that a wife can inherit from her husband without owing any federal estate tax is A. $10,000. B. $600,000. C. $600,000 less excess gift tax. D. unlimited. E. None of the above 49. Individual Retirement Accounts (IRAs) have become very popular. The maximum annual IRA contribution per worker is $2,000 plus an additional $____________ for a non-working spouse. A. $200 B. $250 C. $1,000 D. $2,000 E. None of the above 50. The main difference between a joint tenancy and tenancy in common is A. the surviving joint tenant will eventually own all of the land as a result of right of survivorship. B. the surviving tenant in common will eventually own all the land as a result of right of survivorship. C. only husbands and wives may be joint tenants. D. tenants in common must own equal shares of the property while joint tenants may own unequal shares (i.e., H owns 1/4 and W owns 3/4). 51. If quantity purchased decreases by 10% when prices increases by 20%, then the elasticity of demand is A. 0.5 B. 2.0 C. 10 D. 20 E. None of the above 52. In order for limited partners to maintain their limited liability, they can not A. share in the profits of the limited partnership. B. own more than one-third of the limited partnership. C. participate in the management of the limited partnership. D. own more than 49.9% of the limited partnership. E. Both C and D. 53. You are considering the purchase of a combine, rather than continuing to hire a custom operator at $22.00 per acre. If you purchase the machine, the annual fixed costs (interest, depreciation, etc.) will be $12,000. The variable cost is $10 per acre including the extra labor. There would be no other changes in costs and returns associated with ownership and no savings other than the custom charges. How many acres must be harvested each year in order to justify (on a breakeven basis) purchase the combine? A. 500 B. 833.3 C. 1,000 D. 1,200 E. None of the above 54. A written agreement by which an owner of property transfers title to someone for the benefit of beneficiaries is a A. trust. B. partnership. C. corporation. D. sole proprietorship. E. estate. 55. Effective 1/1/94 a cancelled check is no longer adequate proof of a charitable contribution that is greater than A. $ 250 B. $ 1000 C. $ 5000 D. $ 10,000 E. None of the above 56. Farmer Jones has $10,000 in equipment he uses exclusively for corn. He assumes that this equipment will last 5 years and have a salvage value of $0. He plans to plant 120 acres of corn each year. Assuming an interest rate of 8%, what will be his average fixed costs per year for the next 5 years (depreciation and interest) for this machinery per acre of corn? A. $10 B. $20 C. $25 D. $30 E. None of the above 57. Effective for tax years beginning after 1992, the maximum amount that can be claimed as a section 179 expense deduction on your tax return has been changed from $10,000 to A. $0 B. $5,000 C. $15,000 D. $17,500 E. None of the above 58. A farmer traded a tractor with an adjusted tax basis of $5,000. The new tractor had a list price of $50,000. The dealer allowed a $20,000 trade-in for the old tractor. The farmer paid $10,000 of his own money and borrowed $20,000 to pay the balance. What is the tax basis of the new tractor? A. $15,000 B. $35,000 C. $45,000 D. $50,000 E. None of the above 59. Which of the following is the best measure for comparing the profitability of two farms? A. Debt/asset ratio B. Rate of return to equity capital C. Gross farm income D. Gross farm income minus capital gains 60. Farmer Brown had a grain bin which he will not replace totally destroyed in the 1993 flood. On his 1993 tax return he can A. deduct the replacement cost of a new bin. B. deduct the undepreciated basis of the destroyed bin. C. continue to depreciate the bin. D. take no deduction. E. None of the above 61. Individuals age 55 and over can exclude from income up to $________ of gain from the sale of their principal residence. A. $25,000 B. $50,000 C. $100,000 D. $125,000 E. None of the above 62. For depreciation, computers are classified as A. 3 year property D. 10 year property B. 5 year property E. None of the above C. 7 year property 1994 MISSOURI YOUNG FARMERS ASSOCIATION FARM BUSINESS MANAGEMENT CONTEST Columbia, Missouri February 12, 1994 Key 1. A 22. A 43. A 2. C 23. C 44. C 3. C 24. A 45. D 4. A 25. A 46. B 5. B 26. A 47. B 6. D 27. B 48. D 7. D 28. A 49. B 8. E 29. B 50. A 9. E 30. B 51. A 10. D 31. C 52. C 11. B 32. C 53. C 12. D 33. D 54. A 13. C 34. B 55. A 14. B 35. C 56. B 15. A 36. C 57. D 16. C 37. C 58. B 17. A 38. B 59. B 18. D 39. B 60. B 19. A 40. C 61. D 20. B 41. C 62. B 21. C 42. C