fin 125

Which one of the following applies to the dividend growth model? a. An individual stock has the same value to every investor. b. Even if the dividend amount and growth rate remain constant, the value of a stock can vary. c. Zero-growth stocks have no market value. d. Stocks that pay the same annual dividend will have equal market values. e. The dividend growth rate is inversely related to a stock's market price.

Even if the dividend amount and growth rate remain constant, the value of a stock can vary.

The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting? a. 17 percent b. 20 percent plus one vote c. 25 percent plus one vote d. 50 percent plus one vote e. 51 percent

50 percent plus one vote

For the period 1926-2016, the average risk premium on large-company stocks was about: a. 12.7 percent. b. 10.4 percent. c. 8.6 percent. d. 6.9 percent. e. 7.3 percent.

8.6 percent.

Which of the following are advantages of the payback method of project analysis? a. Considers time value of money, liquidity bias b. Liquidity bias, arbitrary cutoff point c. Liquidity bias, ease of use d. Ignores time value of money, ease of use e. Ease of use, arbitrary cutoff point

Liquidity bias, ease of use

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? a. Maximal-growth model b. Constant-growth model c. Capital pricing model d. Realized-earnings model e. Realized-growth model

Constant-growth model

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment? a. Coupon b. Face value c. Discount d. Call premium e. Yield

Coupon

Which one of the following categories of securities had the highest average annual return for the period 1926-2016? a. U.S. Treasury bills b. Large-company stocks c. Small-company stocks d. Long-term corporate bonds e. Long-term government bonds

Small-company stocks

A decrease in which of the following will increase the current value of a stock according to the dividend growth model? a. Dividend amount b. Number of future dividends, provided the total number of dividends is less than infinite c. Dividend growth rate d. Discount rate e. Both the discount rate and the dividend growth rate

Discount rate

If a project has a net present value equal to zero, then: a. the total of the cash inflows must equal the initial cost of the project. b. the project earns a return exactly equal to the discount rate. c. a decrease in the project's initial cost will cause the project to have a negative NPV. d. any delay in receiving the projected cash inflows will cause the project to have a positive NPV. e. the project's PI must also be equal to zero.

the project earns a return exactly equal to the discount rate.

Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true? a. The dividend must be constant. b. The stock has a negative capital gains yield. c. The capital gains yield must be zero. d. The required rate of return for this stock increased over the year. e. The firm is experiencing supernormal growth.

The capital gains yield must be zero.

Which one of these equations applies to a bond that currently has a market price that exceeds par value? a. Market value < Face value b. Yield to maturity = Current yield c. Market value = Face value d. Current yield > Coupon rate e. Yield to maturity < Coupon rate

Yield to maturity < Coupon rate

A project's average net income divided by its average book value is referred to as the project's average: a. net present value. b. internal rate of return. c. accounting return. d. profitability index. e. payback period.

accounting return.

A discount bond's coupon rate is equal to the annual interest divided by the: a. call price. b. current price. c. face value. d. clean price. e. dirty price.

face value

When using the two-stage dividend growth model,: a. g1 cannot be negative. b. Pt = Dt/R. c. g1 must be greater than g2. d. g1 can be greater than R. e. R must be less than g1 but greater than g2.

g1 can be greater than R.

A bond's principal is repaid on the ____ date. a. coupon b. yield c. maturity d. dirty e. clean

maturity

A project's cash flow is equal to the project's operating cash flow: a. plus the project's depreciation expense minus both the project's taxes and capital spending b. minus both the project's change in net working capital and capital spending c. minus the project's change in net working capital plus all the depreciation expense d. plus the project's depreciation expense minus the project's taxes

minus both the project's change in net working capital and capital spending

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is: a. basically worthless as it offers no growth potential. b. equal in value to the present value of $1 paid one year from today. c. priced the same as a $1 perpetuity. d. valued at an assumed growth rate of 1 percent. e. worth $1 a share in the current market.

priced the same as a $1 perpetuity.

The dividend growth model: a. assumes dividends increase at a decreasing rate. b. only values stocks at Time 0. c. cannot be used to value constant dividend stocks. d. can be used to value both dividend-paying and non-dividend-paying stocks. e. requires the growth rate to be less than the required return.

requires the growth rate to be less than the required return.

