Business Reporting Exam 2

Ch. 7 Compute net accounting profit based on the following information: Revenues = $4,000; Variable costs = $1,600; Fixed costs = $700; Depreciation = $300; Tax rate = 20 percent. $1,400 $1,372 $1,120 $1,360

$1,120 Profit = ($4,000 - 1,600 - 700 - 300)(1 - .2) = $1,120

Ch. 6 A project is expected to create operating cash flows of $26,500 a year for four years. The fixed assets required for the project cost $62,000 and will be worthless at the end of the project. An additional $3,000 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 12 percent? $19,208.11 $14,028.18 $15,306.09 $17,396.31 $21,954.17

$17,396.31 NPV = −$62,000 − 3,000 + $26,500[(1 − 1/1.12^4)/.12] + $3,000/1.12^4 NPV = $17,396.31

Ch. 8 The rate of return required by investors in the market for owning a bond is called the: coupon. face value. maturity. yield to maturity. coupon rate.

yield to maturity.

Ch. 9 A firm with an 8 percent dividend growth rate and a return on equity of 20 percent must have a retention ratio of ______ percent. 2.5 40 1.6 16

40 Rationale: Retention ratio = .08/.2 = .4, or 40%

Ch. 6 True or false: Opportunity costs can be ignored when determining the financial feasibility of a project. True False

False -Opportunity costs are relevant cash flows and should be included when determining the financial feasibility of a project.

Ch. 8 True or false: The real rate of return will generally be higher than the nominal rate of return. True False

False Rationale: Since the inflation rate is generally positive, the nominal rate is generally higher than the real rate

Ch. 9 True or false: Trades on NASDAQ occur on a trading floor. True False

False Rationale: The NASDAQ is an electronic trading market

Ch. 6 According to the bottom-up approach, what is the OCF if EBIT is $600, depreciation is $1,800, and the tax rate is 30 percent? $2,220 $420 $960 $1,680

$2,220

Ch. 7 Compute net accounting profit based on the following information: sales revenue = $50,000; variable costs = $35,000; fixed costs = $5,000; depreciation expense = $1,000; and tax rate = 15%. $8,865 $8,500 $9,000 $7,650

$7,650 =(50,000 - 35,000 - 5,000 - 1,000).85

Ch. 7 Compute the depreciation tax shield based on the following information: Depreciation expense = $40,000; Net profit before depreciation expense = $60,000; Tax rate = 20 percent. $12,000 $8,000 $4,000 $5,000

$8,000 =.2 * 40,000

Ch. 8 What is the value of a bond if the present value of interest cash flows is $200 and the present value of the par value to be received when the bond matures is $750? $750 $200 $1,000 $950

$950 Rationale: Total value=$200 + 750 = $950

Ch. 9 The value of a firm is the function of its ______ rate and its _______ rate. growth; discount growth; inflation discount; burn

growth; discount

Ch. 6 When rates are _____, the approximation of the real interest rate becomes _____. select all that apply high; poor high; good low; poor low; good

high; poor low; good

Ch. 9 Firms with many investment opportunities typically have ______ PE ratios. lower higher

higher

Ch. 7 Sensitivity analysis is primarily designed to determine the: range of possible outcomes given the expected ranges for every variable. degree to which the net present value reacts to changes in a single variable. net present value given the best and the worst possible expected situations. degree to which a project relies on financial leverage. best mix of fixed and variable costs for each project.

degree to which the net present value reacts to changes in a single variable.

Next year's annual dividend divided by the current stock price is called the: yield to maturity. total yield. dividend yield. capital gains yield. earnings yield.

dividend yield.

Ch. 9 The price earnings ratio is found by dividing the current price per share by last year's ______. earnings per share stock price net cash flow book value of assets

earnings per share

Ch. 6 The annual annuity stream of payments with the same present value as a project's costs is called the project's _____ cost. incremental sunk opportunity erosion equivalent annual

equivalent annual

Ch. 9 Select all that apply Firms may retain all their earnings if they have identified: opportunities with returns below the cost of capital positive NPV projects growth opportunities negative NPV projects

positive NPV projects growth opportunities

Ch. 8 The dirty price of a bond is defined as the: market price minus any taxes due on the accrued interest. market price minus the accrued interest. clean price minus the accrued interest. quoted price plus the accrued interest. clean price minus any taxes due on the accrued interest.

quoted price plus the accrued interest.

Ch. 8 What is a bond's yield to maturity (YTM)? YTM is the total yield or return on a bond that is sold today at par value. YTM is equivalent to the bond's current yield. YTM is the expected return on a bond that is held until it matures. YTM is the total yield or return on a bond that is sold today at the current market price.

YTM is the expected return on a bond that is held until it matures.

Ch. 9 The stock will be sold at (or near) the current market price in a _______ order.

market

Ch. 9 Growth opportunities may be lost if a firm pays out _________ in dividends nothing too much too little

too much

Ch. 8 True or false: The price you actually pay to purchase a bond will generally exceed the clean price. True False

True Rationale: Invoice price = Clean price + Accrued interest

Ch. 9 In a stock price quote, the ask price is ______ the bid price. equal to higher than lower than

higher than Rationale: The ask price is higher, because it is what people are willing to accept for purchase of the stock.

Ch. 8 The stated interest payment, in dollars, made on a bond each period is called the bond's: coupon. face value. maturity. yield to maturity. coupon rate.

coupon.

Ch. 9 If a stock pays a constant annual dividend then the stock can be valued using the: fixed coupon bond present value formula. present value of an annuity due formula. payout ratio formula. present value of an ordinary annuity formula. perpetuity present value formula.

perpetuity present value formula.

Ch. 6 According to the top-down approach, what is the operating cash flow if sales are $200,000, total cash costs are $190,636, and the tax bill is $1,144? $7,420 $8,680 $7,960 $8,220

$8,220

Ch. 8 U.S. Treasury notes and bonds have initial maturities ranging from ___ years. 5 to 25 5 to 20 2 to 30 10 to 30

2 to 30

Ch. 9 If a zero-dividend stock is purchased for $80 and sold one year later for $84, the 1-year return is ______ percent. 3 4 5 6

5 Rationale: ($84/$80) - 1 = 5%

Ch. 8 Which of the following are premiums determine the yield on a bond? Select all that apply Default risk Liquidity Expected future inflation Taxability Real rate of return Interest rate risk

Default risk Liquidity Expected future inflation Taxability Interest rate risk

Ch. 6 True or false: Discounting involves determining the future value of present cash flow. True False

False

Ch. 7 Which of the following is the most complex technique for capital budgeting analysis? Break-even analysis Scenario analysis Monte Carlo simulation Sensitivity analysis

Monte Carlo simulation

Ch. 9 Select all that apply NASDAQ has which of these features? Multiple market maker system Physical trading floor Computer network of securities dealers Single DMM system

Multiple market maker system Computer network of securities dealers

Ch. 9 Which of the following has a physical trading floor? NYSE NASDAQ

NYSE

Ch. 9 Which of the following occurs in the primary market? Newly-issued stocks are initially sold Outstanding shares are resold Shareholders gift shares to charities Issuers repurchase shares

Newly-issued stocks are initially sold

Ch. 6 Which of the following is the equation for estimating operating cash flows using the tax shield approach? OCF = (Sales - Costs) × Tax rate + Depreciation × (1 - Tax rate) OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation × Tax rate OCF = (Sales - Costs) + Deprecation × Tax rate

OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation × Tax rate

Ch. 6 What is the equation for estimating operating cash flows using the top-down approach? OCF = EBIT + Depreciation OCF = Sales - Cash costs OCF = Sales - Cash costs - Taxes OCF = EBIT - Depreciation + Taxes

OCF = Sales - Cash costs - Taxes

Ch. 7 The potential decision to abandon a project has option value because: abandonment can occur at one specific point in the future. a project may be worth more dead than alive. management is locked into a negative outcome. future demand may exceed expectations. the project may be worth more if its commencement is delayed.

a project may be worth more dead than alive.

Ch. 8 Which of these are required to calculate the current value of a bond? Select all that apply Price at the time of bond issue Par value Applicable market rate Time remaining to maturity Coupon

Par value Applicable market rate Time remaining to maturity Coupon Price at the time of bond issue Rationale: The price of the bond at the time of issue is not relevant in calculating its current price. Only the remaining cash flows and the market interest rate are important.

A stock's PE ratio is primarily affected by which three factors? Accounting practices, opportunities, and the market rate of return Dividend yield, capital gains yield, and opportunities Market rate of return, risk, opportunities Accounting practices, market rate of return, risk Risk, opportunities, accounting practices

Risk, opportunities, accounting practices

Ch. 7 Break-even analysis determines how low _________ can fall before a project loses money.

Sales

Ch. 7 Market __________ times market _________ times price per unit can determine total revenue for a firm using Monte Carlo simulation.

Share, size

Ch. 8 Which has a higher value, the bid price quote or the asked price quote? The asked price quote is higher. Both have equal prices. The bid price quote is higher. Depends, it could be either one.

The asked price quote is higher. Rationale: The asked price is higher - it represents how much an investor must pay to buy the bond.

Ch. 8 What information is needed to compute a bond's yield to maturity? Select all that apply The bond's current price Time to maturity Coupon rate Inflation rate

The bond's current price Time to maturity Coupon rate Inflation rate Rationale: Inflation rate is not needed to calculate YTM.

Ch. 8 Why does a bond's value fluctuate over time? A bond's value does not fluctuate over time The coupon rate varies, while market interest rates are fixed A bond's par value changes over time The coupon rate and par value are fixed, while market interest rates change

The coupon rate and par value are fixed, while market interest rates change A bond's value does not fluctuate over time Rationale: Bond values continually fluctuate. The coupon rate varies, while market interest rates are fixed Rationale: Market interest rates vary. A bond's par value changes over time Rationale: The par value is constant.

Ch. 8 Which of the following institutions issue bonds that are traded in the bond market? Select all that apply The federal government Sole proprietorships Public corporations State governments

The federal government Public corporations State governments Sole proprietorships Rationale: Sole proprietorships are funded by the owner of the company, who also manages it.

Ch. 7 True or false: While performing sensitivity analysis, we recompute NPV several times by changing one input variable at a time. True False

True False Rationale: The objective of sensitivity analysis is to analyze the impact of the sensitivity of NPV to a change in underlying input values by changing one input variable at a time.

