Chapter 8 LS Intermediate Corporate Finance

The rules for depreciation assets for tax purposes are based upon provisions in the ________ 1986 SEC Acts 1986 IRS Acts 1986 Tax Reform Act 1986 Sarbanes-Oxley Act

1986 Tax Reform Act

The net present value technique does not discount earnings because earnings ________ are too hard to estimate do not represent real money are computed only once a year change every year

do not represent real money

If the inflation rate increases, the nominal rate of interest will _______ decrease fluctuate randomly remain unchanged increase

increase

Synergy will _______ the sales of existing products reduce not affect increase

increase

A firm should replace a current machine when the annual cost of a new machine is _________ than the annual cost of the current machine greater less

less

As a general rule, when estimating equivalent annual costs, ___________ cash flows should be used real nominal

real

Using your personal savings to invest in your business is considered to have an ________ _________ because you are giving up the use of these funds for other investments or uses, such as vacation or paying off a debt.

opportunity cost

If a firm's current assets are $150,000, its total assets are $320,000, and its current liabilities are $80,000, what is its net working capital? $230,000 $70,000 $240,000 $90,000

$70,000 $150,000 - $80,000 = $70,000

Sunk costs are costs that ______ will not contribute to profits in the long run even if a project is accepted relate to other projects of the firm cannot be measured have already occurred and are not affected by accepting or rejecting a project

have already occurred and are not affected by accepting or rejecting a project

Investment in net working capital arises when __________ inventory is purchased credit sales are made cash is kept for unexpected expenditures equipment is purchased using long term debt

inventory is purchased credit sales are made cash is kept for unexpected expenditures

Which of the following are considered relevant cash flows? Cash flows from sunk costs Cash flows from synergy effects Cash flows from erosion effects Cash flows from opportunity cost

Cash flows from synergy effects Cash flows from erosion effects Cash flows from opportunity cost

The shareholders' books in the US follow the rules of the IRS CPA Handbook (formerly CICA) Securities and Exchange COmmission Financial Accounting Standards Board (FASB)

Financial Accounting Standards Board (FASB)

Identify the three main sources of cash flows over the life of a typical project Net cash flows from sales and expenses over the life of the project Net cash flows from salvage value at the end of the project Test marketing expenses that have been classified as sunk costs Cash outflows from investment in plant and equipment at the inception of the project

Net cash flows from sales and expenses over the life of the project Net cash flows from salvage value at the end of the project Cash outflows from investment in plant and equipment at the inception of the project

What is the difference between nominal cash flow and real cash flow? Nominal cash flow is the actual dollars to be received. Real cash flow refers to the cash flow's purchasing power There is no difference between nominal and real cash flow Nominal cash flow refers to the cash flow's purchasing power while real cash flow refers to the actual dollars to be received

Nominal cash flow is the actual dollars to be received. Real cash flow refers to the cash flow's purchasing power

Incremental cash flows of a project are changes in a firm's cash flows that occur as a direct consequence of ______ changing a firm's WACC repurchasing outstanding shares accepting a project issuing bonds

accepting a project

When analyzing a project, sunk costs __________ incremental cash outflows are not are

are not

Opportunity costs are __________ the actual expenses incurred by a firm to preserve its market share benefits gained as a result of accepting a particular project benefits lost due to taking on a particular project the actual expenses of pursuing a specific project

benefits lost due to taking on a particular project

Allocated costs arise when a specific expenditure ________ is difficult to estimate benefits more than one project or division is higher than originally estimated exceeds its budgeted amount

benefits more than one project or division

Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset? There will be a tax savings if the book value exceeds the sales price Taxes are based on the difference between the purchase price and sales price of the asset Book value represents the purchase price minus the accumulated depreciation Taxes are based on the difference between book value and the sales price

There will be a tax savings if the book value exceeds the sales price Book value represents the purchase price minus the accumulated depreciation Taxes are based on the difference between book value and the sales price

Which of the following is (are) true about allocated costs? These costs are classified as sunk costs These costs are classified as irrelevant costs These costs are allocated to more than one project These costs benefit more than one project

These costs are allocated to more than one project These costs benefit more than one project

What is the real interest rate if the nominal annual interest rate is 10 percent and the annual inflation rate is 4 percent? 5.69% 5.77% 6.03% 6.08%

5.77% (1.10/1.04)-1

Which of the following is given greater importance in capital budgeting problems in corporate finance? Cash flows Depreciation Earnings Earnings after tax

Cash flows

What are the two sets of accounting books? Shareholders' books Finance books Auditors' books Tax books

Shareholders' books Tax books