The excess return is computed as the: a. return on a security minus the inflation rate. b. return on a risky security minus the risk-free rate. c. risk premium on a risky security minus the risk-free rate. d. risk-free rate plus the inflation rate. e. risk-free rate minus the inflation rate

return on a risky security minus the risk-free rate.

Pro forma financial statements can best be described as financial statements: a. expressed in a foreign currency b. where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales c. showing projected values for future time periods d. expressed in real dollars, given a stated base year e. where all accounts are expressed as a percentage of last years values

showing projected values for future time periods

What was the average rate of inflation over the period of 1926-2016? a. Less than 2.0 percent b. Between 2.0 and 2.4 percent c. Between 2.4 and 2.8 percent d. Between 2.8 and 3.2 percent e. Greater than 3.2 percent

Between 2.8 and 3.2 percent

A project has an initial cost of $31,800 and a market value of $29,600. What is the difference between these two values called? a. Net present value b. Accounting return c. Payback value d. Profitability index e. Discounted payback

Net present value

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? a. Net present value b. Discounted payback c. Internal rate of return d. Profitability index e. Payback

Net present value

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:

increases at a decreasing rate

Which one of the following is an example of a sunk cost? a. $1,500 of lost sales because an item was out of stock b. $1,200 paid to repair a machine last year c. $20,000 project that must be forfeited if another project is accepted d. $4,400 reduction in current show sales if a store commences selling sandals e. $1,800 increase in comic book sales if a store ceases selling puzzles

$1,200 paid to repair a machine last year

For the period 2009-2016, U.S. Treasury bills had an annual rate of return that was: a. between .5 and 1 percent. b. between 1 and 2 percent. c. negative in at least one year. d. negative for two or more years. e. between 0 and .25 percent.

between 0 and .25 percent.

Which one of the following relationships applies to a par value bond? a. Yield to maturity > Current yield > Coupon rate b. Coupon rate > Yield to maturity > Current yield c. Coupon rate = Current yield = Yield to maturity d. Coupon rate < Yield to maturity < Current yield e. Coupon rate > Current yield > Yield to maturity

c. Coupon rate = Current yield = Yield to maturity

Which one of the following represents the capital gains yield as used in the dividend growth model? a. D1 b. D1/P0 c. P0 d. g e. g/P0

g

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will: a. pay an increasing dividend for a period of time and then cease paying dividends altogether. b. increase the dividend amount every other year. c. pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year. d. grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely. e. pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time.

grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the: a. coupon rate. b. face rate. c. call rate. d. yield to maturity. e. current yield.

yield to maturity.

Dependable motors just purchased some MACRS five year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for years 1 10 3, respectively. Assume the firm opted to forego any bonus depreciation. Which one of the following will correctly give you the book value of the equipment at the end of year 2? a. $216,000/(1 + .2 + .32) b. $216,000/(1 - .2 - .32) c. $216,000 (.20 + .32) d. [$216,000(1 - .20)](1 - .32) e. $216,000[(1 + .20)(1 + .32)]

$216,000/(1 - .2 - .32)

Which one of the following time periods is associated with low rates of inflation? a. 1941-1942 b. 1973-1974 c. 2014-2015 d. 1979-1980 e. 1946-1947

2014-2015

Which one of the following bonds is the least sensitive to interest rate risk? a. 3-year; 4 percent coupon b. 3-year; 6 percent coupon c. 5-year; 6 percent coupon d. 7-year; 6 percent coupon e. 7-year; 4 percent coupon

3-year; 6 percent coupon

Which one of following is the rate at which a stock's price is expected to appreciate? a. Current yield b. Total return c. Dividend yield d. Capital gains yield e. Coupon rate

Capital gains yield

Which of the following yields on a stock can be negative? a. Dividend yield b. Capital gains yield c. Capital gains yield and total return d. Dividend yield, capital gains yield, and total return e. Dividend yield and total return

Capital gains yield and total return

Which one of the following applies to a premium bond? a. Yield to maturity > Current yield > Coupon rate b. Coupon rate = Current yield = Yield to maturity c. Coupon rate > Yield to maturity > Current yield d. Coupon rate < Yield to maturity < Current yield e. Coupon rate > Current yield > Yield to maturity