Ch. 7 True or false: The value of real options, if they exist, must be included in capital budgeting analysis. True False

True False Rationale: Real options can add significant valuable information to capital budgeting analysis and hence cannot be ignored.

Ch. 8 True or false: In general, the stock market is more transparent than the bond market. True False

True Rationale: The stock market is more transparent than the bond market because there is more price and volume information available for the stock market than for the real estate market.

Ch. 8 All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate. a premium; greater than a premium; equal to at par; greater than at par; less than a discount; greater than

a discount; greater than

Ch. 9 A zero-growth model for stock valuation is distinguished by a ____. negative dividend growth rate a constant discount rate constant dividend amount zero stock price at Year 0

constant dividend amount

Ch. 8 The inflation premium is the additional return demanded by investors to compensate for _____. changing interest rates inflation time to maturity default risk

inflation changing interest rates Rationale: The interest rate risk premium compensates for changing interest rates. time to maturity Rationale: The maturity premium compensates for maturity. default risk Rationale: The default premium compensates for default.

Ch. 6 The bottom-up approach to calculating OCF starts with: depreciation net income tax liability total sales

net income

Ch. 6 Nominal interest rate - Inflation rate approximates the __________ interest rate.

real

Ch. 7 All else equal, the contribution margin must increase as: both the sales price and variable cost per unit increase. the fixed cost per unit declines. the variable cost per unit declines. sales price per unit declines. the sales price minus the fixed cost per unit increases.

the variable cost per unit declines.

Ch. 7 Monte Carlo simulation attempts to model: certainty a casino uncertainty

uncertainty

The free cash flow model is most helpful for firms: that have similar investment opportunities as other firms in their industry. that pay steady dividends and have excess cash. that are financially sound and thus pay constant, high dividends. with external financing needs that are not paying dividends. that are projected to grow at a constant, steady pace while increasing their dividends.

with external financing needs that are not paying dividends.

Ch. 6 When bidding for a job, a competing firm can use the NPV approach to determine their bid. Once the bid is submitted, the firm will win the contract for the project if their bid is the: lowest most reasonable bid highest

lowest

Ch. 6 Under capital budgeting, required working capital is classified as a cash ______. outflow inflow

outflow

Ch. 6 Under capital budgeting, opportunity costs are cash ______. inflows outflows

outflows

Ch. 6 Which of the following refers to a cash flows purchasing power? nominal cash flow inflation cash flow real cash flow

real cash flow

Ch. 6 Identify the three main sources of cash flows over the life of a typical project. Select all that apply Net cash flows from salvage value at the end of the project Net cash flows from sales and expenses over the life of the project. Test marketing expenses that have been classified as sunk costs Cash outflows from investment in plant and equipment at the inception of the project

Net cash flows from salvage value at the end of the project Net cash flows from sales and expenses over the life of the project. Cash outflows from investment in plant and equipment at the inception of the project

Ch. 7 Conducting scenario analysis helps managers see the: impact of an individual variable on the outcome of a project. expected range of outcomes from a proposed project. maximum range of outcomes that can occur over the course of a proposed project. various decision points of a specific project. consequences of changing a firm's market share for a specific product.

expected range of outcomes from a proposed project.

Ch. 7 The sales level that results in a project's net present value exactly equaling zero is called the _____ break-even. operational leveraged accounting cash financial

financial

Ch. 6 Interest expenses incurred on debt financing are ______ when computing cash flows from a project. treated as cash outflows treated as cash inflows spread over the life of the project ignored

ignored - In order to separate the investment from the financing of that investment, you must ignore any costs associated with financing. Cash flows from the project should be completed without taking into account the costs associated with the financing of the project.

Ch. 6 Interest on municipal bonds is ______. ignored in shareholders' books and treated as income in tax books included in taxable income in IRS reporting ignored in both shareholders' and tax books ignored for tax purposes but included as income for FASB accounting

ignored for tax purposes but included as income for FASB accounting

Ch. 6 The top-down approach to computing the operating cash flow: ignores all noncash items. applies only if a project produces sales. can only be used if the entire cash flows of a firm are included. is equal to: Sales − Costs − Taxes + Depreciation. includes the interest expense related to a project.

ignores all noncash items.

Ch. 7 An analysis of what happens to the estimate of net present value when only one input variable is changed is called _____ analysis. forecasting scenario sensitivity simulation break-even

sensitivity

Ch. 6 Depreciation × Tax rate represent the depreciation tax __________________.

shield

Ch. 8 What is a premium bond? A bond that sells for less than face value A bond of superior quality A bond that sells for more than face value A bond that is not risky and rated as investment grade

A bond that sells for more than face value Rationale: A premium bond is a bond that sells for more than face value. This will happen if market rates are lower than the coupon rate.

Ch. 7 In a Monte Carlo simulation, specifying a distribution for annual revenue will generally involve which of the following? Select all that apply Determining a distribution of sale prices Modeling industry sales Forecasting probabilities of various market shares Determining the most desired outcome

Determining a distribution of sale prices Modeling industry sales Forecasting probabilities of various market shares Determining the most desired outcome Rationale: Monte Carlo simulation is designed to find most likely outcomes, rather than most desired.

Ch. 9 Which of the following are cash flows to investors in stocks? Select all that apply Fees Dividends Interest Capital gains

Dividends Capital gains

Ch. 6 The shareholders' books in the US follow the rules of the ____. CPA Handbook (formerly CICA) Financial Accounting Standards Board (FASB) IRS Securities and Exchange Commission

Financial Accounting Standards Board (FASB) CPA Handbook (formerly CICA) Rationale: This is the rules followed in Canada. IRS Rationale: This is the Internal Revenue Service. Securities and Exchange Commission Rationale: This is the US government's commission that oversees key participants in the securities markets.

Ch. 9 In the dividend discount model, the expected return for investors comes from which two sources? Select all that apply Growth rate Tax rate Dividend Yield Amount of last year's earnings

Growth rate Dividend Yield Rationale: R = Div/P0+g

Ch. 6 An increase in depreciation expense will ____ cash flows from operations. increase not affect decrease

Increase -Because depreciation is not a cash expense, its only effect is to decrease taxes paid, thereby increasing cash flows from operations

Ch. 9 In an inflationary environment, reported earnings are lower if a firm uses ______ rather than ______ accounting. LIFO; FIFO FIFO; LIFO

LIFO; FIFO

Ch. 9 The determinants of a firm's growth rate include which factors? Select all that apply Long-term assets The debt to equity ratio Return on retained earnings The retention ratio

Return on retained earnings The retention ratio Rationale: g = retention ratio X return on retained earnings

Ch. 6 What are the two sets of accounting books? Finance books Tax books Shareholders' books Auditors' books

Tax books Shareholders' books

Ch. 8 The interest rate for a tax-exempt bond that equates to the rate paid on a taxable bond is computed as: Taxable rate/(1 − T*). Tax-exempt rate × (1 − T*). Taxable rate − (1 + T*). Taxable rate × (1 − T*). Tax-exempt rate/(1 + T*).

Taxable rate × (1 − T*).

Ch. 8 What does the clean price for a bond represent? The quoted price plus accrued interest The original issue price plus accrued interest The original issue price The quoted price, which excludes accrued interest

The quoted price, which excludes accrued interest Rationale: The clean price is the quoted price, which excludes accrued interest. The price including accrued interest is called the dirty price, or the invoice price.

Ch. 8 What is the expected return on a bond? The yield based on future cash flows with no adjustment for risk The promised yield from interest income and capital gains The current yield from interest income, adjusted for risk The return based on the current price and future cash flows adjusted for default risk.

The return based on the current price and future cash flows adjusted for default risk. The yield based on future cash flows with no adjustment for risk Rationale: The expected return is adjusted for risk. The promised yield from interest income and capital gains Rationale: The promised yield does not adjust for risk; however the expected return does. The current yield from interest income, adjusted for risk Rationale: The expected return includes all expected future cash flows, not just interest income.

Ch. 7 What is the purpose of accounting profit break-even analysis? To determine the maximum number of units that can be produced in a plant. To determine the level of sales at which profits are equal to zero. To determine the level of sales at which profits generate the minimum rate of return expected by shareholders. To determine the level of sales at which variable costs are fully recovered.

To determine the level of sales at which profits are equal to zero. To determine the maximum number of units that can be produced in a plant. Rationale: Accounting profit break-even is the level of sales at which profits are zero. This level is unrelated to capacity production, which is a separate concern. To determine the level of sales at which profits generate the minimum rate of return expected by shareholders. Rationale: Accounting profit break-even is the level of sales at which profits are zero. It does not consider the rate of return expected by shareholders. To determine the level of sales at which variable costs are fully recovered. Rationale: Accounting profit break-even is the level of sales at which profits are zero. Variable costs should be covered at any sales level, because the price should be set higher than the variable cost per unit.

Ch. 8 What does TIPS stand for? Treasury induced promissory stocks Treasury Inflation-Protected Securities Treasury Investment Ponzi Securities Tactical Investment Protection Securities

Treasury Inflation-Protected Securities

Ch. 7 A decision _________ involves mapping the sequential outcomes of various decisions and corresponding probabilities.

Tree

Ch. 6 Opportunity costs are ____. benefits gained as a result of accepting a particular project benefits lost due to taking on a particular project the actual expenses of pursuing a specific project the actual expenses incurred by a firm to preserve its market share

benefits lost due to taking on a particular project

Ch. 7 A firm will start generating positive accounting profits: at the break-even sales point at the point at which revenues exceed total fixed costs beyond the break-even sales point below the break-even sales point

beyond the break-even sales point at the break-even sales point Rationale: A firm will start generating accounting profits beyond the break-even sales point. At the break-even sales level, accounting profit will be zero. at the point at which revenues exceed total fixed costs Rationale: A firm will start generating accounting profits beyond the break-even sales point. The point at which revenues exceed fixed costs, accounting profits will still be negative until variable costs are also covered. below the break-even sales point Rationale: A firm will start generating accounting profits beyond the break-even sales point. Below that number, accounting profit will be negative.

Ch. 9 Which of the following help facilitate trades without necessarily maintaining an inventory? broker speculator dealer

broker

Ch. 6 Discounting is the process of _____. converting a simple interest rate into an effective annual rate removing all risk from a potential capital investment calculating the future value of either a lump sum or a series of cash flows calculating the present value of either a lump sum or a series of cash flows.

calculating the present value of either a lump sum or a series of cash flows.

