FIN 3716: Chapters 7-9

True

True or False: Net present value (NPV) is the difference between the present value (PV) of the benefits and the present value (PV) of the costs of a project or investment.

False

True or False: A floor broker is a person at the NASDAQ with a trading license who represents orders on the floor.

False

True or False: A real option is the obligation to take a particular business action.

False

True or False: An announcement by the government that they will decrease corporate marginal tax rates in the future would increase the attractiveness of MACRS depreciation.

False

True or False: Capital budgeting decisions use the Net Present Value rule so that those decisions maximize net present value (NPV).

True

True or False: Firms should use the most accelerated depreciation scheme allowable.

True

True or False: Forecasting dividends requires forecasting the firm's earnings, dividend payout rate, and future share count.

True

True or False: Interest and other financing-related expenses are excluded when determining a project's unlevered net income.

False

True or False: Internal rate of return (IRR) can reliably be used to choose between mutually exclusive projects.

False

True or False: A capital budget lists the potential projects a company may undertake in future years.

True

True or False: A firm can either pay its earnings to its investors, or it can keep them and reinvest them.

yes due to the time value of money; while both methods pay the same amount in taxes, MACRS gives more money in the pocket in the initial days

If available, should MACRS be preferred to straight-line depreciation?

A. as a sunk cost

A company spends $20 million researching whether it is possible to create a durable plastic from the process waste from feedstock preparation. The $20 million should best be considered _____. A. as a sunk cost B. as an opportunity cost C. as a fixed overhead expense D. as a capital cost

C. 100

A "round lot" consists of how many shares? A. 1 B. 10 C. 100 D. 1,000

D. $17,208

A bakery invests $40,000 in a light delivery truck. This was depreciated using the five-year MACRS schedule shown above. If the company sold it immediately after the end of year 3 for $21,000, what would be the after-tax cash flow from the sale of this asset, given a tax rate of 40%? A. $11,520 B. $9480 C. $3792 D. $17,208

D. (whichever one has the line crossing right after 5)

A bakery is deciding whether to buy an extra van to help deliver its products. The van will cost $28,000, but is expected to increase profits by $6,500 per year over the five years of its working life. Which of the following is the correct net present value (NPV) profile for this purchase?

A. $1.625 million

A brewer is launching a new product: brewed ginger ale with a low alcohol content. The brewer plans to spend $4 million promoting this product this year, which is expected to expand the sales of this product to $11 million this year and $8 million new year. They do expect there will be loss of sales of $1 million this year and net year in their other products as customers switch to drinking the new ginger ale. The gross profit margin the for the new ginger ale is 40%, the gross product margin of all of the brewer's other products is 30%, and the brewer's marginal corporate tax rate is 35%. What are incremental earnings arising from the promotion campaign this year? A. $1.625 million B. $1.26 million C. $2.11 million D. $4.40 million

A. $667

A car dealership offers a car for $14,000, with up to one year to pay for the car. If the interest rate is 5%, what is the net present value (NPV) of this offer to buyers who elect not to pay for the car for one year? A. $667 B. $1333 C. $13,333 D. $14,000

D. -$4507

A company buys a color printer that will cost $16,000 to buy, and last 5 years. It is assumed that it will require servicing costing $500 each year. What is the equivalent annual annuity of this deal, given a cost of capital of 8%? A. -$3155 B. -$3606 C. -$4057 D. -$4507

A. $10.756 million

A company buys tracking software for its warehouse which, along with the computer system and ancillaries to run it, will cost $1.6 million. This purchase will be deducted over five years. It is expected that the software will reduce inventory by $10.7 million at the end of the first year after it is installed, though there will be an annual cost of $120,000 per year to run the system. If the company's marginal tax rate is 40%, how will the purchase of this item change the company's free cash flows in the first year? A. $10.756 million B. $10.380 million C. $9.680 million D. $11.832 million

B. Project II

A company has four projects it wishes to undertake. Which of these investments should be the lowest priority, given a discount rate of 5%? A. Project I B. Project II C. Project III D. Project IV

B. a perpetuity that generates a cash flow at the end of year 1 of $800,000, has a growth rate of 2.25%, and a cost of capital of 11.8%

A company has identified the following investments as looking promising. Each requires an initial investment of $1.2 million. Which is the best investment? A. a perpetuity that generates a cash flow at the end of year 1 of $100,000, has a growth rate of 1.25%, and a cost of capital of 11.0% B. a perpetuity that generates a cash flow at the end of year 1 of $800,000, has a growth rate of 2.25%, and a cost of capital of 11.8% C. an investment that generates a cash flow fo $400,000 at the end of each of the next five years, when the cost of capital is 6.1% D. an investment that generates a cash flow of $200,000 at the end of each of the next ten years, when the cost of capital is 6.1%

A. 0.98%

A company has stock which costs $41.50 per share and pays a dividend of $2.50 per share this year. The company's cost of equity is 7%. What is the expected annual growth rate of the company's dividends? A. 0.98% B. 1.96% C. 2.94% D. 3.92%

B. If the motor scooter is sold for $2,480, then the net present value (NPV) for the project will be zero.

A company is planning to market a new model of motor scooter analyzes the effect of changes in the selling price of the motor scooter, the number of units that will be sold, the cost of making the motor scooter, the effect on Net Working Capital, and the cost of capital for the project. They predict that the break-even point for sales price for the motor scooter is $2,480. What does this mean? A. If the motor scooter is sold for $2,480, then the project will make a profit. B. If the motor scooter is sold for $2,480, then the net present value (NPV) for the product will be zero. C. The predicted selling price of the motor scooter is $2,480. D. The maximum that the motor scooter can sell for and still make the project have a positive net present value (NPV) is $2,480.

D. Prep for the Grad School Entry Test, Prep for the Law School Entry Test, and Prep for the Medical School Entry Test

A company that creates education products is planning to create a suite of books to help customers prepare for high-stakes tests for entry into college and grad school. They have 33 in-house writers to create these books. Due to the expertise needed in creating this content is will not be possible to hire temporary writers within the planned time-frame. Which projects should be undertaken? A. Prep for the College Entry Test and Prep for the Law School Entry Test B. Prep for the College Entry Test and Prep for the Grad School Entry Test C. Prep for the Dental School Entry Test, Prep for the Grad School Entry Test, and Prep for the Medical School Entry Test D. Prep for the Grad School Entry Test, Prep for the Law School Entry Test, and Prep for the Medical School Entry Test

B. $175,034

A consultancy calculates that it can supply crude oil assaying services to a small oil producer for $115,000 per year for five years. There are some upfront costs the consultancy will require the oil producer to absorb. What is the maximum that these upfront costs could be, if the equivalent annual annuity to the oil company is to be under $160,000, given that the cost of capital is 9%? A. $45,000 B. $175,034 C. $201,289 D. $160,000

B. $1.7 million

A consumer good company is developing a new brand of organic toothpaste. Above is the sensitivity analysis for this product. If the best-case assumptions for Net Working Capital are met, what will the net present value (NPV) of this project be? A. $0.65 million B. $1.7 million C. $2 million D. $3 million

C. cost of goods

A consumer good company is developing a new brand of organic toothpaste. Above is the sensitivity analysis for this product. The assumptions regarding which parameter should be scrutinized most carefully in the estimation process? A. units sold B. sales price C. cost of goods D. cost of capital

D. No, since the value of the cash flows over the first two years are less than the initial investment.

A convenience store owner is contemplating putting a large neon sign over his store. It would cost $50,000, but is expected to bring an additional $24,000 of profit to the store every year for five years. Would this project by worthwhile if evaluated using a payback period of two years or less and if the cost of capital is 10%? A. Yes, since it will pay back its initial investment in two years. B. Yes, since the value of the cash flows into the store, in present dollars, are greater than the initial investment. C. Yes, since the cash flows after two years are greater than the initial investment. D. No, since the value of the cash flows over the first two years are less than the initial investment.

C. -$574

A delivery service is buying 600 tires for its fleet of vehicles. One supplier offers to supply the tires for $80 per tire, payable in one year. Another supplier will supply the tires for $20,000 down today, then $45 per tire, payable in one year. What is the different in PV between the first and the second offer, assuming interest rates are 8.1%? A. -$860 B. -$229 C. -$574 D. $860

C. $0

A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground, and sow the crop. In one year's time it will cost $93,200 to harvest the crop. If the crop will be worth $350,000, and the interest rate is 7%, what is the net present value (NPV) of this investment? A. $240,000 B. $87,103 C. $0 D. $567,103

D. $190,321

A fast-food company invests $2.2 million to buy machines for making Slurpees. These can be depreciated using the MACRS schedule shown above. If the cost of capital is 10%, what is the increase in the net present value (NPV) of the product gained by using MACRS depreciation over straight-line depreciation for three years? A. $28,559 B. $47,599 C. $76,158 D. $190,321

A. $10,048

A firm has an opportunity to invest $95,000 today that will yield $109,250 in one year. If interest rates are 4%, what is the net present value (NPV) of this investment? A. $10,048 B. $11,053 C. $16,077 D. $14,250

C. $416,250

A firm is considering a new project that will generate cash revenue fo $1,300,000 and cash expenses of $700,000 per year for five years. The equipment necessary for the project will cost $300,000 and will be depreciated straight line over four years. What is the expected free cash flow in the second year of the project if the firm's marginal tax rate is 35%? A. $374,625 B. $341,250 C. $416,250 D. $499,500

D. $135,000

A firm is considering changing their credit terms. It is estimated that this change would result in sales increasing by $1,600,000. This in turn would cause inventory to increase by $125,000, accounts receivable to increase by $100,000, and accounts payable to increase by $90,000. What is the firm's expected change in net working capital? A. $1,735,000 B. $315,000 C. $225,000 D. $135,000

B. $31,200

A firm is considering investing in a new machine that will cots $400,000 and will be depreciated straight-line over five years. If the firm's marginal tax rate is 39%, what is the annual depreciation tax shield of purchasing the machine? A. $80,000 B. $31,200 C. $28,080 D. $156,000

C. net present value (NPV)

A firm is considering several mutually exclusive investment opportunities. The best way to choose between them is which of the following? A. profitability index B. payback period C. net present value (NPV) D. internal rate of return (IRR)

A. $0

A firm is considering the purchase of a new machine for $325,000. The firm is unsure if it should use the 3-Year MACRS schedule or straight-line depreciation over three years. What is the difference in the book value after three years if the firm uses MACRS instead of straight-line depreciation? A. $0 B. $24,083 C. $48,166 D. $300,918

B. $7.1 million

A firm reports that in a certain year it had a net income of $5.0 million, depreciation expenses of $3.0 million, capital expenditures of $2.0 million, and Net Working Capital decreased by $1.1 million. What is the firm's free cash flow for that year? A. $11.1 million B. $7.1 million C. $5.1 million D. $4.9 million

D. 26.00 months

A florist is buying a number of motorcycles to expand its delivery service. These will cost $78,000 but are expected to increase profits by $3000 per month over the next four years. What is the payback period in this case? A. 10.40 months B. 15.60 months C. 19.50 months D. 26.00 months

D. Hoist B, since it has a greater equivalent annual annuity.

A garage is comparing the cost of buying two different car hoists. Hoist A will cost 20,000, will require serving of $1000 every two years, and last ten years. Hoist B will cost $15,000, require servicing of $800 per year, and last eight years. If the cost of capital is 7%, which is the better option, given that the firm has an ongoing requirement for a hoist A. Hoist A, since it has a greater present value (PV). B. Hoist B, since it has a greater present value (PV). C. Hoist A, since it has a greater equivalent annual annuity. D. Hoist B, since it has a greater equivalent annual annuity.

