Finance test 3

Good capital budgeting techniques should consider:

-The time value of money -All projecte cash flows -The required rate of return All of the above.

Bookmark question for later Your son wants to start a lemonade stand. The annual fixed cost is $50. The price of a glass of lemonade is $0.30 while variable costs are $0.10. The breakeven point of this lemonade stand is:

Breakeven = FC/Contribution Margin = 50/(0.30 - 0.10) = 250 glasses of lemonade.

The net present value of a project is smaller when:

Cash inflows are pushed farther into the future

Which one of the following is NOT a part of working capital?

Common equity

Capital budgeting is defined as the process of:

Determining which projects increase firm value.

Internal rate of return is calculated by:

Finding the discount rate that forces the NPV of the project to zero.

Which one of the following is NOT a potential problem with the IRR approach to capital budgeting?

IRR is does not adequately account for risk.

Financial leverage is:

Neither good nor bad as it simply magnifies operating results.

Degree of Financial Leverage is a multiplier that describes the percentage change in:

Net income associated with a percentage change in operating income.

Degree of Combined Leverage (DCL) is a multiplier that describes the percentage change in:

Net income associated with a percentage change in sales.

The Degree of Operating Leverage (DOL) is a multiplier that describes the percentage change in:

Operating income associated with a percentage change in sales.

All of the following are weaknesses of payback period as an evaluation tool except:

Some projects have multiple paybacks.

If the firm's working capital investment increases as a result of accepting a new project, the amount of the increase should be:

Subtracted from project cash flows when the increase occurs.

If an industry tends to require a high level of fixed operating cost, then it:

Tends to have lower DFL.

Which one of the following items should NOT be included in capital budgeting analysis?

The consulting fee associated with a previously completed market analysis.

Which one of the following CANNOT be included as part of the depreciable asset base when purchasing new equipment?

The initial investment in the working capital.

Business risk is measured by the

Volatility of EBIT

Which of the following does not affect the business risk of a firm

debt financing

The higher a firm's fixed operating costs, the:

higher will be the firm's operating leverage.

Operating leverage refers to

the use of fixed cost in firms operations