Ch. 6 When comparing projects with unequal lives, one should use which of the following methods: equivalent annual costs payback period net present value

equivalent annual costs

Ch. 6 A decrease in a firm's current cash flows resulting from the implementation of a new project is referred to as: salvage value expenses. net working capital expenses. sunk costs. opportunity costs. erosion costs.

erosion costs.

Ch. 8 Which of the following are common shapes for the term structure of interest rates? Select all that apply flat upward sloping downward sloping V-shaped

flat upward sloping downward sloping

Ch. 9 The value of a firm is the function of its _________ rate and its _________ rate.

growth, discount

Ch. 8 If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ______$1,000. less than equal to more than

less than

Ch. 6 The computation of equivalent annual costs is useful when comparing projects with unequal _____. lives annual cash flows initial investments salvage values

lives

Ch. 6 When comparing projects with different lives, one should choose the project with the ______ equivalent annual cost. higher lower

lower

Ch. 7 Monte Carlo simulation is _____ complex than scenario analysis. more less

more

Ch. 8 A zero-coupon bond is a bond that ____. has no market value is sold at a premium produces no taxable income makes no interest payments

makes no interest payments has no market value Rationale: A zero-coupon bond is a bond that makes no interest payments; the only cash flow after purchase is the par value at maturity. is sold at a premium Rationale: A zero-coupon bond is a bond that makes no interest payments; the only cash flow after purchase is the par value at maturity. Zeros never sell at a premium (as long as interest rates are positive). produces no taxable income Rationale: A zero-coupon bond is a bond that makes no interest payments; the only cash flow after purchase is the par value at maturity. Taxes must be paid on the accrued interest, even though no cash flow is received.

Ch. 9 Select all that apply When enterprise value is calculated, cash is subtracted from the market value of debt and equity because ____. cash is a long-term asset most businesses run strictly on a credit basis and have no use for cash many firms hold more cash than necessary an EV ratio should reflect the ability of productive assets to create cash flow

many firms hold more cash than necessary an EV ratio should reflect the ability of productive assets to create cash flow

Ch. 7 A decision tree involves ____. mapping the sequential outcomes of various decisions and corresponding probabilities mapping a strategy for dealing with the competition determining the number of decisions that need to be made before a product can be approved depicting the decision-making process in a firm using an organizational chart

mapping the sequential outcomes of various decisions and corresponding probabilities

Assume you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the: market values of all stocks to increase. market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate. market values of all stocks to decrease. stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price. dividend growth rates to increase to offset this change.

market values of all stocks to decrease.

Ch. 6 Erosion will ______ the sales of existing products. not affect increase reduce

reduce

Ch. 7 A fixed cost is a cost that _____. is fixed by the board of directors at their annual meeting remains constant as the level of business activity changes is set as a fixed percentage of sales that changes only at management's discretion

remains constant as the level of business activity changes

Ch. 8 According to the Fisher effect hypothesis, the real rate of return ______ as inflation increases. increases remains the same decreases

remains the same

Ch. 9 When estimating the growth rate, g, with the constant-growth stock valuation model, it is assumed that the ______ ratio stays the same. retention current debt-to-equity equity-to-assets

retention Rationale: When estimating the growth rate, g, with the constant-growth stock valuation model, it is assumed that the retention ratio stays the same.

Ch. 8 When the term structure of interest rates is downward-sloping, ____. there is no relationship between short-term and long-term rates short-term rates are higher than long-term rates short-term rates equal long-term rates short-term rates are lower than long-term rates

short-term rates are higher than long-term rates there is no relationship between short-term and long-term rates Rationale: If there is no relationship then you wouldn't be able to say it was downward sloping. short-term rates equal long-term rates Rationale: When short and long term rates are equal, the term structure of interest rates is flat. short-term rates are lower than long-term rates Rationale: When short term rates are lower than long term rates then the term structure of interest rates is upward sloping.

Ch. 8 The relationship between nominal interest rates on default-free, pure discount securities and the time to maturity is called the: liquidity effect. Fisher effect. term structure of interest rates. inflation premium. interest rate risk premium.

term structure of interest rates.

Ch. 7 A Monte Carlo simulation analyzes ____. the impact on NPV when one of the underlying variable changes the impact on NPV under specific scenarios the sensitivity of NPV to external factors the expected NPV by determining a probability distribution for each variable

the expected NPV by determining a probability distribution for each variable the impact on NPV when one of the underlying variable changes Rationale: This is sensitivity analysis. the impact on NPV under specific scenarios Rationale: This is scenario analysis. the sensitivity of NPV to external factors Rationale: External factors are included in the simulation, but the variables that the manager is interested in measuring the sensitivity of are those that are within her control.

Ch. 9 In theory, which of the following models are best used to determine the value of a non-dividend paying share of stock? the firm cash flow model The dividend discount model the bond valuation model the Baumol-Riggs model

the firm cash flow model

Ch. 6 Marshall's purchased a corner lot five years ago at a cost of $498,000 and then spent $63,500 on grading and drainage so the lot could be used for storing outdoor inventory. The lot was recently appraised at $610,000. The company now wants to build a new retail store on the site. The building cost is estimated at $1.1 million. What amount should be used as the initial cash outflow for this building project? $1,661,500 $1,100,000 $1,208,635 $1,710,000 $1,498,000

$1,710,000 CF0 = $610,000 + 1,100,000 CF0 = $1,710,000

Ch. 6 What is the approximate formula for estimating the real interest rate? Real interest rate = Nominal interest rate - Inflation rate Real interest rate = Nominal interest rate / Inflation Real interest rate = Nominal interest rate Real interest rate = Nominal interest rate + Inflation rate

Real interest rate = Nominal interest rate - Inflation rate

Ch. 6 Which of the following is an example of a sunk cost? Salvage value of equipment Bonus to top management based on project success Cost of equipment purchased specifically for the project Test marketing expenses

Test marketing expenses

Ch. 7 A project has been assigned a discount rate of 12 percent. If the project starts immediately, it will have an initial cost of $480 and cash inflows of $350 a year for three years. If the start is delayed one year, the initial cost will rise to $520 and the cash flows will increase to $385 a year for three years. What is the value of the option to wait? $.70 $1.08 $1.67 $2.20 $.20

$.70 NPV0 = −$480 + $350[(1 − 1/1.12^3)/.12] NPV0 = $360.64 NPV0 = {−$520 + $385[(1 − 1/1.12^3)/.12]}/1.12 NPV0 = $361.34 Value of option to wait = $361.34 − 360.64 Value of option to wait = $.70

Ch. 8 A bond with a coupon rate of 6 percent that pays interest semiannually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each. $1,006; $60 $1,060; $30 $1,060; $60 $1,000; $30 $1,000; $60

$1,000; $30

Ch. 8 Nathan is buying a $1,000 face value bond at a quoted price of 101.364. The bond carries a coupon rate of 7.75 percent, with interest paid semiannually. The next interest payment is two months from today. What is the dirty price of this bond? $1,039.47 $1,042.15 $1,056.02 $1,028.18 $1,026.56

$1,039.47 Dirty price = 101.364%($1,000) + .0775($1,000)(4/12) Dirty price = $1,039.47

Ch. 8 If the present value of the interest payments on a bond is $320 and the present value of the par value to be paid at maturity is $900, the total value of the bond must be ____. $1,220 $1,000 $320 $900

$1,220 Rationale: Bond value = $320 + 900 = $1,220

Ch. 8 What is the value of a zero coupon bond that matures in 15 years if it promises to pay $5,000 at maturity, assuming an interest rate of 7.5 percent compounded annually? $1,689.83 $2,051.16 $3,100.78 $1,794.39

$1,689.83 Rationale: $5,000/(1.075)15 = $1,689.83

The Reading Co. has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 3 percent annually. The last dividend it paid (T = 0) was $.90 a share. What will be the company's dividend six years from now? $.90 $.93 $1.04 $1.07 $1.11

$1.07 D6 = $.90(1.03^6) D6 = $1.07

Ch. 9 What is the value of a stock if next year's dividend is $6, the discount rate is 11 percent and the constant rate of growth is 3 percent? $79 $70 $65 $75

$75 Rationale: P0 = $6/(.11 - .03) = $75 Do not multiply the dividend by 1 + the growth rate, because you're given next year's dividend.

S&P Enterprises will pay an annual dividend of $2.08 a share on its common stock next year. The firm just paid a dividend of $2.00 a share and adheres to a constant rate of growth dividend policy. What will one share of S&P common stock be worth ten years from now if the applicable discount rate is 8 percent? $71.16 $74.01 $76.97 $80.05 $83.25

$76.97 g = ($2.08 − 2.00)/$2.00 g = .04 P10 = [$2.08(1.04^10)]/(.08 − .04) P10 = $76.97

Ch. 7 ABC Co. has compiled these estimates for a new 1-year project: Sales of 1,650 units, ± 5 percent; sales price of $17 a unit, ± 1 percent; variable costs per unit of $7.49, ± 3 percent; fixed costs of $3,800, ± 1 percent; and depreciation of $2,200. The company bases its sensitivity analysis on the expected case scenario. If the company conducts a sensitivity analysis at a sales price of $16.25, what will be the earnings before interest and taxes? $8,265 $8,454 $8,530 $8,709 $8,510

$8,454 EBIT = [($16.25 − 7.49)(1,650)] − $3,800 − 2,200 EBIT = $8,454

Ch. 7 Compute the NPV of a project that has the following end-of-year cash flow projections: Year 1 = $40,000; Year 2 = $50,000; Year 3 = -$22,000. The project requires an initial investment of $75,000 and has a discount rate of 10 percent. -$7,409 $19,215 -$13,843 $21,156

-$13,843 NPV = -$75,000 + $40,000/1.1 + $50,000/1.1^2 + (-$22,000/1.1^3) = -$13,843

Ch. 8 What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100, and a coupon interest payment of $100 per year? 9.09% It will depend on the bond rating for that year 1% 10%

10% Coupon rate =$100/$1,000 = 10%

Ch. 9 What is the total return for a stock that currently sells for $100, pays a dividend in one year of $2, and has a constant growth rate of 8 percent? 11.8% 9.8% 10% 10.8%

10% Rationale: R = ($2/$100) + .08 = .10, or 10%

Ch. 7 Compute the NPV break-even point based on the following information: EAC = $20,000; Fixed cost = $35,000; Tax rate = 20 percent; Depreciation = $500; Contribution margin = $1,000. 48 units 44 units 60 units 69 units

60 units {$20,000 + [$35,000 × (1 - .2)] - ($500 × .2)}/[$1,000 × (1 - .2)] = 60 units

Ch. 9 __________ act as two-sided dealers in particular stocks. DMMs Floor brokers SLPs

DMMs Floor brokers Rationale: Floor brokers execute trades for customers. SLPs Rationale: An SLP is a supplemental liquidity provider, which has agreed to be an active participant in the market for a particular stock.