D. $150,548

A garage is installing a new "bubble-wash" car wash. It will promote the car wash as a fun activity for the family, and it is expected that the novelty of this approach will boost sales in the medium term. If the cost of capital is 10%, what is the net present value (NPV) of this project? A. -$135,493 B. -$143,021 C. $165,603 D. $150,548

D. Option B, since it has a greater equivalent annual annuity.

A janitorial services firm is considering two brands of industrial vacuum cleaners to equip their staff. Option A will cost $1,500, require servicing of $200 per year, and it will last five years. Option B will cost $1,000, require servicing of $200 per year, and it will last three years. If the cost of capital is 8%, which is the better option, given that the firm has an ongoing requirement for vacuum cleaners? A. Option A, since it has a lower equivalent annual annuity. B. Option B, since it has a lower equivalent annual annuity. C. Option A, since it has a greater equivalent annual annuity. D. Option B, since it has a greater equivalent annual annuity.

B. The mower is only expected to be needed for three years.

A lawn maintenance company compares two ride-on mowers - the Excelsior, which has an expected working-life of six years, and the Grassassinator, which has a working life of four years. After examining the equivalent annual annuities of each mower, the company decides to purchase the Excelsior. Which of the following, if true, would be most likely to make them change that decision? A. Fuel prices are expected to rise and raise the annual running costs of all mowers. B. The mower is only expected to be needed for three years. C. The prices of equivalent mowers are expected to grow in the future as lawnmower manufacturers consolidate. D. The number of customers requiring lawn-mowing services is expected to sharply increase in the near future.

C. $6.32 million

A local government awards a landscaping company a contract worth $1.5 million per year for five years for maintaining public parks. The landscaping company will need to buy some new machinery before they can take on the contract. If the cost of capital is 6%, what is the most that this equipment could cost if the contract is to be worthwhile for the landscaping company? A. $5.69 million B. $6.00 million C. $6.32 million D. $6.63 million

A. Yes, because it agrees with the Net Present Value rule.

A lottery winner can take $6 million now or be paid $600,000 at the end of each of the next 16 years. The winner calculates the internal rate of return (IRR) of taking the money at the end of each year and, estimating that the discount rate across this period will be 4%, decides to take the money at the end of each year. Was her decision correct? A. Yes, because it agrees with the Net Present Value rule. B. Yes, because it agrees with the payback rule. C. Yes, because it agrees with both the Net Present Value rule and the payback rule. D. Yes, because it disagrees with the Net Present Value rule.

D. $63,663

A machine is purchased for $575,000 and is used through the end of Year 2. The machine will be depreciated using the 3-Year MACRS schedule. At the end of Year 2, the machine is sold for $75,000. What is the after-tax cash flow from the sale of the machine at the end of Year 2 if the firm's marginal tax rate is 35%? A. $42,608 B. $15,916 C. $32,392 D. $63,663

D. $33,684

A maker of computer games expects to sell 475,000 games at a price of $48 per game. These units cost $10 to produce. Selling, general, and administrative expenses are $1.0 million and depreciation is $280,000. What is the EBIT break-even point for the number of games sold in this case? A. $26,667 B. $26,316 C. $100,000 D. $33,684

A. $8.86

A stock is expected to pay $0.70 per share every year indefinitely. If the current price of the stock is $18.90, and the equity cost of capital for the company that released the shares is 7.9%, what price would an investor be expected to pay per share five years into the future? A. $8.86 B. $14.18 C. $14.62 D. $15.06

A. $14.88

A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the company is 8.4%. What price would an investor be expected to pay per share ten years in the future? A. $14.88 B. $22.32 C. $29.76 D. $37.20

D. $23.64

A stock is expected to pay $2.60 per share every year indefinitely and the equity cost of capital for the company is 11%. What price would an investor be expected to pay per share next year? A. $5.91 B. $11.82 C. $17.73 D. $23.64

D. It cannot be determined whether the decision was correct, since other factors contributing to the project's net present value (NPV), such as the upfront investment, have not been included in the analysis.

A maker of kitchenware is planning on selling a new chef-quality kitchen knife. The manufacturer expects to sell 1.6 million knives at a price of $120 each. These knives cost $80 each to produce. Selling, general, and administrative expenses are $500,000. The machinery required to produce the knives cost $1.4 million, depreciated by straight-line depreciation over five years. The maker determines that the EBIT break-even point for units sold and sale price is less than these estimates and that the EBIT break-even point for costs per unit, SG&A, and depreciation are greater than these estimates, so decides to go ahead with manufacturing the knife. Was this the correct decision? A. No, since the cost per unit should be greater than the EBIT break-even point for cost of goods if the project is to have a positive EBIT. B. Yes, since if the estimates for each parameter are correct, the EBIT will be positive. C. Yes, since a positive EBIT ensures that the project will have a positive net present value (NPV). D. It cannot be determined whether the decision was correct, since other factors contributing to the project's net present value (NPV), such as the upfront investment, have not been included in the analysis.

A. $950,349

A manufacturer of video games develops a new game over two years. This costs $830,000 per year with one payment made immediately and the other at the end of two years. When the game is released, ti is expected to make $1.20 million per year for three years after that. What is the net present value (NPV) of this decision if the cost of capital is 10%? A. $950,349 B. $1,045,384 C. $1,520,559 D. $1,805,663

C. -87.10%

A mining company plans to mine a beach for rutile. To do so will cost $14 million up front and then produce cash flows of $7 million per year for five years. At the end of the sixth year the company will incur shut-down and clean-up costs of $6 million. If the cost of capital is 13.0%, then what is the MIRR for this project? A. -60.97% B. -78.39% C. -87.10% D. -95.81%

C. Job C, Job B, and Job E

A print shop has contracted to print a number of jobs within 24 hours. Any jobs not completely printed within this time will result in a penalty, as shown in the table above. However too many jobs have been accepted, and not all can be printed. Which jobs should be printed in the next 24 hours? A. Job D and Job A B. Job C and Job B C. Job C, Job B, and Job E D. Job D, Job A, and Job E

D. -$36,475

A security company offers to provide CCTV coverage for a parking garage for ten years for an initial payment of $50,000 and additional payments of $30,000 per year. What is the equivalent annual annuity of this deal, given a cost of capital of 5%? A. -$21,885 B. -$25,533 C. -$29,180 D. -$36,475

D. No, since net present value (NPV) is negative.

A security firm is offered $80,000 in one year for providing CCTV coverage of a property. The cost of providing this coverage to the security firm is $74,000, payable now, and the interest rate is 8.5%. Should the firm take the contract? A. Yes, since net present value (NPV) is positive. B. It does not matter whether the contract is taken or not, since NPV = 0. C. Yes, since net present value (NPV) is negative. D. No, since net present value (NPV) is negative.

B. Fabrics, Luggage, Hardware, Watches, and Shoe Repair

A small department store in a mall has the opportunity to rent an additional 20,000 square feet for five years. It can divide up this space between the above new departments. Each department will require a different amount of space, and each department is expected to make a yearly profit as shown, for each of the next five years. The discount rate is 10%. Based on this information, what departments should be added? A. Pet, Fabrics, Hardware, and Shoe Repair B. Fabrics, Luggage, Hardware, Watches, and Shoe Repair C. Pets, Fabrics, Books, and Luggage D. Pet, Fabrics, Luggage, Hardware, and Show Repair

C. $337,500

A small manufacturer that makes clothespins and other household products buys new injection molding equipment for a cost of $500,000. This will allow the manufacturer to make more clothespins in the same amount of time with an estimated increase in sales of 25%. If the manufacturer currently makes 75 tons of clothespins per year, which sell at $18,000 per ton, what will be the increase in revenue next year from the new equipment? A. $125,000 B. $303,750 C. $337,500 D. $837,500

D. It will reduce taxes by $2.8 million

A stationery company plans to launch a new type of indelible ink pen. Advertising for the new product will be heavy and will cost the company $8 million, although the company expects general revenues of $280 million next year from sources other than sales of the new pen. If the company has a corporate tax-rate of 35% on its pretax income, what effect will the advertising for the new pen have on its taxes? A. It will increase taxes by $8 million. B. It will increase taxes by $2.8 million C. It will have no effect on taxes. D. It will reduce taxes by $2.8 million.

D. 17.39%

A stock is bought for $23.00 and sold for $27.00 one year later, immediately after it has paid a dividend of $1.50. What is the capital gain rate for this transaction? A. 3.48% B. 8.70% C. 13.91% D. 17.39%

D. $5,449,600

A textile company invests $10 million in an open-end spinning machine. This was depreciated using the seven-year MACRS schedule shown above. If the company sold it immediately after the end of year 3 for $7 million, what would be the after-tax cash flow from the sale of this asset, given a tax rate of 40%? A. $1,550,400 B. $3,124,000 C. $3,876,000 D. $5,449,600

B. $24.96

Aaron Inc. has 321 million shares outstanding. It expects earnings at the end of the year to be $641 million. The firm's equity cost of capital is 11%. Aaron pays out 50% of its earnings in total: 30% paid out as dividends and 20% used to repurchase shares. If Aaron's earning are expected to grow at a constant 7% per year, what is Aaron's share price? A. $12.48 B. $24.96 C. $37.44 D. $49.92

C. IRR, NPV, Payback period

According to Graham and Harvey's 2001 survey (Figure 8.2 in the test), the most popular decision rules for capital budgeting used by CFOs are _____. A. NPV, IRR, MIRR B. MIRR, IRR, Payback period C. IRR, NPV, Payback period D. Profitability index, NPV, IRR

C. option to abandon

After research into where to place a new restaurant, Burger Billies, a small fast-food chain, plans to open a new store near a small college. The anticipated customer base is students attending the college. They learn that a major fast food chai will be opening a franchise within within the college, which leads the owners of Burger Billies to revise their estimate of sales to one below the break-even point. Which of the following is most likely the best real option for Burger Billies to take with regard to the proposed restaurant site? A. option to delay B. option to expand C. option to abandon D. option to switch

