Finance Final Multiple Choice Q's

The depreciation tax shield is best defined as the: -Amount of tax that is saved when an asset is purchased. -Tax that is avoided when an asset is sold as salvage. -Amount of tax that is due when an asset is sold. -Amount of tax that is saved because of the depreciation expense. -Amount by which the aftertax depreciation expense lowers net income.

Amount of tax that is saved because of the depreciation expense.

The expected return on a portfolio considers which of the following factors? I - Percentage of the portfolio invested in each individual security. II - Projected states of the economy. III - The performance of each security given various economic states. IV - Probability of occurrence for each state of the economy. - I and III only - II and IV only - I, III, and IV only - II, III, and IV only - I, II, III, and IV

I, II, III, and IV

The base case values used in scenario analysis are the values considered to be the most: -Optimistic. -Desired by management. -Pessimistic. -Likely to create a positive net present value. -Likely to occur.

Likely to occur.

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called: -Marginal spending. -Capital preservation. -Soft rationing. -Hard rationing. -Marginal rationing.

Soft rationing.

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

$1,200 paid to repair a machine last year.

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio? 5 10 25 50 75

10

The subjective approach to project analysis: -Is used only when a firm has an all-equity capital structure. -Uses the WACC of Firm X as the basis for the discount rate for a project under consideration by Firm Y. -Assigns discount rates to projects based on the discretion of the senior managers of a firm. -Allows managers to randomly adjust the discount rate assigned to a project once the project's beta has been determined. -Applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt.

Assigns discount rates to projects based on the discretion of the senior managers of a firm.

Which one of the following is an example of unsystematic risk? -Income taxes are increased across the board. . -A national sales tax is adopted. -Inflation decreases at the national level. -An increased feeling of prosperity is felt around the globe. -Consumer spending on entertainment decreased nationally.

Consumer spending on entertainment decreased nationally.

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions? -Riskless market -Evenly distributed market -Zero volatility market -Blume's market -Efficient capital market

Efficient capital market

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following? -Yearly incremental costs. -Sunk costs. -Opportunity costs. -Erosion cost. -Equivalent annual cost.

Equivalent annual cost.

Assume a project has a discounted payback that equals the project's life. The project's sales quantity must be at which one of these break-even points? -Accounting -Leveraged -Marginal -Cash -Financial

Financial

A firm's overall cost of equity is: -Is generally less than the firm's WACC given a debt-equity ratio of .40. -Unaffected by changes in the market risk premium. -Highly dependent upon the risk level of the firm. -Generally less than the firm's aftertax cost of debt. -Inversely related to changes in the firm's tax rate.

Highly dependent upon the risk level of the firm.

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? -Storing supplies in the same space currently used for materials storage. -Utilizing the basket manager to oversee wreath production. -Hiring additional employees to handle the increased workload should the firm accept the wreath project. -Researching the market to determine if wreath sales might be profitable before deciding to proceed. -Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt.

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

Which one of the following should not be included in the analysis of a new product? -Increase in accounts payable for new product inventory purchases. -Reduction in sales for a current product once the new product is introduced. -Market value of a machine owned by the firm which will be used to produce the new product. -Money already spent for research and development of the new product. -Increase in accounts receivable needed to finance sales of the new product.

Money already spent for research and development of the new product.

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances? -Moving furniture to provide floor space for the appliances. -Paying the rent for the store. -Selling furniture to appliance customers. -Having the current store manager oversee appliance sales. -Using the store's billing system for appliance sales.

Selling furniture to appliance customers.

Which one of the following categories of securities had the highest average return for the period 1926-2013? -U.S. Treasury bills -Large-company stocks -Small company stocks -Long-term corporate bonds -Long-term government bonds

Small company stocks

Which one of the following categories of securities had the most volatile annual returns over the period 1926-2013? -Long-term corporate bonds -Large-company stocks -Intermediate-term government bonds -U.S. Treasury bills -Small-company stocks

Small-company stocks

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles? -Underlying value principle. -Stand-alone principle. -Equivalent cost principle. -Salvage principle. -Fundamental principle.

Stand-alone principle.