Ch. 6 Buying new cost-cutting equipment affects operating cash flows by: select all that apply decreasing the depreciation deduction increasing the depreciation deduction increasing taxes increasing pretax income

increasing the depreciation deduction increasing taxes increasing pretax income decreasing the depreciation deduction Rationale: Buying new equipment increases depreciation expense.

Ch. 7 The variable cost per unit for a proposed project is $8.48 and the annual fixed costs are $27,400. These costs can vary by ± 5 percent. Annual depreciation is $13,290 and the tax rate is 21 percent. The sale price is $13.29 a unit, ± 2 percent. If the firm bases its sensitivity analysis on the expected outcome, what will be the operating cash flow for a sensitivity analysis of 9,200 units? $14,066.02 $16,103.98 $22,078.40 $11,554.50 $18,385.60

$16,103.98 Net income = {[9,200($13.29 − 8.48)] − $27,400 − 13,290}(1 − .21) Net income = $2,813.98 OCF = $2,813.98 + 13,290 OCF = $16,103.98

Rosita's announced that its next annual dividend will be $1.65 a share and all future dividends will increase by 2.5 percent annually. What is the maximum amount you should pay to purchase a share of this stock if you require a rate of return of 12 percent? $13.75 $17.80 $15.46 $16.94 $17.37

$17.37 P0 = $1.65/(.12 − .025) P0 = $17.37

Ch. 8 What is the present value of $1,000 to be received in 10 years if the interest rate is 12 percent, compounded semiannually? $311.80 $100 $324.19 $90.91

$311.80 Rationale: $1,000/[1 + (.12/2)]10 × 2 = $311.80

Ch. 7 What is next year's expected cash flow if there is a 50/50 probability that it will be either $10 million or $60 million? $40 million $30 million $70 million $35 million

$35 million Expected cash flow = .5 × $10 million + .5 × $60 million = $35 million

Ch. 7 A project has a projected sales price of $99 a unit, variable costs per unit of $58, annual fixed costs of $238,000, and annual depreciation of $139,000. The tax rate is 22 percent. What is the contribution margin for an analysis using sales units of 12,800? $27.06 $38.97 $22.41 $41.00 $42.64

$41.00 Contribution margin = $99 − 58 Contribution margin = $41

Ch. 8 What is the present value of the annual interest payments on a 20-year, $1,000 par value bond with a 5 percent coupon paid annually, if the yield on similar bonds is 10 percent? $851.03 $542.19 $623.00 $425.68

$425.68 PV = (.05 × $1,000) × (1 - 1/1.10^20)/.10 = $425.68

Ch. 7 A project with a life of one year has an accounting break-even point of 2,962 units. The fixed costs are $46,308 and the depreciation expense is $22,147. The projected variable cost per unit is $23.10. What is the projected sales price? $48.07 $42.96 $41.20 $46.21 $45.40

$46.21 2,962 = ($46,308 + 22,147)/(Sales price − $23.10) Sales price = $46.21

Ch. 7 What is next year's expected cash flow if there is a 50/50 probability that it will be either $250 million or $750 million? $250 million $700 million $100 million $500 million

$500 million Expected cash flow = .5 × $250 million + .5 × $750 million = $500 million

Ch. 8 A bond has a coupon rate of 8.2 percent, a $1,000 par value, matures in 11.5 years, has a yield to maturity of 7.67 percent, and pays interest annually. What is the current yield? 7.89 percent 8.21 percent 8.43 percent 7.67 percent 8.52 percent

7.89 percent Price = .082($1,000)[(1 − 1/1.0767^11.5)/.0767] + $1,000/1.0767^11.5 Price = $1,039.56 Current yield = [.082($1,000)]/$1,039.56 Current yield = .0789, or 7.89%

Ch. 8 Aspens is preparing a bond offering with a coupon rate of 5.5 percent. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest annually. Which one of the following statements is correct? Assume a face value of $1,000. The bonds will pay 19 interest payments and one principal payment. The bonds will initially sell at a discount. At maturity, the bonds will pay a final payment of $1,027.50. The bonds will pay twenty equal coupon payments. At issuance, the bond's yield to maturity is 5.5 percent.

At issuance, the bond's yield to maturity is 5.5 percent.

Ch. 9 What are the three basic patterns of dividend growth? Select all that apply Fast growth Constant growth Differential growth Zero growth

Constant growth Differential growth Zero growth

Ch. 6 All of the following are anticipated effects of a proposed project. Which of these should be considered when computing the cash flow for the final year of the project? Operating cash flow and salvage values only Salvage values and net working capital recovery only Operating cash flow, net working capital recovery, salvage values Net working capital recovery and operating cash flow only Operating cash flow only

Operating cash flow, net working capital recovery, salvage values

Ch. 8 How are TIPS different from traditional bonds? Promised payments are specified in real terms Investors can choose to receive payments in real terms or nominal terms Promised payments are specified in nominal terms

Promised payments are specified in real terms Rationale: For TIPS, promised payments are specified in real terms. For traditional bonds, they are specified in nominal terms.

Ch. 8 Which is the largest security market in the world in terms of trading volume? The U.S. corporate bond market The U.S. derivatives market The U.S. stock market The U.S. Treasuries market

The U.S. Treasuries market

Ch. 8 What is the asked price? The asked price is the price an investor will receive if they sell a bond. The asked price is the price at which a dealer is willing to sell. The asked price is another term for the maturity, or face value. The asked price is the price at which a dealer is willing to buy.

The asked price is the price at which a dealer is willing to sell.

Ch. 7 Management has decided to accept a new project but has yet to decide when the project should commence. Which type of analysis would be most helpful at this time? Expansion analysis Timing option analysis Scenario analysis Sensitivity analysis Simulation analysis

Timing option analysis

Ch. 6 Investment in net working capital arises when ___. select all that apply cash is kept for unexpected expenditures equipment is purchased using long term debt credit sales are made inventory is purchased

cash is kept for unexpected expenditures credit sales are made inventory is purchased equipment is purchased using long term debt Rationale: Equipment is categorized as a fixed asset; neither current assets nor current liabilities are affected by the purchase of equipment.

Ch. 7 The option to wait: increases in value as the project's sensitivity to new technology increases. is independent of the project's discount rate. is valueless when a project is profitable given immediate implementation. decreases the net present value of a project. may have value even if a new project currently has a negative net present value.

may have value even if a new project currently has a negative net present value.

Ch. 7 In order to make a decision utilizing a decision tree, you must: start at the most distant point in time and work backwards to Time 0. begin at Time 0 and work towards the most distant point in time. start at the top of the tree and work vertically downward to the very bottom. start at the middle of the tree and work both upwards and downwards simultaneously. concentrate only on the limbs with the highest probability of occurrence levels.

start at the most distant point in time and work backwards to Time 0.

Ch. 6 If Lew's Steel Forms purchases $618,000 of new equipment, they can lower annual operating costs by $265,000. The equipment will be depreciated straight-line to a zero book value over its 3-year life. Ignore bonus depreciation. At the end of the three years, the equipment will be sold for an estimated $60,000. The equipment will require the company to hold an extra $23,000 of inventory over the 3-year period. What is the NPV if the discount rate is 14 percent and the tax rate is 21 percent? −$2,646.00 −$7,014.54 −$12,593.78 $3,106.54 $6,884.40

−$7,014.54 CF0 = −$618,000 − 23,000 CF0 = −$641,000 OCF = [$0 − (−$265,000)](1 − .21) + ($618,000/3)(.21) OCF = $252,610 Aftertax salvage value = $60,000 − ($60,000 − 0)(.21) Aftertax salvage value = $47,400 NPV = −$641,000 + $252,610[(1 - 1/1.14^3)/.14] + ($47,400 + 23,000)/1.14^3 NPV = −$7,014.54

Ch. 7 The marketing department has projected that the firm's market share will be 8% of industry sales. Industry sales should total 75,000 units. If the price per unit is $200, the firm's expected sales revenue will be _____. $4,500,000 $525,000 $3,825,000 $1,200,000

$1,200,000 =75,000*.08*200

Ch. 6 What is the difference between nominal cash flow and real cash flow? Nominal cash flow refers to the cash flow's purchasing power while real cash flow refers to the actual dollars to be received. Nominal cash flow is the actual dollars to be received. Real cash flow refers to the cash flow's purchasing power. There is no difference between nominal and real cash flow.

Nominal cash flow is the actual dollars to be received. Real cash flow refers to the cash flow's purchasing power.

Ch. 6 The initial cost of one customized machine is $675,000 with an annual operating cost of $14,800, and a life of 4 years. The machine will be worthless and replaced at the end of its life. What is the equivalent annual cost of this machine if the required rate of return is 14.5 percent and we ignore taxes? $249,797.41 $240,008.02 $248,841.99 $247,647.78 $251,610.29

$248,841.99 NPV = −$675,000 − $14,800[(1 − 1/1.145^4)/.145] NPV = −$717,684.65 $717,684.65 = EAC[(1 − 1/1.145^4)/.145] EAC = $248,841.99

Ch. 6 Walks Softly currently sells 14,800 pairs of shoes annually at an average price of $59 a pair. It is considering adding a lower-priced line of shoes that will be priced at $39 a pair. The company estimates it can sell 6,000 pairs of the lower-priced shoes annually but will sell 3,500 less pairs of the higher-priced shoes each year by doing so. What annual sales revenue should be used when evaluating the addition of the lower-priced shoes? $27,500 $24,000 $31,300 $789,100 $900,700

$27,500 Sales = 6,000($39) − 3,500($59) Sales = $27,500

Ch. 7 What is the total number of inputs that change while doing sensitivity analysis? 0 1 All inputs change

1 0 Rationale: Sensitivity analysis seeks to determine the sensitivity of NPV to a change in a single variable. All inputs change Rationale: Sensitivity analysis seeks to determine the sensitivity of NPV to a change in a single variable.

