FINANCE EXAM 2 CH 9-12
Vanessa purchased a stock one year ago and sold it today for $3.15 per share more than her purchaseprice. She received a total of $2.60 per share in dividends. Which one of the following statements iscorrect in relation to this investment?
The capital gains yield is positive.
Which one of the following is the most likely reason why a stock price might not react at all on the daythat new information related to the stock's issuer is released? Assume the market is semistrong formefficient.
The information was expected.
Which one of the following will be used in the best-case analysis of a proposed project?
The lowest variable cost per unit that can reasonably be expected
Ellis-Clay is replacing a machine that has worn out. The replacement machine will not impact sales oroperating costs and will not have any salvage value at the end of its five-year life. The firm has a tax rateof 22 percent, uses straight-line depreciation over an asset's life, ignores bonus depreciation options,and has a positive net income. Given this, which one of the following statements is correct?
The new machine will generate positive operating cash flows.
TipTop Property Management is considering a project that has an NPV of $18,500, an IRR of 13.2percent, and a payback period of 3.2 years. The required return is 12.8 percent and the requiredpayback period is 3.0 years. Which one of the following statements correctly applies to this project?
The payback decision rule could override the accept decision indicated by the net present valueif liquidity is a primary concern
Which one of the following characteristics relates to the cash break-even point for a given project?
The project never pays back.
Assume you graph a project's net present value given various sales quantities. Which one of thefollowing statements is correct regarding the resulting function?
The slope of the function measures the sensitivity of the net present value to a change in salesquantity
Which one of the following categories of securities had the lowest average risk premium for the period1926-2019?
U.S. Treasury bills
Which one of the following had the least volatile annual returns over the period of 1926-2019?
U.S. Treasury bills
Standard deviation is a measure of which one of the following?
Volatility
Which form of market efficiency would most likely offer the greatest profit potential to an outstandingprofessional stock analyst?
Weak
You are comparing two mutually exclusive projects, Project X and Project Z. The crossover point is 11.4percent. You have determined that you should accept project X if the required return is 12.7 percent.This implies you should
always accept Project X if the required return exceeds the crossover rate.
Fixed costs:
are constant over the short-run regardless of the quantity of output produced.
For the period 2009-2019, U.S. Treasury bills had an annual rate of return that was:
between 0 and 2.5 percent.
Changes in the net working capital requirements:
can affect the cash flows of a project every year of the project's life.
The operating cash flow of a cost-cutting project:
can be positive even though there are no sales
Anya just completed analyzing a project. Her analysis indicates that the project will have a six-year lifeand require an initial cash outlay of $98,000. Annual sales are estimated at $64,000 and the tax rate is21 percent. The net present value is negative $98,000. Based on this analysis, the project is expected tooperate at the:
cash break-even point.
The IRR that causes the net present value of the differences between two project's cash flows to equalzero is called the
crossover rate
Sung Office Products just announced it is decreasing its annual dividend from $2.20 per share to $1.85per share effective immediately. If the dividend yield remains at its pre-announcement level, then youknow the stock price:
decreased proportionately with the dividend decrease.
Sensitivity analysis determines the:
degree to which the net present value reacts to changes in a single variable.
The CFO of Shelby & Muhammad receives frequent capital funding requests from the firm's divisionmanagers. These requests are seeking funding for positive net present value projects. The CFO continuesto deny all funding requests due to the financial situation of the company. Apparently, the company is:
facing hard rationing.
The average compound return earned per year over a multiyear period is called the _____ average return
geometric
As the degree of sensitivity of a project to a single variable rises, the:
greater is the importance of accurately predicting the value of that variable.
Pro forma statements for a proposed project should generally do all of the following, except:
include interest expense.
To convince investors to accept greater volatility, you must:
increase the risk premium.
As of 2018, firms can take a "bonus" depreciation deduction of 100 percent of the cost of an eligibleasset in the year the asset was purchased. If a firm elects to take the bonus depreciation instead of usingMACRS depreciation, the project's Year 1 operating cash flow will _______ in the amount of ________
increase; the depreciation expense times the tax rate
The difference between a company's future cash flows if it accepts a project and the company's futurecash flows if it does not accept the project is referred to as the project's
incremental cash flows
A firm is considering borrowing money from a bank to pay for a proposed capital project, how shouldthe cost of borrowing the money be reflected in the discounted cash flow analysis?
it should be excluded because it is a financing cost
Individual investors who continually monitor the financial markets seeking mispriced securities:
make the markets increasingly more efficient.
Inside information has the least value when financial markets are:
strong form efficient.
A project that has a payback period exactly equal to the project's life is operating at:
the accounting break-even point.
A disadvantage of the payback method is:
the payback method ignores all cash flows that occur after the maximum acceptable paybackperiod
And capital project requires an initial investment of $490,000, the companies required rate of return is13.5% and the NPV of the project is $1600. Which of the following statements is true?
the project will generate an annual return of 13.5% plus a one-time increase in firm value of$1600
A project has a net present value of zero. Given this information:
the project's cash inflows equal its cash outflows in current dollar terms.
All other things being equal the NPV of a project will increase when
the required rate of return decreases
A project that has a projected IRR of negative 100 percent will also have a(n):
net present value that is negative and equal to the initial investment.
Estimates of the rate of return on a security based on the historical arithmetic average will probablytend to _____ the expected return for the long-term and estimates using the historical geometricaverage will probably tend to _____ the expected return for the short-term
overestimate; underestimate
10 years ago, you bought a building for $1 million. You have never used the building and it has beendepreciated on a straight-line basis to the value of $0.00 during its 25-year life. You estimate that thebuilding could be sold today for $1.4 million net of selling costs. You're currently evaluating a capitalproject that would convert the building into rental apartments, what amount related to the buildingshould be factored into your capital project analysis excluding taxes?