Coupon rate > Current yield > Yield to maturity

Which one of the following correctly describes the dividend yield? a. Next year's annual dividend divided by today's stock price b. This year's annual dividend divided by today's stock price c. This year's annual dividend divided by next year's expected stock price d. Next year's annual dividend divided by this year's annual dividend e. The increase in next year's dividend over this year's dividend divided by this year's dividend

Next year's annual dividend divided by today's stock price

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule? a. Project A only b. Project B only c. Both A and B d. Neither A nor B e. Either, but not both projects

Project A only

A project has a net present value of zero. Which one of the following best describes this project? a. The project has a zero percent rate of return. b. The project requires no initial cash investment. c. The project has no cash flows. d. The summation of all of the project's cash flows is zero. e. The project's cash inflows equal its cash outflows in current dollar terms.

The project's cash inflows equal its cash outflows in current dollar terms.

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2016? a. Long-term government bonds b. Small-company stocks c. Large-company stocks d. Long-term corporate bonds e. U.S. Treasury bills

U.S. Treasury bills

Which one of the following statements is a correct reflection of the U.S. financial markets for the period 1926-2016? a. U.S. Treasury bill returns never exceeded a return of 9 percent in any one year. b. U.S. Treasury bills had an annual return in excess of 10 percent in three or more years. c. Inflation equaled or exceeded the return on U.S. Treasury bills every year during the period. d. Long-term government bonds outperformed U.S. Treasury bills every year during the period. e. National deflation occurred in at least one year during every decade during the period.

U.S. Treasury bills had an annual return in excess of 10 percent in three or more years.

You own a bond that pays an annual coupon of 6 percent that matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent? a. The current yield to maturity is greater than 6 percent. b. The current yield is 6 percent. c. The next interest payment will be $30. d. The bond is currently valued at one-half of its issue price. e. You will realize a capital gain on the bond if you sell it today.

You will realize a capital gain on the bond if you sell it today.

Net working capital: a. can be ignored in project analysis because any expenditure is normally recouped at the end of the project b. requirements, such as increase in accounts receivable, create a cash inflow at the beginning of a project c. is rarely affected when a new product is introduced d. can create either an initial cash inflow or outflow e. is the only expenditure where at least partial recovery can be made at the end of a project

can create either an initial cash inflow or outflow

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? a. sunk b. total c. variable d. incremental e. fixed

incremental

Which one of the following should not be included in the analysis of a new project? a. increase in accounts payable for inventory purchases of the new product b. reduction in sales for a current product once the new product is introduced c. market value of a machine owned by the firm which will be used to produced the new product d. money already spent for research and development of the new product e. increase in accounts receivable needed to finance sales of the new product

money already spent for research and development of the new product

A project has a discounted payback period that is equal to the required payback period. Given this, the project: a. will not be acceptable under the payback rule. b. must have a profitability index that is equal to or greater than 1.0. c. must have a zero net present value. d. must have an internal rate of return equal to the required return. e. will still be acceptable if the discount rate is increased.

must have a profitability index that is equal to or greater than 1.0.

The annual dividend yield is computed by dividing _____ annual dividend by the current stock price. a. this year's b. last year's c. next year's d. the past 5-year average e. the next 5-year average

next year's

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances? a. moving furniture to provide floor space for the appliances b. paying the rent for the store c. selling furniture to appliance customers d. having the current store manager oversee appliance sales e. using the store's billing system for appliance sales

selling furniture to appliance customers

Which one of the following cost was incurred in the past and cannot be recouped? a. incremental b. side c. sunk

sunk

Which one of the following statements related to capital gains is correct? a.The capital gains yield includes only realized capital gains. b. An increase in an unrealized capital gain will increase the capital gains yield. c. The capital gains yield must be either positive or zero. d. The capital gains yield is expressed as a percentage of a security's total return. e. The capital gains yield represents the total return earned by an investor.

An increase in an unrealized capital gain will increase the capital gains yield.

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project? a. Reduction in the cash outflow at Time 0 b. Cash inflow in the final year of the project c. Cash inflow in the final year of the project d. Cash inflow prorated over the life of the project e. Excluded from the net present value calculation

Cash inflow in the final year of the project

Which one of the following relationships is stated correctly? a. The coupon rate exceeds the current yield when a bond sells at a discount. b. The call price must equal the par value. c. An increase in market rates increases the market price of a bond. d. Decreasing the time to maturity increases the price of a discount bond, all else constant. e. Increasing the coupon rate decreases the current yield, all else constant.