Ch. 6 If the nominal rate is 5 percent and the annual rate of inflation is 2 percent, what is the real rate of return? 5.00% 3.00% 3.75% 2.94%

2.94%

Ch. 6 What is the real interest rate if the nominal annual interest rate is 10 percent and the annual inflation rate is 4 percent? 6.03% 6.08% 5.69% 5.77%

5.77%

Ch. 7 In general, what is the decision rule for NPV? Accept a project if the NPV is less than zero. Accept a project if the NPV is greater than zero. Accept a project if the NPV is less than the IRR. Accept a project if the NPV is greater than the IRR.

Accept a project if the NPV is greater than zero.

Ch. 6 Which of the following is given greater importance in capital budgeting problems in corporate finance? Depreciation Earnings Cash flows Earnings after taxes

Cash flows -Cash flows are given greater importance in capital budgeting problems in corporate finance. Earnings after taxes are accrual-based, so they don't give an accurate representation of timing or amount of cash.

Ch. 6 How does depreciation affect the operating cash flows? Depreciation expense does not affect the operating cash flow. Depreciation expense reduces the taxable income and taxes, and increases the operating cash flow. Depreciation expense increases the taxable income and taxes, and reduces the operating cash flow. A $1 increase in depreciation expense will increase the operating cash flow by $1.

Depreciation expense reduces the taxable income and taxes, and increases the operating cash flow.

Ch. 6 _______________ expenses incurred on debt financing are ignored when computing cash flows from a project.

Interest

Ch. 7 In the context of capital budgeting, what does sensitivity analysis do? It examines the sensitivity of management to the possibility that a project will be rejected. It examines the sensitivity of profits to changes in market share. It examines the increase in the cost of a project when the cost of capital increases. It examines how sensitive a particular NPV calculation is to changes in underlying assumptions.

It examines how sensitive a particular NPV calculation is to changes in underlying assumptions. It examines the sensitivity of management to the possibility that a project will be rejected. Rationale: Sensitivity analysis examines how sensitive a particular NPV calculation is to changes in underlying assumptions. It examines the sensitivity of profits to changes in market share. Rationale: In capital budgeting, the focus is on cash flows, not profits. It examines the increase in the cost of a project when the cost of capital increases. Rationale: It examines how sensitive a particular NPV is to many inputs, not only cost.

Ch. 7 Which of the following are costs related to a doctor's office are NOT fixed costs? Select all that apply Rent for the medical office Lab reports for patients Property Taxes Medical supplies

Lab reports for patients Medical supplies

Ch. 7 Which of the following are reasons why NPV is considered a superior capital budgeting technique? Select all that apply NPV properly discounts earnings. NPV considers all the cash flows. NPV considers time value of money. NPV results in only one rate of return.

NPV considers all the cash flows. NPV considers time value of money. NPV properly discounts earnings. Rationale: Earnings do not represent real money; in capital budgeting, only cash flows are discounted. NPV results in only one rate of return. Rationale: NPV does not give a rate of return. It gives the dollar amount added to the value of the firm if the project is accepted.

Ch. 6 Among the three main sources of cash flow, which source of cash flow is the most important and also the most difficult to forecast? The operating cash flows from net sales over the life of the project The salvage value of the project The costs incurred at the inception of the project The sunk costs incurred before the inception of the project

The operating cash flows from net sales over the life of the project The salvage value of the project Rationale: While salvage value is difficult to forecast, it is not of primary importance. The costs incurred at the inception of the project Rationale: While these costs are important, they are easier to determine since they occur immediately. The sunk costs incurred before the inception of the project Rationale: Sunk costs are not included in the project analysis.

Ch. 6 Three years ago, you purchased some 5-year MACRS equipment at a cost of $135,000. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. You sold the equipment today for $82,500. Which of these statements is correct if your tax rate is 23 percent and you ignore bonus depreciation? The tax due on the sale is $10,032.60. The book value today is $40,478. The book value today is $37,320. The taxable amount on the sale is $47,380. The tax refund from the sale is $13,219.40.

The tax due on the sale is $10,032.60. Book value = $135,000(1 − .20 − .32 − .192) Book value = $38,880 Taxable amount = $82,500 − 38,880 Taxable amount = $43,620 Tax = .23($43,620) Tax = $10,032.60

Ch. 6 The book value of an asset is primarily used to compute the: annual depreciation tax shield. amount of cash received from the sale of the asset. amount of tax saved annually due to the depreciation expense. amount of tax due on the sale of that asset. change in depreciation needed to reflect the market value of the asset.

amount of tax due on the sale of that asset.

Ch. 6 If sales are made on credit, net working capital will _____. decrease remain the same increase

increase

Ch. 6 If the inflation rate increases, the nominal rate of interest will ______. increase fluctuate randomly decrease remain unchanged

increase

Ch. 6 Synergy will ______ the sales of existing products. not affect increase reduce

increase

Ch. 6 If the tax rate increases, the value of the depreciation tax shield will ____. decrease increase not be affected

increase - Rationale: If the tax rate increases, the value of the depreciation tax shield will increase. The formula is Depreciation X Tax rate.

Ch. 6 As depreciation ______, operating cash flows will _______. Select all that apply. increase; decrease increase; increase decrease; decrease decrease; increase

increase; increase decrease; decrease

Ch. 6 The changes in a firm's future cash flows that are a direct consequence of accepting a project are called _____ cash flows. incremental stand-alone opportunity net present value erosion

incremental

Ch. 6 The equation for determining the real interest rate has the nominal interest rate in the _____ and the inflation rate in the ______. numerator; denominator denominator; numerator numerator; numerator denominator; denominator

numerator; denominator

Ch. 6 Allocated costs must be treated as relevant or incremental costs ___. whether or not the cost being allocated is affected by the new project only if the costs being allocated are affected by the proposed project if management so desires all the time

only if the costs being allocated are affected by the proposed project

Ch. 6 The most valuable investment given up if an alternative investment is chosen is referred to as a(n): salvage value expense. net working capital expense. sunk cost. opportunity cost. erosion cost.

opportunity cost.

Ch. 6 You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost. opportunity fixed incremental sunk relevant

sunk

Ch. 6 A cost that has already been paid, or a liability to pay that has already been incurred, is classified as a(n): salvage value expense. net working capital expense. sunk cost. opportunity cost. erosion cost.

sunk cost.

Ch. 6 When a firm evaluates a proposal to make an existing facility more cost effective, the cost savings must be large enough to justify: the necessary reduction in revenue the decrease in annual depreciation allowances the necessary capital expenditure

the necessary capital expenditure

Ch. 7 Variable costs typically ______ based on the level of production and are ______ per unit of output. vary; variable vary; constant fixed; variable fixed; constant

vary; constant

Ch. 7 An accounting break-even point of 1,000 means that ____. when the firm sells 1,000 units, profits will be equal to zero when the firm generates costs of $1,000, profits will be equal to zero the total fixed costs are equal to $1,000 the maximum capacity of the plant is 1,000 units

when the firm sells 1,000 units, profits will be equal to zero

Ch. 6 Sometimes when the low bidder wins the bid on a project, it is because they have underbid the project. In other words, the bid they have submitted probably won't even cover the costs of the project. When this happens, the low bidder is said to suffer from the: loser's blessing right to bear arms winner's curse cost of doing business

winner's curse

Ch. 7 The marketing department has projected that the firm's market share will be 15 percent of industry sales. Industry sales should total 30,000 units. If the price per unit is $150, the firm's expected sales revenue will be _____. $525,000 $675,000 $4,500,000 $3,825,000

$675,000 =.15*30,000*150

Ch. 9 What is the price of a stock if its dividend a year from now is expected to be $3.20, the discount rate is 9 percent, and the constant rate of growth is 5 percent? $83.50 $85 $78 $80

$80 Rationale: P0 = $3.20/(.09 - .05) = $80

Ch. 8 Consider a bond with a coupon rate of 8 percent that pays semiannual interest and matures in eight years. The market rate of return on bonds of this risk is currently 11 percent. What is the current value of a $1,000 face value bond? $830.58 $843.07 $893.30 $929.17 $854.08

$843.07 Bond value = [.08($1,000)/2]{[1 − 1/(1 + .11/2)^(8(2))]/(.11/2)} + $1,000/(1 + .11/2)^(8(2)) Bond value = $843.07

Ch. 6 What is the equation for determining the real interest rate? ((1+Nominal Interest Rate)/ (1+Inflation Rate)) - 1 ((1+Inflation Rate) / (1+Nominal Interest Rate)) - 1 (1+Nominal Interest Rate / (1+Inflation Rate) (Nominal Interest Rate / (InflationRate) - 1

((1+Nominal Interest Rate)/ (1+Inflation Rate)) - 1

Ch. 6 Which of the following correctly describes the relationship between depreciation, income, taxes, and investment cash flows? Depreciation expense has no effect on income, taxes, or cash flows. As depreciation expense increases, income, taxes, and investment cash flows will all increase. As depreciation expense increases, net income and taxes will decrease, while investment cash flows will increase. As depreciation expense increases, income, taxes, and investment cash flows will all decrease.

As depreciation expense increases, net income and taxes will decrease, while investment cash flows will increase.

Ch. 7 Which of the following defines the contribution margin? Ignore taxes. Contribution Margin = Sales - Fixed costs Contribution Margin = Sales + Capital gains Contribution Margin = Sales - Variable costs Contribution Margin = Sales + Interest income

Contribution Margin = Sales - Variable costs

Ch. 7 Modeling industry sales, forecasting probabilities of various market shares, and determining a distribution of sale prices are all used to specify a ___________ for annual revenue in a Monte Carlo simulation.

Distribution

Ch. 7 Which of the following formulas can be used to determine total revenue for a firm using Monte Carlo simulation? Market size × Market share × Price per unit Market size × Price per unit Market share × Price per unit Market size × Market share

Market size × Market share × Price per unit

Ch. 7 The approach that further attempts to model real world uncertainty by analyzing projects the way one might analyze gambling strategies is called: the gambler's approach. the blackjack approach. Monte Carlo simulation. scenario analysis. sensitivity analysis.