D. sensitivity analysis

An analysis that breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as one of the underlying assumptions changes is called _____. A. scenario analysis B. internal rate of return (IRR) analysis C. accounting break-even analysis D. sensitivity analysis

A. $498,597

An auto-parts company is deciding whether to sponsor a racing team for a cost of $1 million. The sponsorship would last for three years and is expected to increase cash flows by $570,000 per year. If the discount rate is 6.9%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship? A. $498,597 B. $747,896 C. $797,756 D. $847,615

A. scenario analysis

An exploration of the effect of changing multiple project parameters on net present value (NPV) is called _____. A. scenario analysis B. internal rate of return (IRR) analysis C. accounting break-even analysis D. sensitivity analysis

D. the cost of the research into the feasibility of renting the sixth floor

An insurance officer owns a large building downtown. The sixth floor of this building currently houses its entire Human Resources Department. After carrying out a survey to see whether the sixth floor could be rented and for what price, the company must decide whether to split the Human Resources Department between currently unoccupied spaces on several floors and rent out the entire sixth floor or to leave things as they currently are. Which of the following should NOT be considered when deciding whether to rent out the sixth floor? A. the amount obtained by renting the sixth floor B. the cost of refurbishing the new space to be occupied by the Human Resources Department C. cost involved with a loss of efficiency resulting from the Human Resources Department being split between several spaces D. the cost of the research into the feasibility of renting the sixth floor

D. Project C and Project D

An investor has a budget of $30 million. He can invest in the projects shown above. If the cost of capital is 5%, what investment or investments should he make? A. Project A B. Project B C. Project B and Project D D. Project C and Project D

C. Project B and Project C

An investor has a budget of $35 million. He can invest in the projects shown above. If the cost of capital is 8%, what investment or investments should he make? A. Project A B. Project B C. Project B and Project C D. Project C and Project D

D. Initial investment: $60,000; Cash flow in year 1: $6,000; Growth Rate: 2.50%; Cost of Capital: 7.2%

An investor has the opportunity to invest in four new retail stores. The amount that can be invested in each store, along with the expected cash flow at the end of the first year, the growth rate of the concern, and the cost of capital is shown for each case. It is assumed each investment will operate in perpetuity after the initial investment. Which investment should the investor choose?

B. $2.91 million

An investor is considering a project that will generate $900,000 per year for four years. In addition to upfront costs, at the completion of the project at the end of the fifth year there will be shut-down costs of $400,000. If the cost of capital is 4.4% based on the MIRR, at what upfront costs does this project cease to be worthwhile? A. $2.62 million B. $2.91 million C. $3.21 million D. $3.50 million

C. The investor should take investment B since it has a greater net present value (NPV).

An investor is considering the two investments shown above. Her cost of capital is 8%. Which of the following statements about these investments is true? A. The investor should take investment A since it has a greater net present value (NPV). B. The investor should take investment A since it has a greater internal rate of return (IRR). C. The investor should take investment B since it has a greater net present value (NPV). D. The investor should take investment B since it has a greater internal rate of return (IRR).

D. Neither investment should be taken since they both have a negative net present value (NPV).

An investor is considering the two investments shown above. Which of the following statements about these investments is true? A. The investor should take investment A since it has a greater net present value (NPV). B. The investor should take investment A since it has a greater internal rate of return (IRR). C. The investor should take investment B since it has a greater net present value (NPV). D. Neither investment should be taken since they both have a negative net present value (NPV).

C. $3.3 million

An oil company is buying a semi-submersible oil rig for $15 million. Additionally, it will cost $1.5 million to move the oil rig to the oilfield and to prepare it for operations. If it is depreciated over five years using straight-line depreciation, what are the yearly depreciation expenses in this case? A. $2.7 million B. $3.0 million C. $3.3 million D. $3.8 million

A. -$42,098

An orcharder spends $110,000 to plant pomegranate bushes. It will take four year for the bushes to provide a usable crop. He estimates that every year for 20 years after that he will receive a crop worth $10,500 per year. If the discount rate is 9%, what is the net present value (NPV) of this investment? A. -$42,098 B. -$21,049 C. $8420 D. $12,629

D. invest in project Beta, since NPVBeta > NPVAlpha > 0

Assume that projects Alpha and Beta are mutually exclusive. The correct investment decision and the best rationale for that decision is to _____. A. invest in project Beta, since NPVBeta > 0 B. invest in project Alpha, since NPVBeta < NPVAlpha C. invest in project Beta, since IRRB > IRRA D. invest in project Beta, since NPVBeta > NPVAlpha > 0

B. $69,000

Assume that your capital in constrained, so that you only have $500,000 available to invest in projects. If you invest in the optimal combination of projects given your capital constraint, then the total net present value (NPV) for all the projects you invest in will be closest to _____. A. $111,000 B. $69,000 C. $80,000 D. $58,000

B. $80,000

Assume that your capital is constrained, so that you only have $600,000 available to invest in projects. If you invest in the optimal combination of projects given your capital constraint, then the total net present value (NPV) for all the projects you invest in will be closest to _____. A. $65,000 B. $80,000 C. $69,000 D. $111,000

A. 0.17

Assume the appropriate discount rate for this project is 14%. The profitability index for this project is closest to _____. A. 0.17 B. 0.25 C. 0.66 D. 0.18

Increasing dividend-payout ratio will decrease the retention rate, thereby decreasing the growth rate.

Assuming everything else remains unchanged, how does a firm's decision to increase its dividend-payout ratio affect its growth rate?

A. CBFH

Assuming that your capital is constrained, so that you only have $600,000 available to invest in projects, which project should you invest in and in what order? A. CBFH B. CBGF C. BCFG D. CBFG

A. Project H

Assuming that your capital is constrained, what is the fifth project that you should invest in? A. Project H B. Project I C. Project B D. Project A

A. profitability index

Assuming that your capital is constrained, which investment tool should you use to determine the correct investment decisions? A. profitability index B. incremental IRR C. net present value (NPV) D. internal rate of return (IRR)

A. Project C

Assuming that your capital is constrained, which project should you invest in first? A. Project C B. Project G C. Project B D. Project F

C. Project D

Assuming that your capital is constrained, which project should you invest in last? A. Project A B. Project I C. Project D D. Project C

C. $9.23

Avril Synchronistics will pay a dividend of $1.20 per share this year. It is expected that this dividend will grow by 3% each year in the future. What will be the current value of a single share of Avril's stock if the firm's equity cost of capital is 16%? A. $6.46 B. $6.92 C. $9.23 D. $10.15

B. $210 million

Bubba Ho-Tep Company reported net income of $290 million for the most recent fiscal year. The firm had depreciation expenses of $100 million and capital expenditures of $150 million. Although it had no interest expense, the firm did have an increase in net working capital of $30 million. What is Bubba Ho-Tep's free cash flow? A. $10 million B. $210 million C. $270 million D. $570 million

D. 2.9 years

Consider the following two projects: The payback period for project B is closest to _____. A. 3.2 years B. 2.3 years C. 2.6 years D. 2.9 years

B. $668,667

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $4 million to buy the machine and $12,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to have a working life of six years. If straight-line depreciation is used, what are the yearly depreciation expenses in this case? A. $666,667 B. $668,667 C. $1,166,667 D. $1,168,667

C. $2,434,000

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $5,000,000 to buy the machine and $10,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4,500,000 per year, starting at the end fo the first year, with associated costs of $1 million for each of those year.s The marginal tax rate is 40%. What are incremental free cash flows associated with the new machine in year 2? A. $835,000 B. $2,665,000 C. $2,434,000 D. $831,667

C. the redesign of the plant only

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $6 million to buy the machine and $10,000 to have it delivered an installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to have a working life of six years. Which of these activities will be reported as an operating expense? A. the delivery and install cost only B. the cost of the depositor only C. the redesign of the plant only D. the delivery and install cost and the cost of the depositor

A. -$6,020,000

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $6,000,000 to buy the machine and $20,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4,000,000 per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of five years and will be depreciated over those five years. The marginal tax rate is 40%. What are the incremental free cash flows associated with the new machine in year 0? A. -$6,020,000 B. -$6,000,000 C. -$5,418,000 D. $1,204,000

Yes, the dividend-discount model can handle negative growth rates. The model works as long as growth rate is smaller than the cost of equity and negative growth rate is smaller than the cost of equity.

Can the dividend-discount model handle negative growth rates?

A. 0.16

Consider the following two projects: The profitability index for project A is closest to _____. A. 0.16 B. 32.38 C. 0.24 D. 16.14

A. $2.492 million

CathFoods will release a new range of candies which contain anti-oxidants. New equipment to manufacture the candy will cost $4 million, which will be depreciated by straight-line depreciation over six years. In addition, there will be $5 million spent on promoting the new candy line. It is expected that the range of candies will bring in revenues of $6 million per year for five years with production and support costs of $1.5 million per year. If CathFood's marginal tax rate is 35%, what are the incremental earnings in the second year of this project? A. $2.492 million B. $2.100 million C. $3.833 million D. $1.342 million

A. $1.800 million

CathFoods will release a new range of candies which contain antioxidants. New equipment to manufacture the candy will cost $2 million, which will be depreciated by straight-line depreciation over four years. In addition, there will be $5 million spent on promoting the new candy line. It is expected that the range of candies will bring in revenues of $4 million per year for four years with production and support costs of $1.5 million per year. If CathFood's marginal tax rate is 35%, what are the incremental free cash flows in the second year of this project? A. $1.800 million B. $1.400 million C. $2.000 million D. $0.700 million

C. $7.47

Chittenden Enterprises has 643 million shares outstanding. It expects earnings at the end of the year to be $960 million. The firm's equity cost of capital is 9%. Chittenden pays out 30% of its earnings in total: 20% paid out as dividends and 10% used to repurchase shares. If Chittenden's earnings are expected to grow at a constant 3% per year, what is Chittenden's share price? A. $3.74 B. $2.24 C. $7.47 D. $14.94

C. -$3077

Consider a project with the following cash flows. Year 0, 1, 2, 3, 4 Cash Flow -12000, 3000, 3000, 3000, 3000 If the appropriate discount rate for this project is 13%, then the net present value (NPV) is closest to _____. A. $24,000 B. -$1846 C. -$3077 D. -$2154

B. 2.40 years

Consider a project with the following cash flows: Year; Cash Flow 0; -12,000 1; 5000 2; 5000 3; 5000 4; 5000 Assume the appropriate discount rate for this project is 13%. The payback period for this project is closest to _____. A. 2.88 years B. 2.40 years C. 1.92 years D. 3.60 years