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? -Opportunity -Fixed -Incremental -Erosion -Sunk

Sunk

Which one of the following statements related to the capital asset pricing model approach to equity valuation is correct? Assume the firm uses debt in its capital structure. -This model considers a firm's rate of growth. -The model applies only to non-dividend paying firms. -The model is dependent upon a reliable estimate of the market risk premium. -The model generally produces the same cost of equity as the dividend growth model. -This approach generally produces a cost of equity that equals the firm's overall cost of capital.

The model is dependent upon a reliable estimate of the market risk premium.

Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2013? -U.S. Treasury bill returns never exceeded a 9 percent return in any one year during the period. -U.S. Treasury bills provided a positive rate of return each and every year during the period. -Inflation equaled or exceeded the return on U.S. Treasury bills every year during the period. -Long-term government bonds outperformed U.S. Treasury bills every year during the period. -National deflation occurred at least once every decade during the period.

U.S. Treasury bills provided a positive rate of return each and every year during the period.

Which one of the following risks is irrelevant to a well-diversified investor? Systematic risk. Unsystematic risk. Market risk. Non diversifiable risk. Systematic portion of a surprise

Unsystematic risk.

Standard deviation is a measure of which one of the following? Average rate of return Volatility Probability Risk premium Real returns

Volatility

Flotation costs for a levered firm should: -be ignored when analyzing a project because they are a sunk cost. -be spread over the life of a project thereby reducing the cash flows for each year of the project. -only be considered only when two projects are mutually exclusive. -be weighted and included in the initial cash flow. -be totally ignored when internal equity funding is utilized.

be weighted and included in the initial cash flow.

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the: -Method of analysis used to make the decision. -Initial cash outflow. -Ability to recoup any investment in net working capital. -Accuracy of the projected cash flows. -Length of the project.

Accuracy of the projected cash flows.

Which one of the following statements best defines the efficient market hypothesis? -Efficient markets limit competition. -Security prices in efficient markets remain steady as new information becomes available. -Mispriced securities are common in efficient markets. -All securities in an efficient market are zero net present value investments. -Profits are removed as a market incentive when markets become efficient.

All securities in an efficient market are zero net present value investments.

A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith, Inc. What is the return that these individuals require on this investment called? -Dividend yield. -Cost of equity. -Capital gains yield. -Cost of capital. -Income return.

Cost of equity.

Which of the following variables will be forecast at their highest expected level under a worst case scenario? -Fixed costs and salvage value. -Variable costs and sales price. -Fixed costs and sales price. -Fixed and variable costs. -Initial cost and salvage value.

Fixed and variable costs.

Operating leverage is the degree of dependence a firm places on its: -Variable costs. -Fixed costs. -Sales -Operating cash flows. -Depreciation tax shield.

Fixed costs

PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing: -Financial deferral. -Financial allocation. -Capital allocation. -Marginal rationing. -Hard rationing.

Hard rationing.

Which one of the following is an example of diversifiable risk? I Earthquake damages an entire town. II Federal government imposes a $100 fee on all business entities III Employment taxes increase nationally. IV Toymakers are required to improve their safety standards. - I and III only. - II and IV only. - II and III only - I and IV only. - I, III, and IV only

I and IV only.

To convince investors to accept greater volatility, you must: -Decrease the risk premium. -Increase the risk premium. -Decrease the real return. -Decrease the risk-free rate. -Increase the risk-free rate.

Increase the risk premium.

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly? -Variance -Standard deviation -Reward-to-risk ratio -Beta -Risk premium

Reward-to-risk ratio.

Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return? -Risk premium -Geometric return -Arithmetic -Standard deviation -Variance

Risk premium

Which one of the following will be used in the computation of the best-case analysis of a proposed project? -Minimal number of units that are expected to be produced and sold. -The lowest expected salvage value that can be obtained for a project's fixed assets. -The most anticipated sales price per unit. -The lowest variable cost per unit that can reasonably be expected. -The highest level of fixed costs that is actually anticipated.

The lowest variable cost per unit that can reasonably be expected.

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2013? -Long-term government bonds -Small company stocks -Large company stocks -Long-term corporate bonds -U.S. Treasury bills

U.S. Treasury bills