Monte Carlo simulation.

The Merriweather Co. just announced that it will pay a dividend next year of $1.60. The company will then increase its dividend by 10 percent per year for two years after which it will maintain a constant 2 percent dividend growth rate. What is one share worth today at a required rate of return of 14 percent? $21.60 $15.17 $23.14 $23.95 $24.79

P0 = $1.60/1.14 + [$1.60(1.10)]/1.14^2 + [$1.60(1.10^2)]/1.14^3 + {[$1.60(1.10^2)(1.02)]/(.14 − .02)}/1.14^3 P0 = $15.17

Ch. 8 Which of the following variables are required to calculate the value of a bond? Select all that apply Remaining life of bond Coupon rate Market yield Original issue price of bond

Remaining life of bond Coupon rate Market yield Original issue price of bond Rationale: The price of the bond at the time of issue is not relevant in calculating its current price. Only the remaining cash flows and the market interest rate are important.

For a firm with a constant payout ratio, the dividend growth rate can be estimated as: Payout ratio × Return on equity. Return on assets × Retention ratio. Return on equity × (1 + Retention ratio). Payout ratio × Return on assets. Return on retained earnings × Retention ratio.

Return on retained earnings × Retention ratio.

Ch. 9 Select all that apply In theory, which of the following models are mutually consistent and can be used to determine the value of a share of stock? The dividend discount model The comparables method the firm cash flow model the Baumol-Riggs model the bond valuation model

The dividend discount model The comparables method the firm cash flow model

Ch. 8 When the US government wants to borrow money for the long-term (more than one year) it issues: Select all that apply Treasury bonds Treasury stocks Treasury notes Treasury bills

Treasury bonds Treasury notes Treasury stocks Rationale: Treasury stock is not issued by the government. Treasury bills Rationale: Treasury bills have maturities of less than one year.

Ch. 6 True or false: NPV will be the same regardless of whether nominal or real cash flows are used. True False

True Rationale: As long as nominal cash flows are discounted at the nominal rate and real cash flows are discounted at the real rate, the NPV will be the same.

Ch. 6 Corporate finance emphasizes _____ while financial accounting emphasizes ______. cash flows; earnings earnings; cash flows earnings; earnings cash flows; cash flows

cash flows; earnings

Ch. 7 A key reason that makes NPV a superior capital budgeting technique is that it uses _____ instead of ______. profits; cash flows cash flows; profits revenues; costs

cash flows; profits

Ch. 9 If the discount rate increases, the PE ratio will ______. decrease remain the same increase

decrease

Ch. 9 Select all that apply The PE ratio is negatively related to the ____. market's pricing perceptions firm's growth opportunities firm's discount rate stock's risk

firm's discount rate stock's risk market's pricing perceptions Rationale: All else equal, PE ratio is higher for firms that the market values more. firm's growth opportunities Rationale: PE ratio is often positively related to growth opportunities.

Ch. 8 In an inflationary environment, the nominal rate will be _________ the real rate. equal to lower than greater than

greater than Rationale: In an inflationary environment, the nominal rate will be greater than the real rate, because the nominal rate adds the effects of inflation to the real rate.

Ch. 9 In a stock price quote, the number of shares outstanding multiplied by the current price per share is known as the ____. bid price ask price market cap day's range

market cap

Ch. 9 Enterprise value is equal to the market value of a firm's equity plus the market value of a firm's debt _____. plus cash minus cash minus current liabilities plus taxes

minus cash Rationale: Enterprise value is equal to the market value of a firm's equity plus the market value of a firm's debt minus cash.

Ch. 9 A firm with growth opportunities should sell for ____ a firm without growth opportunities. the same price as less than more than

more than Rationale: Higher growth opportunities create higher value today.

Ch. 9 Comparable firms are assumed to have similar: accounting systems costs multiples

multiples

Ch. 7 Contribution margin refers to the contribution made by each additional unit sold to ____. taxes pretax sales pretax profits dividends

pretax profits

Ch. 7 Corporate managers care about the break-even point because it indicates: the level of sales at which depreciation expense will be fully written off the level to which sales can fall before a project will start losing money the level of sales at which the firm can enjoy maximum tax benefits the level of sales they will need to make to enjoy leadership in the industry

the level to which sales can fall before a project will start losing money

If the issuer of a stock receives the proceeds from a sale of that issuer's stock, then the sale: had to have occurred on the floor of an exchange. was a secondary market transaction. was transacted on the NYSE. was conducted in the primary market. had to have been a limit order.

was conducted in the primary market.

Ch. 7 Adept Co. is analyzing a proposed project with annual sales of 5,200 units, ± 6 percent; variable costs per unit of $11, ± 3 percent; fixed costs of $17,500 per year, ± 3 percent; and a sales price of $22 per unit, ± 2 percent. The annual depreciation expense is $4,200. What is the annual sales revenue under the optimistic case scenario? $105,385 $116,688 $127,474 $123,689 $109,408

$123,689 Sales revenueOptimistic = 5,200(1.06)($22)(1.02) Sales revenueOptimistic = $123,689

Unique Stores common stock pays a constant annual dividend of $1.75 a share. What is the value of this stock at a discount rate of 13.25 percent? $12.50 $13.33 $13.21 $12.88 $14.18

$13.21 P0 = $1.75/.1325 P0 = $13.21

Martin's Yachts is expected to pay annual dividends of $1.40, $1.75, and $2.00 a share over the next three years, respectively. After that, the dividend is expected to remain constant. What is the current value per share at a discount rate of 14 percent? $12.22 $13.57 $13.08 $12.82 $13.39

$13.57 P0 = $1.40/1.14 + $1.75/1.14^2 + ($2.00/.14)/1.14^2 P0 = $13.57

Ch. 7 In general, what is the decision rule for evaluating two mutually exclusive projects using NPV? Accept both projects if the NPV of both projects is greater than zero. Accept the project that has the lower positive NPV. Mutually exclusive projects cannot be evaluated using NPV. Accept the project that has the higher positive NPV.

Accept the project that has the higher positive NPV. Accept both projects if the NPV of both projects is greater than zero. Rationale: Mutually exclusive means that we can accept only one project. Accept the project that has the lower positive NPV. Rationale: Accept the project that has the highest NPV. Mutually exclusive projects cannot be evaluated using NPV. Rationale: Mutually exclusive projects can (and should) be evaluated using NPV.

Ch. 8 What is a discount bond? Discount bonds are bonds with short maturities. Discount bonds are bonds that a distressed corporation sells at fire sale prices to raise emergency funds. Discount bonds are junk bonds that are rated below investment grade. Discount bonds are bonds that sell for less than the face value.

Discount bonds are bonds that sell for less than the face value. Rationale: Discount bonds are bonds that sell for less than the face value. This will happen if market interest rates are higher than the coupon rate.

Ch. 9 Which one of the following represents valuation of stock using a zero-growth model? Dividend/Discount rate (Dividend)Discount rate Discount rate/Dividend Dividend × Discount rate

Dividend/Discount rate

Ch. 6 Which one of these is an example of erosion that should be included in project analysis? The anticipated loss of current sales when a new product is launched. The expected decline in sales as the market for a product becomes saturated. The reduction in sales that occurs when a competitor introduces a new product. The sudden loss of sales due to a major employer in your community implementing massive layoffs. The reduction in sales price that will most likely be required to sell inventory that has aged.

The anticipated loss of current sales when a new product is launched.

Ch. 8 Which two prices can be found in the Wall Street Journal's daily Treasury bond listing? Select all that apply The call price The average daily trade price The asked price The bid price

The asked price The bid price

Ch. 6 Which of the following is (are) true about allocated costs? select all that apply These costs are allocated to more than one project. These costs are classified as irrelevant costs. These costs are classified as sunk costs. These costs benefit more than one project.

These costs are allocated to more than one project. These costs benefit more than one project. These costs are classified as irrelevant costs. Rationale: These costs are relevant to the project only if they would not occur if the project were rejected. These costs are classified as sunk costs. Rationale: They are not necessarily sunk costs, but costs that benefit more than one project.

Ch. 6 Allocated costs arise when a specific expenditure ____. is higher than originally estimated benefits more than one project or division exceeds its budgeted amount is difficult to estimate

benefits more than one project or division

Ch. 7 Sensitivity analysis is also known as ____. Select all that apply break-even analysis simulation analysis bop (best, optimistic and pessimistic) analysis profit and loss analysis what-if analysis

bop (best, optimistic and pessimistic) analysis what-if analysis

Ch. 7 An analysis of the relationship between the sales volume and accounting profitability is called _____ analysis. forecasting scenario sensitivity simulation break-even

break-even

The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield. current total dividend capital gains earnings

capital gains

Enterprise value equals the: combined market value of debt and equity minus excess cash. market value of equity minus the market value of debt plus excess cash. market value of debt plus the book value of equity minus excess cash. combined market value of debt and equity. combined book value of debt and equity minus excess cash.

combined market value of debt and equity minus excess cash.

Ch. 8 A limitation of bond ratings is that they ____. focus on both default risk and interest rate risk change every day are generated by the issuing corporations, not an external independent agency focus exclusively on default risk

focus exclusively on default risk focus on both default risk and interest rate risk Rationale: Bond ratings focus only on default risk; they do not incorporate interest rate risk. change every day Rationale: Bond ratings change only when the firm's circumstances change such that there is an impact on default risk. are generated by the issuing corporations, not an external independent agency Rationale: Bond ratings are generated by external independent agencies.

Ch. 6 Sunk costs are costs that ____. will not contribute to profits in the long run even if a project is accepted cannot be measured have already occurred and are not affected by accepting or rejecting a project relate to other projects of the firm

have already occurred and are not affected by accepting or rejecting a project

Ch. 9 Higher growth opportunities create ______ value today. no higher lower

higher

Ch. 9 Initial public offerings of stock occur in the ____ market. futures secondary commodities primary

primary

Ch. 9 For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed. True False

False Rationale: Neither dividends nor capital gains are fixed or guaranteed.

Ch. 8 The Fisher effect hypothesizes that the real rate of return ____. increases in response to increases in inflation decreases in response to increases in inflation is invariant to the rate of inflation

is invariant to the rate of inflation Rationale: According to the Fisher effect, the real rate is not affected by inflation.