A. invest in project A, since NPVB < NPVA

Consider the following two projects: Assume that projects A and B are mutually exclusive. The correct investment decision and the best rationale for that decision is to _____. A. invest in project A, since NPVB < NPVA B. invest in project B, since IRRB > IRRA C. invest in project B, since NPVB > NPVA D. invest in project A since NPVA > 0

B. $25.08

Consider the following two projects: The net present value (NPV) for project alpha is closest to _____. A. $31.35 B. $25.08 C. $37.62 D. $21.32

C. $18.06

Consider the following two projects: The net present value (NPV) for project beta is closest to _____. A. $21.67 B. $14.45 C. $18.06 D. $12.64

A. 20.5

Consider the following two projects: The net present value (NPV) of project A is closes to _____. A. 20.5 B. 22.5 C. 25.6 D. 51.2

A. 9.3

Consider the following two projects: The net present value (NPV) of project B is closest to _____. A. 9.3 B. 10.2 C. 11.6 D. 23.2

D. 2.1 years

Consider the following two projects: The payback period for project A is closest to _____. A. 1.9 years B. 2.3 years C. 2.6 years D. 2.1 years

C. 0.15

Consider the following two projects: The profitability index for project B is closest to _____. A. 22.49 B. 14.99 C. 0.15 D. 0.09

A. $28.87

Coolibal Holdings is expected to pay dividends of $1.20 every six months for the next three years. If the current price of Coolibah stock is $22.60, and Coolibah's equity cost of capital is 18%, what price would you expect Coolibah's stock to sell for at the end of three years? A. $28.87 B. $31.76 C. $33.20 D. $34.64

A. $3.56

Credenza Industries is expected to pay a dividend of $1.70 at the end of the coming year. It is expected to sell for $62 at the end of the year. If its equity cost of capital is 9%, what is the expected capital gain from the sale of this stock at the end of the coming year? A. $3.56 B. $56.88 C. $5.12 D. $58.44

C. $62,958

Cromwell Industries is considering a new project which will have costs, revenues, etc. as shown by the data above. If the cost of capital is 8.0%, what is the net present value (NPV) of this project? A. -$56,662 B. -$59,810 C. $62,958 D. $69,254

As long as there is an alternative use of the place, it has an opportunity cost. Opportunity cost of idle assets is often mistaken as zero, but that is inaccurate.

If a business owner is using the extra space at home for his business, does it imply a zero opportunity cost for the space?

C. $38,000

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects: The free cash flow for the first year of Epiphany's project is closest to ____. A. $45,600 B. $28,500 C. $38,000 D. $53,200

A. $65,750

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects: The free cash flow for the last year of Epiphany's project is closest to _____. A. $65,750 B. $59,175 C. $49,313 D. $52,600

Yes, MACRS should be preferred to straight-line depreciation due to the time value of money. While both methods pay the same amount in taxes, MACRS gives more money in the pocket in the initial days.

If available, should MACRS be preferred to straight-line depreciation?

A. $139,000

Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $175,000 per year. FFL currently offers overnight film processing with annual sales of $90,000. While many of the one-hour photo sales will be to new customer, FFL estimates that 40% of their current overnight photo customers will switch and use the one-hour service. The level of incremental sales associated with introducing the new one-hour photo service is closest to _____. A. $139,000 B. $175,000 C. $36,000 D. $70,000

A. $15.0 million

Ford Motor Company is considering launching a new line of hybrid diesel-electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $30 million next year. Without the new SUC, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 30% tax rate on its pre-tax income. The amount that Ford Motor Company owes in taxes next year with the launch of the new SUC is closest to _____. A. $15.0 million B. $9.0 million C. $33.0 million D. $24.0 million

A. $28.0 million

Ford Motor Company is considering launching a new line of hybrid diesel-electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 35% tax rate on its pre-tax income. The amount that Ford Motor Company owes in taxes next year without the launch of the new SUC is closest to _____. A. $28.0 million B. $12.3 million C. $40.3 million D. $15.8 million

B. 12%

Gremlin Industries will pay a dividend of $1.90 per share this year. It is expected that this dividend will grow by 4% per year each year in the future. The current price of Gremlin's stock is $23.50 per share. What is Gremlin's equity cost of capital? A. 11% B. 12% C. 14% D. 16%

We are not paying less in taxes when using MACRS, but it is the timing of the tax payment that is different.

How are the taxes paid under MACRS different from that paid under straight-line depreciation?

we're not paying less in taxes when using MACRS, but it is the timing of the tax payment that is different

How are the taxes paid under MACRS different from that paid under straight-line depreciation?

Most firms have high growth rate during the early part of their existence, which gradually tapers to the steady-state growth rate. We cannot apply the formula during the period while the growth rate is changing. We can only apply it once the growth rate has stabilized to a constant rate.

How can the dividend-discount model handle changing growth rates?

The y-intercept of a net present value (NPV) profile is the algebraic sum of the project cash flows, since the discount rate is zero at that point.

How can you calculate the y-intercept of a net present value (NPV) profile without using TVM concepts?

We do not generally include interest expense when making capital budgeting decisions.

How do we handle interest expense when making a capital budgeting decision?

When making an investment decision under the availability of multiple projects, take the alternative with the highest net present value (NPV).

How do you apply the Net Present Value rule when multiple projects are available and you have the added constraint of accepting only one project?

B. Project B

If WiseGuy Inc is choosing one of the above mutually exclusive projects (Project A or Project B), given a discount rate of 7%, which should the company choose? A. Project A B. Project B C. Neither project - both have negative NPV. D. Both projects - both have positive NPV.

B. Project B

If WiseGuy Inc. uses IRR rule to choose projects, which of the following projects (Project A or Project B) will rank highest? A. Project A B. Project B C. Project A and Project B have the same ranking D. Cannot calculate a payback period without a discount rate.

A. Project A

If WiseGuy Inc. uses payback period rule to choose projects, which of the projects (Project A or Project B) will rank highest? A. Project A B. Project B C. Project A and Project B have the same ranking. D. Cannot calculate a payback period without a discount rate.

No there are several ways of computing the MIRR and each of them are subject to their respective assumptions.

Is there a unique way for calculating the MIRR to resolve the multiple IRR situation?

A. $19.32

JRN Enterprises just announced that it plans to cut its dividend from $3.00 to $1.50 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow indefinitely at 4% per year and JRN's stock was trading at $25.50 per share. With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to _____. A. $19.32 B. $12.75 C. $38.63 D. $25.50

D. -$111

Jenkins Security has learned that a rival has offered to supply a parking garage with security for ten years for $45,000 up front and a further $15,000 per year. If Jenkins Security offers to provide security for eight years for an upfront cost of $60,000 and a separate yearly payment, by what maximum amount can this yearly payment be over $20,000, so that Jenkins' offer matches the equivalent annual annuity of their rival's offer? (Assume a cost of capital of 5%) A. -$89 B. -$94 C. -$100 D. -$111

A. option to delay

Jim owns a farm that he wants to sell. He learns that a highway will be built near the farm in the future, giving access to the farmland from a nearby city and thus making the land attractive to housing developers. Expecting the net present value (NPV) of the sale to be greater after the highway is built, he decides not to sell at this time. What real option is Jim taking? A. option to delay B. option to expand C. option to abandon D. option to switch

A. Yes, since he invested a valuable asset, his time, in a project based on its previous costs.

Joe pre-orders a non-refundable movie ticket. He then reads a number of reviews of the movie in question that make him realize that he will not enjoy it. He goes to see it anyway, rationalizing that otherwise his money would have been wasted. Is Joe succumbing to the Sunk Cost Fallacy, and why? A. Yes, since he invested a valuable asset, his time, in a project based on its previous costs. B. No, because the cost of the movie was not recoverable and would have been lost whatever action he took. C. No, because going to see the movie means that the product of his initial investment was realized as originally planned. D. Yes, because he incurred no further costs by going to see the movie.

D. $21.18

Jumbo Transport, an air-cargo company, expects to have earnings per share of $2.00 in the coming year. It decides to retain 10% of these earnings in order to lease new aircraft. The return on this investment will be 25%. If its equity cost of capital is 11%, what is the expected share price of Jumbo Transport? A. $12.71 B. $14.83 C. $16.94 D. $21.18

C. 14.33%

Jumbuck Exploration has a current stock price of $3.00 and is expected to sell for $3.15 in one year's time, immediately after it pays a dividend of $0.28. Which of the following is closest to Jumbuck Exploration's equity cost of capital? A. 7.17% B. 8.60% C. 14.33% D. 17.91%

A. 1.48%

Kirkevue Industries pays out all its earnings as dividends and has a share price of $27. In order to expand, Kirkevue announces it will cut its dividend payments from $2.15 to $1.75 per share and reinvest the retained funds. What is the growth rate that should be achieved on the reinvested funds to keep the equity cost of capital unchanged? A. 1.48% B. 0.14% C. 0.17% D. 0.15%

A. 5.5%

Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 10%. Luther Industries' dividends are expected to grow at a constant rate indefinitely. The growth rate of Luther's dividends is closest to _____. A. 5.5% B. 14.5% C. 11.0% D. 5.0%

D. 5 years

Luther Industries has outstanding tax loss carryforwards of $72 million from losses over the past four years. If Luther earns $15 million per year in pre-tax income from now on, in how many years will Luther first pay taxes? A. 7 years B. 2 years C. 4 years D. 5 years

C. 3%

Martin is offered an investment where for $6000 today, he will receive $6180 in one year. He decides to borrow $6000 from the bank to make this investment. What is the maximum interest rate the bank needs to offer on the loan if Martin is at least even on this investment? A. 1% B. 2% C. 3% D. 4%

A. Rule I only

Mary is in contract negotiations with a publishing house for her new novel. She has two options. She may be paid $100,000 up front, and receive royalties that are expected to total $26,000 at the end of the each of the next five years. Alternatively, she can receive $200,000 up front and no royalties. Which of the following investment rules would indicate that she should take the former deal, given a discount rate of 8%? Rule I: The Net Present Value rule Rule II: The Payback Rule with a payback period of two years Rule III: The internal rate of return (IRR) Rule A. Rule I only B. Rule III only C. Rule II and III D. Rule I and II

B. $1,218,350

Massive Amusements, an owner of theme parks, invests $65 million to build a roller coaster. This can be depreciated using the MACRS schedule shown above. How much less is the depreciation tax shield for year 4 under MACRS depreciation than under 7-year, straight-line depreciation, if the tax rate is 35%? A. $974,680 B. $1,218,350 C. $2,193,030 D. $6,091,750

C. $23.33

Matilda Industries pays a dividend of $2.10 per share and is expected to pay this amount indefinitely. If Matilda's equity cost of capital is 9%, which of the following would be closest to Matilda's stock price? A. $14.00 B. $18.66 C. $23.33 D. $29.16