Decreasing the time to maturity increases the price of a discount bond, all else constant.

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? a. Electing the board of directors b. Receiving a distribution of company profits c. Voting either for or against a proposed merger or acquisition d. Determining the amount of the dividend to be paid per share e. Having first chance to purchase any new equity shares that may be offered

Determining the amount of the dividend to be paid per share

Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows? a. Constant dividend growth model b. Discounted cash flow valuation c. Average accounting return d. Expected earnings model e. Internal rate of return

Discounted cash flow valuation

Which one of these statements related to discounted payback is correct? a. Payback is a better method of analysis than discounted payback. b. Discounted payback is used more frequently in business than payback. c. Discounted payback does not require a cutoff point. d. Discounted payback is biased towards short-term projects. e. The discounted payback period increases as the discount rate decreases.

Discounted payback is biased towards short-term projects.

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model? a. No dividends for five years, then increasing dividends forever b. $1 per share annual dividend for two years, then $1.25 annual dividends forever c. Decreasing dividends for six years followed by one final liquidating dividend payment d. Dividends payments that increase by 2, 3, and 4 percent respectively for three years followed by a constant dividend thereafter e. Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information? a. Regardless of the voting procedure, Jen does not own enough shares to gain a seat on the board. b. If straight voting applies, Jen is assured a seat on the board. c. If straight voting applies, Jen can control all of the open seats. d. If cumulative voting applies, Jen is assured one seat on the board. e. If cumulative voting applies, Jen can control all of the open seats.

If cumulative voting applies, Jen is assured one seat on the board.

Which one of the following will decrease the net present value of a project? a. Increasing the value of each of the project's discounted cash inflows b. Moving each cash inflow forward one time period, such as from Year 3 to Year 2 c. Decreasing the required discount rate d. Increasing the project's initial cost at time zero e. Increasing the amount of the final cash inflow

Increasing the project's initial cost at time zero

Which one of the following statements correctly applies to the period 1926-2016? a. Large-company stocks earned a higher average risk premium than did small-company stocks. b. The average inflation rate exceeded the average return on U.S. Treasury bills. c. Large-company stocks had an average annual return of 14.7 percent. d. Inflation averaged 2.6 percent for the period. e. Long-term corporate bonds outperformed long-term government bonds.

Long-term corporate bonds outperformed long-term government bonds.

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? a. Short-term; low coupon b. Short-term; high coupon c. Long-term; zero coupon d. Long-term; low coupon e. Long-term; high coupon

Long-term; zero coupon

Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return? a. Risk premium b. Geometric average return c. Arithmetic average return d. Standard deviation e. Variance

Risk premium

Which one of the following earned the highest risk premium over the period 1926-2016? a. Long-term corporate bonds b. U.S. Treasury bills c. Small-company stocks d. Large-company stocks e. Long-term government bonds

Small-company stocks

The historical record for the period 1926-2016 supports which one of the following statements? a. When large-company stocks have a negative return, they will have a negative return for at least two consecutive years. b. The return on U.S. Treasury bills exceeds the inflation rate by at least .5 percent each year. c. There was only one year during the period when double-digit inflation occurred. d. Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year. e. The inflation rate was positive each year throughout the period.

Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year.

Which one of the following statements is correct? a. Stocks can only be assigned one dividend growth rate. b. Preferred stocks generally have variable growth rates. c. Dividend growth rates must be either zero or positive. d. All stocks can be valued using the dividend discount models. e. Stocks can have negative growth rates.

Stocks can have negative growth rates.

Why is payback often used as the sole method of analyzing a proposed small project? a. Payback considers the time value of money. b. All relevant cash flows are included in the payback analysis. c. The benefits of payback analysis usually outweigh the costs of the analysis. d. Payback is the most desirable of the various financial methods of analysis. e. Payback is focused on the long-term impact of a project.

The benefits of payback analysis usually outweigh the costs of the analysis.

Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct? a. The bonds will become discount bonds if the market rate of interest declines. b. The bonds will pay 10 interest payments of $60 each. c. The bonds will sell at a premium if the market rate is 5.5 percent. d. The bonds will initially sell for $1,030 each. e. The final payment will be in the amount of $1,060.

The bonds will sell at a premium if the market rate is 5.5 percent.