Ch. 8 The U.S. Treasuries market is the ______ security market in the world (based on trading volume). largest smallest

largest

Ch. 8 A $1,000 face value coupon bond will pay 5 percent interest annually for 12 years. What is the percentage change in the price of this bond if the market yield rises to 6 percent from the current level of 5.5 percent? −5.28 percent −4.26 percent −2.38 percent 1.13 percent 4.13 percent

−4.26 percent Price5.5% = .05($1,000)[(1 − 1/1.055^12)/.055] + $1,000/1.055^12 Price5.5% = $956.91 Price6% = .05($1,000)[(1 − 1/1.06^12)/.06] + $1,000/1.06^12 Price6% = $916.16 %Δ in price = ($916.16 − 956.91)/$956.91 %Δ in price = −.0426, or − 4.26%

Ch. 6 Ernie's Electrical is evaluating a project which will increase annual sales by $50,000 and costs by $30,000. The project has an initial asset cost of $150,000 that will be depreciated straight-line to a zero book value over the 10-year life of the project. Ignore bonus depreciation. The applicable tax rate is 25 percent. What is the annual operating cash flow for this project? $19,250 $15,500 $21,350 $17,900 $18,750

$18,750 OCF = ($50,000 − 30,000)(1 − .25) + ($150,000/10)(.25) OCF = $18,750

Ch. 8 What is the value of a 20-year, zero-coupon bond with a face value of $1,000 when the market required rate of return is 9.6 percent, compounded semiannually? $153.30 $192.40 $195.26 $168.31 $172.19

$153.30 Bond value = $1,000/[1 + (.096/2)]^(20(2)) Bond value = $153.30

Ch. 7 You are in the business of manufacturing watches. The parts for each of these watches costs an average of $25. Your period costs for the month are $3,000. What will be the monthly total variable costs if you manufacture 100 watches? $5,500 $25 $2,500 -$500

$2,500 =25*100

Ch. 6 The Boat Works currently produces boat sails and is considering expanding its operations to include awnings. The expansion would require the use of land the firm purchased three years ago at a cost of $197,000 that is currently valued at $209,500. The expansion could use some equipment that is currently sitting idle if $7,500 of modifications were made to it. The equipment originally cost $387,500 five years ago, has a current book value of $132,700, and a current market value of $139,000. Other capital purchases costing $520,000 will also be required. What is the value of the opportunity costs that should be included in the initial cash outflow for the expansion project? $425,000 $485,000 $329,700 $348,500 $537,200

$348,500 Opportunity cost = $209,500 + 139,000 Opportunity cost = $348,500

Ch. 7 What is the contribution margin if the sales price per unit is $15,000, variable cost per unit is $10,000 and fixed costs are $2,000? Ignore taxes. $3,000 $5,000 $13,000 $25,000

$5,000 =15,000 - 10,000

Ch. 6 What is the depreciation tax shield if EBIT is $600, depreciation is $1,800, and the tax rate is 30 percent? $540 $200 $360 $180

$540 Rationale: Tax shield = $1,800 × .3 = $540

Ch. 6 For this year, Jessica's has sales of $439,000, depreciation of $32,000, and net working capital of $56,000. The firm has a tax rate of 23 percent and a profit margin of 6 percent. The firm has no interest expense. What is the amount of the operating cash flow? $49,384 $52,616 $54,980 $58,340 $114,340

$58,340 OCF = $439,000(.06) + $32,000 OCF = $58,340

Ch. 6 Northern Enterprises just purchased $1,900 of fixed assets that are classified as 3-year MACRS property. The MACRS rates are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent for Years 1 to 4, respectively. What is the amount of the depreciation expense for Year 2? Ignore bonus depreciation. $562.93 $633.27 $719.67 $844.36 $1,477.63

$844.36 DepreciationYear 2 = $1,900(.4444) DepreciationYear 2 = $844.36

Ch. 7 A firm has a 50 percent probability of obtaining regulatory approval to enter an overseas market. If it enters that market, there is a 20 percent probability of successfully gaining significant market share. What is the probability of successfully entering the overseas market? 1% 10% 20% 8%

10% =.5 * .2

Ch. 8 Which one of these bonds is the most interest-rate sensitive? 5-year zero coupon bond 10-year zero coupon bond 5-year, 6 percent, annual coupon bond 10-year, 6 percent, semiannual coupon bond 10-year, 6 percent, annual coupon bond

10-year zero coupon bond

Ch. 8 The bonds issued by Manson and Son bear a coupon of 6 percent, payable semiannually. The bond matures in 15 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to maturity? 5.87 percent 5.97 percent 6.00 percent 6.09 percent 6.17 percent

6.00 percent Since the bond is selling at par, the yield to maturity will equal the coupon rate of 6 percent.

Ch. 8 A corporate bond has a coupon of 7.5 percent and pays interest annually. The face value is $1,000 and the current market price is $1,108.15. The bond matures in 14 years. What is the yield to maturity? 6.31 percent 7.82 percent 8.00 percent 8.04 percent 8.12 percent

6.31 percent $1,108.15 = [.075($1,000)]{[1 − 1/(1 + YTM)^14]/YTM} + $1,000/(1 + YTM)^14 YTM = 6.31%

Ch. 8 Currently, you own a municipal bond with a yield to maturity of 4.86 percent. If you are in the 24 percent tax bracket, what is your equivalent corporate tax rate? Ignore state taxes. 7.17 percent 6.61 percent 6.39 percent 6.59 percent 6.82 percent

6.39 percent T* = .0486/(1 − .24) T* = .0639, or 6.39%

Ch. 9 Which one of the following is true about dividend growth patterns? Dividends may grow at a constant rate. Dividends always grow at a differential rate. Dividends never grow. Dividends always grow at a constant rate.

Dividends may grow at a constant rate.

Ch. 8 Which six factors determine the yield on a bond? Select all that apply Expected future inflation Liquidity Default risk Real rate of return Interest rate risk Voting rights Taxability

Expected future inflation Liquidity Default risk Real rate of return Interest rate risk Taxability

Ch. 8 True or false: In an upward-sloping term structure, the long-term rates will be lower than the short-term rates. True False

False

Ch. 8 True or false: A bond's value is not affected by changes in the market rate of interest. True False

False Rationale: Bond prices are inversely related to interest rates.

Ch. 8 True or false: The inflation premium will be higher if the rate of inflation is low. True False

False Rationale: The inflation premium will be lower if the rate of inflation is low.

Ch. 9 True or false: A market order allows the investor to choose the price they will transact at. True False

False Rationale: The stock will be sold at or near the current market price.

Ch. 8 What are three important features of Treasury notes and bonds? Select all that apply Highly liquid Tax-free Default-free Taxable

Highly liquid Default-free Taxable

Ch. 8 What are the cash flows involved in the purchase of a 5-year zero-coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent. Pay $800 today and receive $1,250 at the end of five years Pay $800 today and receive $1,000 at the end of 5 years Pay $800 today and receive $800 plus $250 at the end of 5 years Pay $800 today, receive $50 every year for 5 years, and receive $1,000 at the end of 5 years

Pay $800 today and receive $1,000 at the end of 5 years Rationale: Pay $800 today and receive $1,000 at the end of 5 years Zero coupon bonds do not pay periodic interest.

Ch. 8 What is the bid price? The bid is the price at which a bondholder can buy securities. The bid is the price at which the last bond traded. The bid is the price at which a dealer is willing to sell securities. The bid is the price at which a dealer is willing to buy securities.

The bid is the price at which a dealer is willing to buy securities.

Ch. 8 What key assumption makes the promised yield different from the expected return? The promised yield assumes the bond is trading at par. The promised yield assumes no default risk. The promised yield assumes default risk. The promised yield assumes that bond prices have not changed since the date of issue.

The promised yield assumes no default risk. The promised yield assumes the bond is trading at par. Rationale: Neither yield assumes the bond trades at par; both use the market price in the calculation. The promised yield assumes default risk. Rationale: The expected return adjusts for default risk; the promised yield does not. The promised yield assumes that bond prices have not changed since the date of issue. Rationale: Neither yield makes this assumption.

Ch. 8 How is the real rate of return different from the nominal rate of return? The real rate of return is the expected return while the nominal return is the actual realized return. The real rate of return adds inflation to the nominal rate. There is no difference between the real and nominal rates of return. The real rate of return adjusts the nominal rate to remove the effects of inflation.

The real rate of return adjusts the nominal rate to remove the effects of inflation.

Ch. 7 Which of the following pieces of information are required in order to compute NPV? Select all that apply The time horizon of the project Projected future debt costs The discount rate Projected future cash flows

The time horizon of the project The discount rate Projected future cash flows

Ch. 7 Which of the following is an example of a timing option? Waiting to build a convenience store in an area where several housing developments have been proposed. Disposing of a piece of property in an area where development prospects have failed to materialize. Building a gas station and waiting to see if that gas station is successful before building additional stations.

Waiting to build a convenience store in an area where several housing developments have been proposed. Disposing of a piece of property in an area where development prospects have failed to materialize. Rationale: This is an example of an option to abandon. Building a gas station and waiting to see if that gas station is successful before building additional stations. Rationale: This is an example of an option to expand.

Ch. 7 Under which of the following scenarios will an option to abandon be a valuable option? Select all that apply When a project is guaranteed to be a success When there is the possibility of a negative future outcome When future market conditions are unpredictable When a project's assets can be quickly liquidated at fair values

When there is the possibility of a negative future outcome When future market conditions are unpredictable When a project's assets can be quickly liquidated at fair values

Ch. 9 Forecasting requires: absolutes assumptions

assumptions

Ch. 8 A corporate bond's yield to maturity ____. Select all that apply can be greater than, equal to, or less than the bond's coupon rate remains fixed over the life of the bond is always equal to the bond's coupon rate changes over time

can be greater than, equal to, or less than the bond's coupon rate changes over time remains fixed over the life of the bond Rationale: Yield to maturity changes as the market rate for bonds with similar features changes. is always equal to the bond's coupon rate Rationale: The YTM and the coupon rate will be equal only if a bond sells for its par value.

Ch. 8 Interest rate risk _____ as the time to maturity decreases and ____ as the coupon rate decreases. decreases; increases decreases; decreases increases; increases increases; decreases increases; is unaffected

decreases; increases

Ch. 6 The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the: aftertax depreciation savings. depreciable basis. depreciation tax shield. operating cash flow. aftertax salvage value.

depreciation tax shield.