D. present value (PV)

Most corporations measure the value of a project in terms of which of the following? A. discount value B. discount factor C. future value (FV) D. present value (PV)

D. $12.00

NoGrowth Industries presently pays an annual dividend of $1.20 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowth's equity cost of capital is 10%, then the value of a share of NoGrowth's stock is closest to _____. A. $9.60 B. $14.40 C. $13.20 D. $12.00

D. $16.00

Owen Inc. has a current stock price of $15.00 and is expected to pay a $0.80 dividend in one year. If Owen's equity cost of capital is 12%, what price would its stock be expected to sell for immediately after it pays the dividend? A. $11.20 B. $12.80 C. $16.80 D. $16.00

B. at least 1.4%

Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems. It has made the above estimates of free cash flows resulting from such a decision (all quantities in millions of dollars). It is thought that if marketing expenses are increased by 40%, then revenues will rise. By how much will revenues have to rise for the net present value (NPV) of the project to increase? A. at least 0.8% B. at least 1.4% C. at least 1.5% D. at least 2.0%

A. $90 million

Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected that the project will produce the following cash flows for the first two years (in millions of dollars). The depreciation tax shield for Shepard Industries project in year 2 is closest to _____. A. $90 million B. $69 million C. $135 million D. $108 million

A. $1.66 million

Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems. It has made the above estimates of free cash flows resulting from such a decision (all quantities in millions of dollars). There are some concerns that estimates of manufacturing expenses may be low, due to the rising cost of raw materials. What is the break-even point for manufacturing expenses, if all other estimates are correct and the cost of capital is 9%? A. $1.66 million B. $1.83 million C. $1.99 million D. $2.32 million

D. 14%

Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems. It has made the above estimates of free cash flows resulting from such a decision. There are concerns of the sensitivity of this project to changes in the cost of capital. For what cost of capital does this project break-even? A. 8% B. 10% C. 12% D. 14%

B. Yes, since he can borrow the $10,000 from a bank, repair his home, invest $10,000 in the business opportunity, which, since it has a NPV > 0 will mean he will still come out ahead after repaying the loan.

Peter has a business opportunity that requires him to invest $10,000 today, and receive $12,000 in one year. He can either use $10,000 that he already has for this investment or borrow the money from his bank at an interest rate of 10%. However, the $10,000 he has right now is needed for urgent repairs to his home, repairs that will cost at least $15,000 if he delays them for a year. What is the best alternative for Peter out of the following choices? A. No, since the net present value (NPV) of the investment, should he take it, is less than the net present value (NPV) of the home repairs if he delays them for one year. B. Yes, since he can borrow the $10,000 from a bank, repair his home, invest $10,000 in the business opportunity, which, since it has a NPV > 0 will mean he will still come out ahead after repaying the loan. C. Yes, since the net present value (NPV) of the investment is greater than zero he can invest the $10,000 in the business opportunity, and then next year use the money plus the benefit from this money to make the necessary home repairs. D. Yes, since the net present value (NPV) of the investment, should he take it, is greater than the net present value (NPV) of the home repairs if he delays them for one year.

D. $69 million

Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions). The depreciation tax shield for Shepard Industries project in year 1 is closest to _____. A. $84 million B. $104 million C. $83 million D. $69 million

A. $21.96

Rylan Industries is expected to pay a dividend of $5.70 a year for the next four years. If the current price of Rylan stock is $31.27, and Rylan's equity cost of capital is 12%, what price would you expect Rylan's stock to sell for at the end of the four years? A. $21.96 B. $39.53 C. $17.57 D. $61.49

No; personal preferences for cash flow should not affect the decision-making process. A manager should decide based on always maximizing the net present value (NPV).

Should personal preferences for cash today versus cash tomorrow play a role in the net present value (NPV) decision-making process?

B. $25.78

Sinclair Pharmaceuticals, a small drug company, develops a vaccine that will protect against Helicobacter pylori, a bacteria that is the cause of a number of diseases of the stomach. It is expected that Sinclair Pharmaceuticals will experience extremely high growth over the next three year and will reinvest all of its earnings in expanding the company over this time. Earnings were $1.10 per share before the development of the vaccine and are expected to grow by 40% per year for the next three years. After this time, it is expected that growth will drop to 5% and stay there for the expected future. Four years from now Sinclair will pay dividends that are 75% of its earnings. If its equity cost of capital is 12%, what is the value of a share of Sinclair Pharmaceuticals today? A. $20.62 B. $25.78 C. $33.96 D. $33.51

D. $34.29

Spacefood Products will pay a dividend of $2.40 per share this year. It is expected that this dividend will grow by 5% per year each year in the future. What will be the current value of a single share of Spacefood's stock if the firm's equity cost of capital is 12%? A. $24.00 B. $22.29 C. $30.86 D. $34.29

D. $60.00

Sultan Services has 1.2 million shares outstanding. It expects earnings at the end of the year of $6.0 million. Sultan pays out 60% of its earnings in total: 40% paid out as dividends and 20% used to repurchase shares. If Sultan's earnings are expected to grow by 5% per year, these payout rates do not change, and Sultan's equity cost of capital is 10%, what is Sultan's share price? A. $12.00 B. $24.00 C. $36.00 D. $60.00

C. $52.38

Sunnyfax Publishing pays out all its earnings and has a share price of $37. In order to expand, Sunnyfax Publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds. Once the funds are reinvested, they are expected to grow at a rate of 13%. If the reinvestment does not affect Sunnyfax's equity cost of capital, what is the expected share price as a consequence of this decision? A. $36.67 B. $41.90 C. $52.38 D. $62.86

D. Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today

Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer? A. $531.40 later today, since $1 today is worth more than $1 in one year B. $550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested C. Neither - both investments have a negative NPV D. Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today

A. $2,956,522

Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5 million to set up and will generate $21 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $8 million during this year and depreciation expense will be another $2 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%. Assume that THSI's cost of capital for this project is 15%. The net present value (NPV) of this temporary housing project is closest to _____. A. $2,956,522 B. -$9.15 C. $5,913,044 D. -$2,956,522

D. $7.85 million

Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $6 million to set up and will generate $22 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $11 million during this year and depreciation expense will be another $2 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%. Ignoring the original investment of $5 million, what is THSI's free cash flow for the first and only year of operation? A. $6.00 million B. $3.85 million C. $9.81 million D. $7.85 million

15%

The Busby Corporation had a share price at the state of the year of $26.10, paid a dividend of $0.59 at the end of the year, and had a share price of $29.50 at the end of the year. Which of the following is closest to the rate of return of investments in companies with equal risk to The Busby Corporation for this period? A. 14% B. 13% C. 12% D. 15%

A. (Units Sold x Sale Price) - (Units Sold x Cost per unit) - SG&A - Depreciation = 0

The EBIT break-even point can be calculated using which of the following formulas? A. (Units Sold x Sale Price) - (Units Sold x Cost per unit) - SG&A - Depreciation = 0 B. (Units Sold x Sale Price) + (Units Sold x Cost per unit) - SG&A - Depreciation = 0 C. (Units Sold x Sale Price) - (Units Sold x Cost per unit) + SG&A + Depreciation = 0 D. (Units Sold x Sale Price) + (Units Sold x Cost per unit) + SG&A - Depreciation = 0

B. $1,260,000

The Sisyphean Company is considering a new project that will have an annual depreciation expense of $3.6 million. If Sisyphean's marginal corporate tax rate is 35% and its average corporate tax rate is 30%, then what is the value of the depreciation tax shield on the company's new project? A. $1,080,000 B. $1,260,000 C. $1,890,000 D. $1,134,000

C. 21%

The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $400,000. The Sisyphean Company expects cash inflows from this project as detailed below: Year 1 $157,452.975 Year 2 $157,452.975 Year 3 $157,452.975 Year 4 $157,452.975 The appropriate discount rate for this project is 15%. The internal rate of return (IRR) for this project is closest to _____. A. 13% B. 16% C. 21% D. 24%

A. $206,265

The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $420,000. The Sisyphean Company expects cash inflows from this project as detailed below: Year 1 $200,000 Year 2 $225,000 Year 3 $275,000 Year 4 $200,000 The appropriate discount rate for this project is 16%. The net present value (NPV) for this project is closest to _____. A. $206,265 B. $144,385 C. $515,661 D. $216,578

C. -0.98%

The Sisyphean Company's common stock is currently trading for $25.50 per share. The stock is expected to pay a $2.80 dividend at the end of the year and the Sisyphean Company's equity cost of capital is 10%. If the dividend payout rate is expected to remain constant, then the expected growth rate in the Sisyphean Company's earnings is closest to _____. A. -1.96% B. -1.47% C. -0.98% D. -0.49%

C. scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters

The difference between scenario analysis and sensitivity analysis is _____. A. scenario analysis is based upon the internal rate of return (IRR) and sensitivity analysis is based upon net present value (NPV) B. only sensitivity analysis allows us to change estimated inputs of net present value (NPV) analysis C. scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters D. only scenario analysis breaks the net present value (NPV) calculation into its component assumptions

A. $4114

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% each year through year 3. The price per cane that Sisyphean will charge its customers is $17 each and is to remain constant. The canes have a cost per unit to manufacture of $8 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 5% of its annual sales in accounts receivable, 10% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 9%. The required net working capital in the second year for the Sisyphean Corporation's project is closest to _____. A. $4114 B. $3740 C. -$3366 D. $8602

B. an increase of $356

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2400 canes in year 1. Sales are estimated to grow by 9% each year through year 3. The price per cane that Sisyphean will charge its customers is $15 each and is to remain constant. The canes have a cost per unit to manufacture of $8 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 3% of its annual sales in cash, 5% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 8%. The change in net working capital from year 1 to year 2 is closest to _____. A. a decrease of $356 B. an increase of $356 C. an increase of $389 D. a decrease of $389

A. $5200

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2500 canes in year 1. Sales are estimated to grow by 9% each year through year 3. The price per cane that Sisyphean will charge its customers is $16 each and is to remain constant. The canes have a cost per unit to manufacture of $10 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 3% of its annual sales in cash, 5% of its annual sales in accounts receivable, 10% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 9%. The required net working capital in the first year for the Sisyphean Corporation's project is closest to _____. A. $5200 B. $5668 C. -$2800 D. $9200

B. $3500

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year 3. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 10%. The depreciation tax shield for the Sisyphean Corporation's project in the first year is closest to _____. A. $10,500 B. $3500 C. $3150 D. $2800

B. March 2008

The above screen shot above from Google Finance shows the price history of Progenics, a pharmaceutical company. In the time period shown, Progenics released information that an intravenously-administered formulation of their leading product had failed in a Phase III clinical trial. In which of the months shown in the price history is this most likely to have occurred? A. February 2008 B. March 2008 C. April 2008 D. May 2008

D. $688.00

The above screen shot from Google Finance shows basic stock information for PepsiCo. If you owned 1600 shares of PepsiCo for the period shown, how much would you have earned in dividend payments? A. $480.00 B. $658.44 C. $584.80 D. $688.00

D. $35.29

The above screen shot from Google Finance shows the basic stock information for Kraft Foods Inc. after the close of the stock market on May 30, 2008. What is the highest that the stock has traded at in the last 12 months? A. $32.44 B. $32.48 C. $32.99 D. $35.29

C. $0.24

The above screen shot from Google Finance shows the basic stock information for Logitech International SA (USA) after the close of business on August 22, 2008. What is the difference between the opening and closing price of the stock on this date? A. $0.49 B. $0.27 C. $0.24 D. $0.03

D. LOGI

The above screen shot from Google Finance shows the basic stock information for Logitech International SA (USA). What is Logitech International SA (USA)'s ticker symbol? A. LIS B. LOGITECH C. LOG D. LOGI

C. $46 thousand

The balance sheet for a small firm is shown above. All amounts are in thousands of dollars. What is this firm's Net Working Capital? A. $126 thousand B. $7 thousand C. $46 thousand D. $86 thousand

C. compiling a list of potential projects

The capital budgeting process begins by _____. A. analyzing alternate projects B. evaluating the net present value (NPV) of each project's cash flows C. compiling a list of potential projects D. forecasting the future consequences for the firm of preach potential project

B. Investment B

The cash flows for four investments have been identified as follows: Based on the above information, and with an interest rate of 7%, which is the best investment? A. Investment A B. Investment B C. Investment C D. Investment D

C.