Stacy purchased a stock last year and sold it today for $4 a share more than her purchase price. She received a total of $1.15 per share in dividends. Which one of the following statements is correct in relation to this investment? a. The dividend yield is expressed as a percentage of the par value. b. The capital gain would have been less had Stacy not received the dividends. c. The total dollar return per share is $2.85. d. The capital gains yield is positive. e. The dividend yield is greater than the capital gains yield.

The capital gains yield is positive.

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project? a. The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. b. The cash flow in Year 3 is ignored. c. The project's cash flow in Year 3 is discounted by a factor of (1 + R)3. d. The cash flow in Year 2 is valued just as highly as the cash flow in Year 1. e. The project is acceptable whenever the payback period exceeds three years.

The cash flow in Year 2 is valued just as highly as the cash flow in Year 1.

A $1,000 par value corporate bond that pays $60 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $996.20? a. The bond is currently selling at a premium. b. The current yield exceeds the coupon rate. c. The bond is selling at par value. d. The current yield exceeds the yield to maturity. e. The coupon rate has increased to 7 percent.

The current yield exceeds the coupon rate.

The rate of return on which type of security is normally used as the risk-free rate of return? a. Long-term Treasury bonds b. Long-term corporate bonds c. Treasury bills d. Intermediate-term Treasury bonds e. Intermediate-term corporate bonds

Treasury bills

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect: a. an increase in all stock values. b. all stock values to remain constant. c. a decrease in all stock values. d. dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. e. dividend-paying stocks to increase in price while non-dividend paying stocks remain constant in value.

a decrease in all stock values.

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. a. a premium; less than b. a premium; equal to c. a discount; less than d. a discount; higher than e. par; less than

a discount; less than

net working capital requirements: a. can affect the cash flows of a project every year of the projects life b. only affect initial cash flows of a project c. only affect the initial and final cash flows of a project d. are generally excluded from project analysis due to their irrelevance to the total project e. are excluded from project analysis as they are recovered when the project ends

can affect the cash flows of a project every year of the projects life

Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ______ than the stock of Dixie South. a. market price b. dividend yield c. capital gains yield d. total return e. real return

capital gains yield

The price sensitivity of a bond increases in response to a change in the market rate of interest as the: a. coupon rate increases. b. time to maturity decreases. c. coupon rate decreases and the time to maturity increases. d. time to maturity and coupon rate both decrease. e. coupon rate and time to maturity both increase.

coupon rate decreases and the time to maturity increases.

Which one of the following is a project cash inflow? Ignore any tax effects. a. decrease in accounts payable b. increase in accounts receivable c. decrease in inventory d. depreciation expense e. equipment acquisition

decrease in inventory

Bayside Marina just announced it is decreasing its annual dividend from $1.48 per share to $1.45 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: a. was unaffected by the announcement. b. increased proportionately with the dividend decrease. c. decreased proportionately with the dividend decrease. d. decreased by $.03 per share. e. increased by $.03 per share.

decreased proportionately with the dividend decrease.

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the: a. net present value period. b. internal return period. c. payback period. d. discounted profitability period. e. discounted payback period

discounted profitability period.

A forward PE is based on a. the last four quarterly dividend payments. b. the last dividend payment multiplied by 2. c. historical earnings. d. estimated future earnings. e. industry averages.

estimated future earnings.

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called? a. Coupon b. Face value c. Discount d. Yield e. Dirty price

face value

A newly issued bond has a coupon rate of 7 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: a. 3.5 percent. b. greater than 3.5 percent but less than 7 percent. c. 7 percent. d. greater than 7 percent. e. less than 3.5 percent.

greater than 7 percent.

Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? a. storing supplies in the same space currently used for materials storage b. utilizing the basket manager to oversee wreath production c. hiring additional employees to handle the increased workload should the firm accept the wreath project d. researching the market to determine if wreath sales might be profitable before deciding to proceed e. planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduced the firm's currently outstanding debt

hiring additional employees to handle the increased workload should the firm accept the wreath project

Pro forma statements for a proposed project should generally do all of the following except: a. be compiled on a stand-alone basis b. include all project related fixed asset acquisitions as disposals c. include all the incremental cash flows related to the project d. include taxes e. include interest expense

include interest expense

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the projects: a. incremental cash flows b. internal cash flows c. external cash flows d. erosion effects e. financing cash flows

incremental cash flows

All of the following are related to a proposed project. Which one of these should be included in the cash flow at time 0? a. loan obtained to finance the project b. initial investment to support the project c. annual depreciation tax shield d. after tax salvage value e. net working capital recovery

initial investment to support the project

The average accounting rate of return (AAR): a. considers the time value of money. b. measures net income as a percentage of the sales generated by a project. c. is the best method of financially analyzing mutually exclusive projects. d. is the primary methodology used in analyzing independent projects. e. is similar to the return on assets ratio.

is similar to the return on assets ratio.