$1.4 million
Which one of the following is an example of a sunk cost?
$2,000 paid last year to rent equipment
Honor Computing just purchased new equipment that cost $213,000. The equipment is classified asMACRS five-year property. The MACRS rates are .2, .32, and .192 for Years 1 to 3, respectively. What isthe proper methodology for computing the depreciation expense for Year 2 assuming the firm opts toforego any bonus depreciation?
$213,000(.32)
For the period 1926-2019, the average risk premium on large-company stocks was about:
8.7 percent.
A project with financing type cash flows is typified by a project that has which one of the followingcharacteristics?
A cash inflow at Time 0
Which one of the following statements is correct concerning market efficiency?
A firm will generally receive a fair price when it issues new shares of stock if the market isefficient.
Which one of the following statements is correct?
A project can create a positive operating cash flow without affecting sales.
Which one of the following statements best defines the efficient market hypothesis?
All securities in an efficient market are zero net present value investments.
Which one of the following statements related to capital gains is correct?
An increase in an unrealized capital gain will increase the capital gains yield.
Which one of the following methods of analysis provides the best information on the benefits to bereceived from a project per dollar invested?
profitability index
Which of the following yields on a stock can be negative?
Capital gains yield and total return
Boyd Leasing is analyzing a project that requires purchasing $210,000 of new fixed assets. When theproject ends, those assets are expected to have an aftertax salvage value of $22,000. How is the $22,000salvage value handled when computing the net present value of the project?
Cash inflow in the final year of the project
Andrea is analyzing a project that currently has a projected NPV of zero. Which one of the followingchanges that she is considering is most apt to cause that project to produce a positive NPV instead?Consider each change independently.
Decrease the labor hours per unit produced
Assume a profitable, tax-paying company uses the bottom-up approach to compute operating cash flow.An increase in which one of the following items will result in an increase in operating cash flow?
Depreciation expense
Decreasing which one of the following will increase the acceptability of a project?
Equivalent annual cost
Which one of the following represents the level of output where a project produces a rate of return justequal to its requirement?
Financial break-even
Which one of the following characteristics best describes a project that has a low degree of operatingleverage?
High variable costs relative to the fixed costs
Bybee Printing makes custom posters and is currently considering making large-scale outdoor bannersas well. Which one of the following is the best example of an incremental operating cash flow related tothe banner project?
Hiring additional employees to handle the increased workload should the firm accept thebanner project
Which of the following values will be equal to zero when a project is operating at the accounting break-even level of output?
IRR and net income
A firm used a discount rate of 10% to determine an independent project with cash flows that have aNPV equal to $10,000. Which of the following statements regarding the projects IRR is true?
IRR is greater than 10%
When analyzing a project, scenario analysis is best suited to accomplishing which one of the following?
Identifying the potential range of reasonable outcomes
A project you are evaluating will reduce the annual packaging expenses by $15,000. You were told thatthe project will reduce shipping costs of the department annually by $2000, how will you handle theinformation from your coworker?
Included, it is a side effect that will increase incremental operating cash flow
Which of the following are advantages of the payback method of project analysis?
Liquidity bias; ease of use
Which one of the following statements correctly applies to the period 1926-2019?
Long-term corporate bonds outperformed long-term government bonds.
Which one of the following is a correct ranking of securities based on the volatility of their annualreturns over the period of 1926-2019? Rank from highest to lowest
Long-term government bonds, long-term corporate bonds, intermediate-term governmentbonds
Which one of the following is a project acceptance indicator given an independent project withconventional cash flows?
Modified internal rate of return that exceeds the required return
Assume interest expense is equal to zero. Which one of the following is a correct method for computingthe operating cash flow of a project?
Net income + Depreciation
A project has an initial cost of $52,700 and a market value of $61,800. What is the difference betweenthese two values called?
Net present value
When evaluating two mutually exclusive projects, the final decision on which project to acceptultimately depends upon which one of the following?
Net present value
By definition, which one of the following must equal zero at the cash break-even point?
Operating cash flow
Which of the following are inversely related to variable costs per unit?
Operating cash flow per unit and contribution margin per unit
A decrease in which one of the following will increase the accounting break-even quantity? Assumestraight-line depreciation is used and ignore taxes.
Sales price per unit
When analyzing the best-case scenario, which of the following variables will be forecast at their highestexpected level?
Salvage value and units sold
Which one of the following best illustrates erosion as it relates to a snack stand located on the beach?
Selling fewer cookies because ice cream was added to the menu
A furniture store is considering adding kitchen appliances to its offerings. Which one of the following isthe best example of an incremental cash flow related to the appliances?
Selling furniture to appliance customers
Which one of the following categories of securities had the highest average annual return for the period1926-2019?
Small-company stocks
Which one of the following categories of securities had the most volatile annual returns over the period1926-2019?
Small-company stocks
Which one of the following earned the highest risk premium over the period 1926-2019?
Small-company stocks
Which one of the following will best reduce the risk of a project by lowering the degree of operatingleverage?
Subcontracting portions of the project rather than purchasing new equipment to do all the workin-house
The current book value of a fixed asset that was purchased two years ago is used in the computation ofwhich one of the following?
Tax due on the current salvage value of that asset
Which one of the following statements related to the internal rate of return (IRR) is correct?
The IRR is equal to the required return when the net present value is equal to zero.