The cash flows for four projects are shown below, along with the cost of capital for these projects. If these projects are mutually exclusive, which one should be taken?

D. Cost of Capital: 5.0%

The cash flows for four projects are shown below, along with the cost of capital for these projects. If these projects are mutually exclusive, which one should be taken?

D. none of these investments

The cash flows for three projects are shown above. The cost of capital is 9.5%. If an investor decided to take projects with a payback period two years or less, which of these projects would he take? A. Investment A B. Investment B C. Investment C D. none of these investments

B. 3.78%

The owner of a number of gas stations is considering installing coffee machines in his gas stations. It will cost $270,000 to install the coffee machines, and they are expected to boost cash flows by $120,536 per year for their five-year working life. What must the cost of capital be if this investment has a profitability index of 1? A. 1.89% B. 3.78% C. 7.55% D. 9.44%

C. Initial investment: $1.3 million; Cash flow in year 1: $160,000; Annual Growth Rate: 1%; Cost of Capital: 8.4%

The following show four mutually exclusive investments. Which one is the best investment?

D. If the good costs $110 to make, the net present value (NPV) of the project will be zero.

The graph above shows the break-even analysis for the cost of making a certain good. Based on this chart, which of the following is true? A. The net present value (NPV) of the project increases with increased cost of goods sold. B. The project should not be undertaken if the predicted cost of goods sold is less than $110. C. The net present value (NPV) of the project will be positive if the cost of goods sold is greater than $110. D. If the good costs $110 to make, the net present value (NPV) of the project will be zero.

A. scenario analysis

The manufacturer of a brand of kitchen knives is investigating the likely effects that an increase in the cost of the raw materials required to make these knives will have on the cost of manufacturing the knives, the selling price of the knives, the number of knives that will then be sold, and the project's net present value (NPV). Which of the following best describes what type of analysis the manager is performing? A. scenario analysis B. sensitivity analysis C. break-even analysis D. EBIT-break even analysis

B. No, because the NPV is negative at that rate

The owner of a hair salon spend $1,000,000 to renovate its premises, estimating that this will increase her ash flow by $220,000 per year. She constructs the above graph, which shows the net present value (NPV) as a function of this discount rate. If her discount rate is 6%, should she accept the project? A. Yes, because the NPV is positive at that rate. B. No, because the NPV is negative at that rate. C. No, because the NPA is positive at that rate. D. Cannot be determined from the information given.

D. The vertical axis crossing point cannot be calculated since the cash inflows are in perpetuity.

The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will increase her cash flow by $220,000 per year. She constructs the above graph, which shows the net present value (NPV) as a function of the discount rate. At what dollar value should the nPV profile cross the vertical axis? A. $780,000 B. $1,000,000 C. Cannot be determined because inadequate information is given. D. The vertical axis crossing point cannot be calculated since the cash inflows are in perpetuity.

B. 3.3%

The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will increase her cash flow by $220,000 per year. She constructs the above graph, which shows the net present value (NPV) as a function of the discount rate. At which discount rate does her decision to renovate become untenable? A. 3.0% B. 3.3% C. 4.0% D. 4.8%

D. Yes, as it has a net present value (NPV) of $22.23 million.

The owners of a chain of fast food restaurants spend $25 million installing donut makers in all their restaurants. This is expected to increase cash flows by $11 million per year for the next five years. If the discount rate is 5.3%, were the owners correct in making the decision to install donut makers? A. No, as it has a net present value (NPV) of -$4.45 million. B. No, as it has a net present value (NPV) of -$2.22 million. C. Yes, as it has a net present value (NPV) of $13.34 million. D. Yes, as it has a net present value (NPV) of $22.23 million.

A. the amount that an investment would yield if the benefit were realized today

The present value (PV) of an investment is _____. A. the amount that an investment would yield if the benefit were realized today B. the difference between the cost of the investment and the benefit of the investment in dollars today C. the amount you need to invest at the current interest rate to re-create the cash flow from the investment D. the amount by which the cash flow of an investment exceeds or falls short of the cash flow generated by the same amount of money invested at market rate

A. decrease in the sales of current project caused by the launching of new project

The term "cannibalization" refers to _____. A. decrease in the sales of current project caused by the launching of new project B. decrease in the sunk cost caused by launching of new project C. decrease in overhead expenses incurred due to launch of new project D. cost of using a resource for the best value it could provide in its best alternative

A. 0.110

The timeline of an investment is shown above. If the cost of capital is 8%, what is the profitability index of this investment? A. 0.110 B. 0.121 C. 0.275 D. 0.441

D. determine the effect of the decision to accept or reject a project on the firm's cash flows

The ultimate goal of the capital budgeting process is to _____. A. determine how the consequences of making a particular decision affects the firm's revenues and costs B. list the projects and investments that a company plans to undertake in the future C. forecast the consequences of a list of future projects for the firm D. determine the effect of the decision to accept or reject a project on the firm's cash flows

True

True or False: Net present value (NPV) is usefully supplemented by internal rate of return (IRR), since IRR gives a good indication of the sensitivity of any decision made to changes in the discount rate.

False

True or False: Preference for cash today versus cash in the future in part determines net present value (NPV).

False

True or False: Stocks that do not pay a dividend must have a value of $0.

True

True or False: The Net Present Value rule implies that we should compare a project's net present value (NPV) to zero.

True

True or False: The Valuation Principle states that the value of a stock is equal to the present value (PV) of both the dividends and future sale price of that stock which the investor will receive.

True

True or False: The cash flow effect from a change in Net Working Capital is always equal in size and opposite in sign to the changes in Net Working Capital.

False

True or False: The internal rate of return (IRR) rule will agree with the Net Present Value rule even when positive cash flows preceded negative cash flows.

True

True or False: The most difficult part of the capital budgeting process is accurately estimating cash flows and cost of capital.

True

True or False: The ownership in a corporation is divided into shares of stock, which carry rights to a share in the profits of the firm through future dividend payments.

True

True or False: The payback rule is based on the idea that an opportunity that pays back its initial investment quickly is a worthwhile opportunity.

True

True or False: The profitability index can break down completely when dealing with multiple resource restraints.

False

True or False: To evaluate a capital budgeting decision, it is sufficient to determine its consequences for the firm's earnings.

True

True or False: When an alternative decision rule disagrees with the net present value (NPV), the NPV should be followed.

True

True or False: When comparing mutually exclusive projects which have different scales, you must know the dollar impact of each investment rather than percentage returns.

True

True or False: When different investment rules give conflicting answers, then decisions should be based on the Net Present Value rule, as it is the most reliable and accurate decision rule.

False

True or False: When different projects put different demands on a limited resource, then net present value (NPV) is always the best way to choose the best project.

False

True or False: When evaluating the effectiveness of an improved manufacturing process we should evaluate the total sales and costs generated by this process

False

True or False: When using equivalent annual annuities to compare the costs of projects with different lives, you should not consider any changes in the expected replacement cost of equipment.

True

True or False: You can evaluate alternative projects with different lives by calculating and comparing their equivalent annual annuity.

C. 13%

Two mutually exclusive investment opportunities require an initial investment of $7 million. Investment A pays $2.0 million per year in perpetuity, while investment B pays $1.4 million in the first year, with cash flows increasing by 4% per year after that. At what cost of capital would an investor regard both opportunities as beign equivalent? A. 3% B. 7% C. 13% D. 15%

D. $75.12

Valence Electronics has 213 million shares outstanding. It expects earnings at the end of the year of $800 million. Valence pays out 40% of its earnings in total - 15% paid out as dividends and 25% used to repurchase shares. If Valence's earnings are expected to grow by 7% per year, these payout rates do not change, and Valence's equity cost of capital is 9%, what is Valence's share price? A. $11.27 B. $22.54 C. $60.10 D. $75.12

C. $38.09

Valorous Corporation will pay a dividend of $1.75 per share at this year's end and a dividend of $2.35 per share at the end of next year. It is expected that this price of Valorous' stock will be $41 per share after two years. If Valorous has an equity cost of capital of 9%, what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today? A. $32.38 B. $36.19 C. $38.09 D. $39.99

D. $9.5 million

Vernon-Nelson Chemicals is planning to release a new brand of insecticide, Bee-Safe, that will kill many insect pests but not harm useful pollinators. Buying new equipment to manufacture the product will cost $15 million, and there will be an additional $2 million cost to reconfigure existing plant. The equipment is expected to have a lifetime of nine years and will be depreciated by the straight-line method over its lifetime. The firm expects that they should be able to sell 1,500,000 gallons per year at a price of $53 per gallon. It will take $36 per gallon to manufacture and support the product. If Vernon-Nelson's marginal tax rate is 40%, what are the incremental earnings after tax in year 3 of this project? A. $25.5 million B. $14.3 million C. $23.8 million D. $9.5 million

A. 12%

Visby Rides, a livery car company, is considering buying some new luxury cars. After extensive research, they come up with the above estimate of free cash flows from this project. By how much could the discount rate rise before the net present value (NPV) of this project is zero, given that it is currently 10%? A. 12% B. 17% C. 27% D. 22%

B. $9082

Visby Rides, a livery car company, is considering buying some new luxury cars. After extensive research, they come up with the above estimates of free cash flow from this project. The depreciation schedule shown is for three-year, straight-line depreciation. By how much would the net present value (NPV) of this project be increased, if the cars were depreciated by the MACRS schedule shown below given that the cost of capital is 10%? A. $7266 B. $9082 C. $10,898 D. $22,705

D. 56%

Visby Rides, a livery car company, is considering buying some new luxury cars. After extensive research, they come up with the above estimates of free cash flow from this project. Visby learns that a competitor is thinking of offering similar services, thus reducing Visby's sales. By how much could sales fall before the net present value (NPV) was zero, given that the cost of capital is 8%, and that cost of goods sold is 45% of revenues? A. 28% B. 34% C. 45% D. 56%

A. $42.86

Von Bora Corporation (VBC) is expected to pay a $3.00 dividend at the end of this year. If you expect VBC's dividend to grow by 6% per year forever and VBC's equity cost of capital to be 13%, then the value of a share of VBS stock is closest to _____. A. $42.86 B. $15.79 C. $25.72 D. $17.14

shows how the net present value (NPV) varies as the underlying assumptions change; thus we understand the critical assumptions underlying the project

What is the most important function of sensitivity analysis?