Net present value: a. is the best method of analyzing mutually exclusive projects. b. is less useful than the internal rate of return when comparing different-sized projects. c. is the easiest method of evaluation for nonfinancial managers. d. cannot be applied when comparing mutually exclusive projects. e. is very similar in its methodology to the average accounting return.

is the best method of analyzing mutually exclusive projects.

Supernormal growth is a growth rate that: a. is both positive and follows a year or more of negative growth. b. exceeds a firm's previous year's rate of growth. c. is generally constant for an infinite period of time. d. is unsustainable over the long term. e. applies to a single, abnormal year.

is unsustainable over the long term.

The current yield is defined as the annual interest on a bond divided by the: a. coupon rate. b. face value. c. market price. d. call price. e. par value.

market price

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the: a. coupon rate will also increase. b. current yield will decrease. c. yield to maturity will be less than the coupon rate. d. market price of the bond will decrease. e. coupon payment will increase.

market price of the bond will decrease.

The option that is forgone so than an asset can be utilized by a specific project is referred to as which one of the following? a. salvage value b. wasted value c. sunk cost d. opportunity cost e. erosin

opportunity cost

The length of time a firm must wait to recoup the money it has invested in a project is called the: a. internal return period. b. payback period. c. profitability period. d. discounted cash period. e. valuation period.

payback period.

For the period 1926-2016, U.S. Treasury bills always: a. provided an annual rate of return that exceeded the annual inflation rate. b. had an annual rate of return in excess of 1.2 percent. c. provided a positive annual rate of return. d. earned a higher annual rate of return than long-term government bonds. e. had a greater variation in returns year-over-year than did long-term government bonds.

provided a positive annual rate of return.

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? a. providing both ketchup and mustard for customer's use b. repairing the roof of the hotdog stand because of water damage c. selling fewer hot dogs because hamburgers were added to the menu d. offering french fried but not onion rings e. losing sales due to bad weather

selling fewer hot dogs because hamburgers were added to the menu

Small-company stocks, as the term is used in the textbook, are best defined as the: a. 500 newest corporations in the U.S. b. companies whose stock trades OTC. c. smallest 20 percent of the companies listed on the NYSE. d. smallest 25 percent of the companies listed on NASDAQ. e. companies whose stock is listed on NASDAQ.

smallest 20 percent of the companies listed on the NYSE.

Applying the discounted payback decision rule to all projects may cause: a. some positive net present value projects to be rejected. b. the most liquid projects to be rejected in favor of the less liquid projects. c. projects to be incorrectly accepted due to ignoring the time value of money. d. a firm to become more long-term focused. e. some projects to be accepted which would otherwise be rejected under the payback rule.

some positive net present value projects to be rejected.

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles? a. underlying value principle b. stand-alone principle c. equivalent cost principle d. salvage principle e. fundamental principle

stand-alone principle

GL Plastics spend $1,200 last week repairing a machine. This week the company is trying to decide id the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? a. opportunity b. fixes c. incremental d. erosion e. sunk

sunk

The net present value of a project will increase if: a. the required rate of return increases. b. the initial capital requirement increases. c. some of the cash inflows are deferred until a later year. d. the aftertax salvage value of the fixed assets increases. e. the final cash inflow decreases.

the aftertax salvage value of the fixed assets increases.

Which one of the following best describes the concept of erosion? a. expenses that have already been incurred and cannot be recovered b. change in net working capital related to implementing a new project c. the cash flows of a new project that come at the expense of a firm's existing cash flows d. the alternative that is forfeited when a fixed asset is utilized by a project e. the difference in a firm's cash flows with and without a particular project

the cash flows of a new project that come at the expense of a firm's existing cash flows