D. a share of the profits paid to each shareholder on the basis of the number of shares they hold

What are dividend payments? A. payments made to a company by investors for a share of the ownership of that company B. incremental increases in the value of the stock held by an investor due to rises in share price C. the difference between the original cost price of a share and the price an investor receives when that share is sold D. a share of the profits paid to each shareholder on the basis of the number of shares they hold

Project externalities are indirect effects of the project that may increase or decrease the profits of other business activities of the firm.

What are project externalities?

One has to be careful when evaluating mutually exclusive projects especially using internal rate of return (IRR) as they may lead to incorrect decision making

What are some potential problems in using internal rate of return (IRR) for mutually exclusive projects?

Sunk costs are payments already made or that will be made that are independent of the project under discussion. These are costs for which the firm is already liable.

What are sunk costs?

deciding how to estimate the cash flows and the cost of capital

What are the most difficult parts of capital budgeting?

A multiple IRR project will have a net present value (NPV) profile that cuts the discount rate axis as many times as there are IRRs because the point of intersections of the discount rate axis by the net present value (NPV) curve are the IRRs of the project.

What can you comment about the shape of the net present value (NPV) profile of a multiple IRR project?

an extension of sensitivity analysis basically telling us the minimum level of different parameters that would give a zero net present value (NPV)

What do you understand by break-even analysis?

It is assumed that the growth rate used in the dividend-discount model be constant in the future.

What is a major assumption about growth rate in the dividend-discount model?

Generally the net present value (NPV) method will give the correct decision in case of mutually exclusive projects.

What is a safe method to use when confronted with mutually exclusive projects?

The Net Present Value rule states to accept a project if its net present value (NPV) is greater than zero.

What is the Net Present Value rule?

The correct tax rate that should be used is the firm's marginal tax rate, which is the tax rate paid on the last dollar earned by the firm.

What is the correct tax rate that should be used for capital budgeting decisions?

The decision criteria using internal rate of return (IRR) rule for project type cash flows is to accept projects if the internal rate of return (IRR) is greater than the cost of capital.

What is the decision criteria using internal rate of return (IRR) rule?

The decision criteria using the Net Present Value rule is to reject projects if their net present value (NPV) is less than zero.

What is the decision criterion using the Net Present Value rule?

The payback rule does not have any decision criteria. Consequently, decision making using payback rule is rather subjective.

What is the decision criterion while using the payback rule?

The net present value (NPV) profile can be upward sloping if the benefits of the cash flows occur before the costs. In that case the net present value (NPV) value profile will be a rising function of discount rate.

What is the general shape of the net present value (NPV) profile?

Sensitivity analysis focuses on the impact of changing one variable, holding all other variables constant. Scenario analysis allows for multiple variables to change at once, typically such that the change will impact NPV in the same direction (all change such that NPV increases or all change such that NPV decreases).

What is the major different between scenario analysis and sensitivity analysis?

For the dividend-discount model equation to be viable, the growth rate should be smaller than the cost of equity because the model becomes meaningless if the growth rate is equal to or greater than the cost of equity.

What is the relationship between the growth rate and the cost of equity implied in the dividend-discount model?

Dividends are periodic payments given out by the firm in to shareholders. It is not necessary for a firm to declare dividends, but mature firms tend to pay out dividends.

What role do dividends play in stock investing?

B. so that the projects can be compared on their cost or value created per year

When comparing two projects with different lives, why do you compute an annuity with an equivalent present value (PV) to the net present value (NPV)? A. so that you can see which project has the greatest net present value (NPV) B. so that the projects can be compared on their cost or value created per year C. to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter timeframe D. to ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are considered

D. subtracting depreciation expenses from taxable earnings

Which of the following adjustments should NOT be made when computing free cash flow from incremental earnings? A. adding depreciation B. adding all non-cash expenses C. subtracting increases in Net Working Capital D. subtracting depreciation expenses from taxable earnings

B. the amount by which a firm's earnings are expected to change as a result of an investment decision

Which of the following best defines incremental earnings? A. cash flows arising from a particular investment decision B. the amount by which a firm's earnings are expected to change as a result of an investment decision C. the earnings arising from all projects that a company plans to undertake in a fixed time span D. the net present value (NPV) of earnings that a firm is expected to receive as the result of an investment decision

A. Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative.

Which of the following best describes the Net Present Value rule? A. Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative. B. Take any investment opportunity where the net present value (NPV) exceeds the opportunity cost of capital; turn down any opportunity where the cost of capital exceeds the net present value (NPV). C. When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV). D. If the difference between the presents cost of an investment and the present value (PV) of its benefits after a fixed number of years is positive the investment should be taken, otherwise it should be rejected.

C. These earnings are not actual cash flows.

Which of the following best describes why the predicted incremental earnings arising from a given decision are not sufficient in and of themselves whether that decision is worthwhile? A. They do not tell how the decision affects the firm's reported profits from an accounting perspective. B. They are not easily predicted from historical financial statements of a firm and its competitors. C. These earnings are not actual cash flows. D. They do not show how the firm's earnings are expected to change as the result of a particular decision.

D. The firm will receive greater benefits to its cash flow earlier in the depreciation timeline and thus increase net present value (NPV).

Which of the following best explains why is it sensible for a firm to use an accelerated depreciation schedule such as MACRS rather than straight-line depreciation? A. The firm will substantially decrease its depreciation tax shield across all of the depreciation timeline. B. The firm can decide over how many years an item may be depreciated, thus allowing it full control of its depreciation expenses. C. The firm will have substantially fewer depreciation expenses later in the depreciation timeline. D. The firm will receive greater benefits to its cash flow earlier in the depreciation timeline and thus increase net present value (NPV).

B. opportunity cost

Which of the following costs would you consider when making a capital budgeting decision? A. sunk cost B. opportunity cost C. interest expense D. fixed overhead cost

D. payback period

Which of the following decision rules is best defined as the amount of time it takes to pay back the initial investment? A. internal rate of return (IRR) B. profitability index C. net present value (NPV) D. payback period

D. payback period

Which of the following decision rules might best be used as a supplement to net present value (NPV) by a firm that favors liquidity? A. profitability index B. MIRR C. equivalent annual annuity D. payback period

B. pN - (rE - g) x DivN + 1

Which of the following formulas is INCORRECT? A. Divt = EPSt x Dividend Payout Rate B. pN = (rE - g) x DivN + 1 C. earnings growth rate = retention rate x return on new investment D. rE = (Divt / P0) + g

D. rE = (Div1 / P0) - g

Which of the following formulas is INCORRECT? A. g = Retention Rate x Return on New Investment B. Divt = EPSt x Dividend Payout Rate C. p0 = Div1 / (rE - g) D. rE = (Div1 / P0) - g

B. Cash + Inventory + Receivables - Payables

Which of the following formulas will correctly calculate Net Working Capital? A. Cash + Inventory + Receivables + Payables B. Cash + Inventory + Receivables - Payables C. Cash + Inventory - Receivables + Payables D. Cash - Inventory + Receivables + Payables

B. A new product typically has its highest sales immediately after releases as customers are attracted by the novelty of the product.

Which of the following is NOT a factor that a manager should bear in mind when estimating a project's revenues and costs? A. Sales of a product will typically accelerate, stabilize, and then decline as the product becomes outdated or faces increased competition. B. A new product typically has its highest sales immediately after release as customers are attracted by the novelty of the product. C. The prices of technology products tend to fall over time as newer, superior technologies emerge and production costs decline. D. Prices and costs tend to rise with the general level of inflation in the economy.

B. It is difficult to calculate.

Which of the following is NOT a limitation of the payback period rule? A. It does not account for the time value of money. B. It is difficult to calculate. C. It ignores cash flows after payback. D. It does not account for changes in the discount rate.

C. It is difficult to calculate.

Which of the following is NOT a limitation of the payback rule? A. It does not consider the time value of money. B. Lacks a decision criterion that is economically based. C. It is difficult to calculate. D. It does not consider cash flows occurring after the payback period.

D. Turn multiple negative cash flows into a single negative cash flow by summing all negative cash flows over the project's lifetime

Which of the following is NOT a valid method of modifying cash flows to produce a MIRR? A. Discount all of the negative cash flows to time 0 and leave the positive cash flows alone. B. Leave the initial cash flow alone and compound all of the remaining cash flows to the final period of the project. C. Discount all of the negative cash flows to the present and compound all of the positive cash flows to the end of the project. D. Turn multiple negative cash flows into a single negative cash flow by summing all negative cash flows over the project's lifetime.

A. by increasing its retention rate

Which of the following is NOT a way that a firm can increase its dividend? A. by increasing its retention rate B. by decreasing its shares outstanding C. by increasing its earnings (net income) D. by increasing its dividend payout rate

D. relies on accurate estimate of the discount rate

Which of the following is a disadvantage of the Net Present Value rule? A. can be misleading if inflows come before outflows B. not necessarily consistent with maximizing shareholder wealth C. ignores cash flows after the cutoff point D. relies on accurate estimate of the discount rate

A. It cannot handle negative growth rates.

Which of the following is a limitation of the dividend-discount model? A. It cannot handle negative growth rates. B. It requires accurate dividend forecasts, which is not possible. C. It requires that the growth rate always be higher than the required rate of return, which is not realistic. D. It does not consider past earnings and performance.

A. A toothpaste manufacturer adds a new line of toothpaste (that contains baking soda) to its product line.

Which of the following is an example of cannibalization? A. A toothpaste manufacturer adds a new line of toothpaste (that contains baking soda) to its product line. B. A grocery store begins selling T-shirts featuring the local university's mascot. C. A basketball manufacturer adds basketball hoops to its product line. D. A convenience store begins selling pre-paid cell phones.

C. Attention must be taken when using it to make sure that all of the constrained resource is utilized.

Which of the following is true regarding the profitability index? A. It does not use the net present value (NPV) to assess benefits. B. It is very simple to compute. C. Attention must be taken when using it to make sure that all of the constrained resource is utilized. D. It is unreliable when used for choosing between different projects.

A. the fluctuations in the cost of capital over the period in question

Which of the following is usually NOT a factor that must be considered when estimating the revenues and costs arising from a new product? A. the fluctuations in the cost of capital over the period in question B. the sales of a new product will typically accelerate, plateau, and ultimately decline over time C. the prices of technology products generally fall over time D. competition tends to reduce profit margins over time in most industries

B. II only

Which of the following models directly values all of the firm's equity, rather than a single share? I. Dividend-discount model II. Total payout model III. Discounted cash flow model A. I only B. II only C. III only D. II and III

D. All of the above can lead to IRR giving a different decision than NPV.

Which of the following situations can lead to IRR giving a different decision than NPV? A. delayed investment B. multiple IRRs C. differences in project scale D. All of the above can lead to IRR giving a different decision than NPV.

C. Investments in plant, property, and equipment are directly listed as expense when calculating earnings.

Which of the following statements i FALSE? A. We begin the capital budgeting process by determining the incremental earnings of a project. B. The marginal corporate tax rate is the tax rate the firm will pay on an incremental dollar of pre-tax income. C. Investments in plant, property, and equipment are directly listed as expense when calculating earnings. D. The opportunity cost of using a resource is the value it could have provided in it best alternative use.

D. During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.

Which of the following statements is FALSE about dividend payout and growth? A. A common approximation is to assume that in the long run, dividends will grow at a constant rate. B. The dividend each year is the firm's earnings per share (EPS) multiplied by its dividend payout rate. C. There is a tremendous amount of uncertainty associated with any forecast of a firm's future dividends. D. During periods of high growth it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.

A. We cannot use the dividend-discount model to value the stock of a firm with rapid or changing growth.

Which of the following statements is FALSE of the dividend-discount model? A. We cannot use the dividend-discount model to value the stock of a firm with rapid or changing growth. B. As firms mature, their growth slows to rates more typical of established companies. C. The dividend-discount model values the stock based on a forecast of the future dividends paid to shareholders. D. The simplest forecast for the firm's future dividends states that they will grow at a constant rate, i.e., forever.

A. If a firm wants to increase its share price, it must diversify.

Which of the following statements is FALSE regarding profitable and unprofitable growth? A. If a firm wants to increase its share price, it must diversify. B. If a firm retains more earnings, it will pay out less of those earnings, reducing its dividends. C. A firm can increase its growth rate by retaining more of its earnings. D. Cutting a firm's dividend to increase investment will raise the stock price if the new investment has a positive net present value (NPV).

B. Total return equals earnings multiplied by the dividend payout rate.

Which of the following statements is FALSE? A. As firms mature, their earnings exceed their investment needs and they begin to pay dividends. B. Total return equals earnings multiplied by the dividend payout rate. C. Cutting the firm's dividend to increase investment will raise the stock price if, and only if, the new investments have a positive net present value (NPV).

D. According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate.

Which of the following statements is FALSE? A. Estimating dividends, especially for the distant future, is difficult. B. A firm can only pay out its earnings to investors or reinvest their earnings. C. Successful young firms often have high initial earnings growth rates. D. According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate.

D. If the cost of capital estimate is more than the internal rate of return (IRR), the net present value (NPV) will be positive.

Which of the following statements is FALSE? A. In general, the difference between the cost of capital and the internal rate of return (IRR) is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. B. The internal rate of return (IRR) can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital. C. If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. D. If the cost of capital estimate is more than the internal rate of return (IRR), the net present value (NPV) will be positive.

B. When evaluating a capital budgeting decision, we generally include interest expense.

Which of the following statements is FALSE? A. Many projects use a resource that the company already owns. B. When evaluating a capital budgeting decision, we generally include interest expense. C. Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. D. As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.

D. When we are certain regarding the input to a capital budgeting decision, it is often useful to determine the break-even level of that input.

Which of the following statements is FALSE? A. Sensitivity analysis allows us to explore the effects of errors in our estimated inputs in our net present value (NPV) analysis for the project. B. To compute the net present value (NPV) for a project, you need to estimate the incremental cash flows and choose a discount rate. C. Estimates of the cash flows and cost of capital are often subject to significant uncertainty. D. When we are certain regarding the input to a capital budgeting decision, it is often useful to determine the break-even level of that input.

A. The break-even level of an input is the level for which the investment has an internal rate of return (IRR) of zero.

Which of the following statements is FALSE? A. The break-even level of an input is the level for which the investment has an internal rate of return (IRR) of zero. B. The most difficult part of capital budgeting is deciding how to estimate the cash flows and the cost of capital. C. When evaluating a capital budgeting project, financial managers should make the decision that maximizes net present value (NPV). D. Sensitivity analysis reveals those aspects of the project which are most critical when we are actually managing the project.

B. An internal rate of return (IRR) will always exist for an investment opportunity.

Which of the following statements is FALSE? A. The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is a good idea. B. An internal rate of return (IRR) will always exist for an investment opportunity. C. A net present value (NPV) will always exist for an investment opportunity. D. In general, there can be as many internal rates of return (IRRs) as the number of times the project's cash flows change sign over time.

B. The payback rule is reliable because it considers the time value of money and depends on the cost of capital.

Which of the following statements is FALSE? A. The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the net present value (NPV). B. The payback rule is reliable because it considers the time value of money and depends on the cost of capital. C. For most investment opportunities, expenses occur initially and cash is received later. D. Fifty percent of firms surveyed reported using the payback rule for making decisions.

D. Scenario analysis breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as each one of the underlying assumptions changes.

Which of the following statements is FALSE? A. We can use scenario analysis to evaluate alternative pricing strategies for our project. B. Scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters. C. The difference between the internal rate of return (IRR) of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision. D. Scenario analysis breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as each one of the underlying assumptions changes.

B. Real options enhance the forecast of a project's expected future cash flows by incorporating, at the start of their project, the effect of decisions that will be made at a later date.

Which of the following statements regarding real options is NOT correct? A. Real options should only be exercised when they increase the NPV of a project. B. Real options enhance the forecast of a project's expected future cash flows by incorporating, at the start of their project, the effect of decisions that will be made at a later date. C. Real options give owners the right, but not the obligation, to exercise these opportunities at a later date. D. Real options build greater flexibility into a project and thus increase its net present value (NPV).

A. It can issue more shares.

Which of the following will NOT increase a company's dividend payments? A. It can issue more shares. B. It can increase its earnings. C. It can decrease the number of shares outstanding. D. It can increase its dividend payout rate.

C. I and II

Which of the following will be a source of cash flows for a shareholder of a certain stock? I. Sale of the shares at a future date II. The firm in which the shares are held paying out cash to shareholders in the form of dividends III. The firm in which the shares of held increasing the total number of shares outstanding through a stock split. A. I only B. II only C. I and II D. II and III

A. a decrease in the sales price

Which of the following will cause the EBIT Break-Even for sales to increase? A. a decrease in the sales price B. a decrease in depreciation expense C. a decrease in selling, general, and administrative expenses D. a decrease in the number of units sold

B. the cost of a marketing study completed last year

Which of the following would you NOT consider when making a capital budgeting decision? A. the additional taxes a firm would have to pay in the next year B. the cost of a marketing study completed last year C. the opportunity to lease out a warehouse instead of using it to house a new production line D. the change in direct labor expense due to the purchase of a new machine

because it allows a firm to drop a project if the project turns out to be unsuccessful, which allows the firm to cut its losses

Why does the option to abandon a project have value?

A. $0

Year 0, 1, 2, 3, 4 Cash Flow -12000, 3000, 3000, 3000, 3000 Given the cash flows in the table above, the point at which the NPV profile crosses the vertical axis is _____. A. $0 B. $12,000 C. 23% D. 19%

D. $6400

You are considering adding a microbrewery onto one of your firm's existing restaurants. This will entail an increase in inventory of $8700, an increase in accounts payable of $2300, and an increase in property, plant, and equipment of $48,000. All other accounts will remain unchanged. The change in net working capital resulting from the addition of the microbrewery is _____. A. $54,400 B. $11,000 C. $7680 D. $6400

A. $3290

You are considering adding a microbrewery onto one of your firm's existing restaurants. This will entail an investment of $47,000 in new equipment. This equipment will be depreciated straight-line over five years. If your firm's marginal corporate tax rate is 35%, then what is the value of the microbrewery's depreciation tax shield in the first year of operation? A. $3290 B. $16,450 C. $6110 D. $30,550

D. profitability index

You are opening up a brand new retail strip mall. You presently have more potential retail outlets wanting to locate in your mall than you have space available. What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space? A. internal rate of return (IRR) B. payback period C. net present value (NPV) D. profitability index

A. net present value (NPV)

You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision is _____. A. net present value (NPV) B. profitability index C. internal rate of return (IRR) D. incremental internal rate of return (IRR)

B. 9.8%

You expect KT industries (KTI) will have earnings per share of $5 this year and expect that they will pay out $1.25 of these earnings to shareholders in the form of a dividend. KTI's return for new investments is 13% and their equity cost of capital is 15%. The expected growth rate for KTI's dividends is closest to _____. A. 11.3% B. 9.8% C. 5.9% D. 3.9%

C. $62.50

You expect KT industries (KTI) will have earnings per share of $5 this year and expect that they will pay out $2.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 14% and their equity cost of capital is 11%. The value of a share of KTI's stock today is closest to _____. A. $75.00 B. $37.50 C. $62.50 D. $25.00

C. $41.36

You expect that Bean Enterprises will have earnings per share of $2 for the coming year. Bean plans to retain all of its earnings for the next three years. For the subsequent two years, the firm plans on retaining 50% of its earnings. It will then retain only 25% of its earnings from that points forward. Retained earnings will be invested in projects with an expected return of 20% per year. If Bean's equity cost of capital is 10%, then the price of a share of Bean's stock is closest to _____. A. $24.82 B. $16.54 C. $41.36 D. $66.18

B. limit order

You placed an order to purchase stock where you specified the maximum price you were willing to pay. This type of order is known as a _____. A. maximum order B. limit order C. floor order D. market order

A. $700,000

Your firm is considering building a new office complex. Your firm already owns land suitable for the new complex. The current book value of the land is $130,000; however, a commercial real estate agent has informed you that an outside buyer is interested in purchasing this land would be willing to pay $700,000 for it. When calculating the net present value (NPV) of your new office complex, ignoring taxes, the appropriate incremental cash flow for the use of this land is _____. A. $700,000 B. $0 C. $130,000 D. $830,000