Ch. 8 A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond. par discount premium zero coupon floating rate

discount

Ch. 8 The market price of a bond increases when the: face value decreases. coupon rate decreases. discount rate decreases. par value decreases. coupon is paid annually rather than semiannually.

discount rate decreases.

The total return on a stock is equal to the: dividend yield minus the capital gains yield. dividend growth rate minus the dividend yield. dividend yield plus the dividend growth rate. growth rate of the dividends. dividend divided by the sum of the dividend yield and capital gains yield.

dividend yield plus the dividend growth rate.

Ch. 8 A market is considered transparent if ____. there are no transaction costs there are intermediaries its prices and trading volume are easily observed it is not controlled by the government

its prices and trading volume are easily observed there are no transaction costs Rationale: A market is considered transparent if its prices and trading volumes are easily observed. There are transaction costs in most markets, though they may not be transparent. there are intermediaries Rationale: A market is considered transparent if its prices and trading volumes are easily observed. There are intermediaries in markets without much transparency. it is not controlled by the government Rationale: A market is considered transparent if its prices and trading volumes are easily observed. Whether or not it is controlled by government is not a factor.

Ch. 9 In an inflationary environment, reported earnings are _____ if a firm uses LIFO rather than FIFO accounting. the same higher lower

lower

As a general rule, when estimating equivalent annual costs, ________ cash flows should be used. real nominal

real -Rationale: As a general rule, when estimating equivalent annual costs, real cash flows should be used because the projects have different lives and inflation could be different in the later periods during which the shorter project is over.

Ch. 9 Valuing companies using the comparables approach is similar to valuation in __________ ____________.

real estate

Ch. 8 If you own corporate bonds, you will be concerned about interest rate risk as it affects ____. the par value of the bonds the market price of the bonds the time to maturity coupon rates

the market price of the bonds Rationale: If you own corporate bonds, you will be concerned about interest rate risk as it affects the market price of the bond. Bonds with more interest rate risk (longer time to maturity and lower coupon rates) have larger price changes when market rates change. Time to maturity is set when the bond is issued, and decreases as time passes.

The underlying assumption of the dividend growth model is that a stock is worth: the same amount to every investor regardless of their desired rate of return. the present value of the future income that the stock is expected to generate. an amount computed as the next annual dividend divided by the market rate of return. the same amount as any other stock that pays the same current dividend and has the same required rate of return. an amount computed as the next annual dividend divided by the required rate of return.

the present value of the future income that the stock is expected to generate.

Ch. 6 When using nominal cash flows, the NPV will be _____ when using real cash flows. the same as lower than higher than

the same as

Ch. 6 Schroeder Electronics is considering a project which will require the purchase of $5.68 million in new equipment that will be depreciated straight-line to a zero book value over the 5-year life of the project. Ignore bonus depreciation. The firm requires a rate of return of 12 percent and the tax rate is 21 percent. What is the value of the depreciation tax shield in Year 5 of the project? $225,608 $228,406 $334,800 $238,560 $0

$238,560 Depreciation tax shieldYear 5 = $5,680,000/5(.21) Depreciation tax shieldYear 5 = $238,560

Ch. 6 Foamsoft currently sells 16,850 pairs of shoes annually at an average price of $79 a pair. It is considering adding a new line of shoes that would sell for $49 a pair. The company estimates it can sell 5,000 pairs of the lower-priced shoes annually but will sell 1,250 less pairs of the higher-priced shoes each year by doing so. What is the estimated value of the annual erosion cost that should be charged to the lower-priced shoe project? $138,750 $146,250 $98,750 $52,000 $123,240

$98,750 Erosion cost = $79(1,250) Erosion cost = $98,750

Ch. 7 A proposed 1-year project has a contribution margin of $5, fixed costs of $12,000, variable costs per unit of $12, depreciation of $30,000, an EAC of $41,185 and a tax rate of 21 percent. What is the present value break-even point in units? 12,458 9,489 11,232 10,603 9,617

11,232 PV break-even point = [$41,185 + $12,000(1 − .21) − $30,000(.21)]/[$5(1 − .21)] PV break-even point = 11,232 units

Rudy's stock is currently valued at $28.40 a share. The firm had earnings per share of $1.86 last year and projects earnings of $2.09 a share for next year. What is the trailing twelve month price-earnings ratio? 13.59 14.38 12.84 16.67 15.27

15.27 PETTM = $28.40/$1.86 PETTM = 15.27

Ch. 7 A firm has a 10% probability of obtaining regulatory approval to enter an overseas market. If it enters that market, there is a 30% probability of successfully gaining significant market share. What is the probability of successfully entering the overseas market? 10% 3% 8% 5%

3% =.3* .1

Ch. 8 The Lo Sun Corporation offers a bond with a current market price of $1,029.75, a coupon rate of 8 percent, and a yield to maturity of 7.52 percent. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures? 8.5 years 8.0 years 9.0 years 17 years 16 years

8.5 years $1,029.75 = (.08/2)($1,000){[1 − 1/(1 + .0752/2)^(t(2))]/(.0752/2)} + $1,000/(1 + .0752/2)^(t(2)) t = 17 semiannual periods, or 8.5 years

Ch. 8 True or false: Interest earned on Treasury notes and bonds is taxable True False

True

Ch. 7 Which of the following statements is true in the context of comparing accounting profit and present value break-even point? The superiority of a particular technique will vary from firm to firm depending on the unique circumstances of the firm. Present value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect. Accounting profit is superior because the financial statements report profits and not present value. Both techniques are equally good.

Present value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect. The superiority of a particular technique will vary from firm to firm depending on the unique circumstances of the firm. Rationale: Present value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect. Accounting profit is superior because the financial statements report profits and not present value. Rationale: Present value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect. Profits are accrual based, so they do not reflect cash flows. Both techniques are equally good. Rationale: Present value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect.

Ch. 8 The interest paid on any municipal bond is: free of default risk. subject to default risk and is exempt from state income taxation. free of both default risk and federal income taxation. exempt from federal income taxation and may or may not be exempt from state taxation. taxable at the federal level and tax exempt at the state and local level.

exempt from federal income taxation and may or may not be exempt from state taxation.

Ch. 8 In general, a corporate bond's coupon rate ____, is fixed until the bond matures decreases as a bond nears maturity changes in sync with market interest rates changes every year

is fixed until the bond matures

Ch. 8 The federal government can raise money from financial markets to finance its deficits by ___. raising taxes requesting foreign aid issuing stocks issuing bonds

issuing bonds raising taxes Rationale: Taxes can be used to finance deficits, but they are not directly linked to financial markets. requesting foreign aid Rationale: This would not be a financial market transaction. issuing stocks Rationale: The federal government cannot issue stock.

Ch. 8 Bond ratings are based on the probability of default risk, which is the risk that ___. inflation may increase in the short term the bond's interest rates may change unexpectedly the bond's issuer may not be able make all the required payments the bond's maturity may change

the bond's issuer may not be able make all the required payments inflation may increase in the short term Rationale: Bond ratings are based on default risk. the bond's interest rates may change unexpectedly Rationale: This is interest rate risk. Bond ratings are based on default risk. the bond's maturity may change Rationale: A bond's maturity is fixed. Bond ratings are based on default risk.

Ch. 7 The contribution margin per unit will increase if ____. both the sales price per unit and the variable cost per unit increase the sales price per unit decreases while the variable cost per unit increases the sales price per unit increases while the variable cost per unit decreases fixed costs decrease

the sales price per unit increases while the variable cost per unit decreases

Ch. 7 A firm will start generating positive profits when ___. total revenue exceeds the total fixed costs total variable costs exceed total fixed costs the total number of units sold exceeds the accounting break-even point total revenue exceeds the initial investment required to general that revenue

the total number of units sold exceeds the accounting break-even point

Ch. 9 A designated market maker, or DMM, continually posts and updates bid and ask prices as he or she maintains a ____ market. one-sided three-sided two-sided four-sided

two-sided Rationale: A designated market maker, or DMM, continually posts and updates bid and ask prices as he or she maintains a two-sided market, meaning he or she is willing to buy or sell to keep the market liquid.

Ch. 8 A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond. Treasury municipal floating-rate junk zero coupon

zero coupon

Ch. 7 Which of the following is an example of an option to abandon? Withdrawing an offer to take over a firm Ignoring sunk costs when determining the cash flows of a potential project Stopping production of a product if sales fall below a certain level Retaining a project for its planned duration

Stopping production of a product if sales fall below a certain level Withdrawing an offer to take over a firm Rationale: Withdrawing an offer to take over a firm is not an option to abandon because it is not an existing project of the company (it hasn't been bought yet). Ignoring sunk costs when determining the cash flows of a potential project Rationale: Sunk costs are always ignored when calculating cash flows of a potential project. Retaining a project for its planned duration Rationale: The option to abandon is the opposite of retaining a project for its planned duration. If cash flows don't prove good enough, the option to abandon keeps the company from losing further money.

Ch. 8 What is a corporate bond's yield to maturity (YTM)? Select all that apply YTM is the yield that will be earned if the bond is sold immediately in the market. YTM is the expected return for an investor who buys the bond today and holds it to maturity. YTM is another term for the bond's coupon rate. YTM is the prevailing market interest rate for bonds with similar features.

YTM is the expected return for an investor who buys the bond today and holds it to maturity. YTM is the prevailing market interest rate for bonds with similar features. YTM is the yield that will be earned if the bond is sold immediately in the market. Rationale: YTM is the prevailing market interest rate for bonds with similar features. It is also the expected return for an investor who buys the bond and holds it to maturity. Investors who sell the bond before maturity may earn a different rate. YTM is another term for the bond's coupon rate. Rationale: YTM is the prevailing market interest rate for bonds with similar features. It is also the expected return for an investor who buys the bond and holds it to maturity. The coupon rate determines the periodic interest payments made to investors.

Ch. 6 It is appropriate to use the approximate formula for estimating the real interest rate when: the government approves such approximations the interest rate and inflation rate are high the interest rate and inflation rate are very volatile the interest rate and inflation rate are low

the interest rate and inflation rate are low the government approves such approximations Rationale: It is appropriate to use the approximate formula for estimating the real interest rate when the interest rate and the inflation rate are low. the interest rate and inflation rate are high Rationale: It is appropriate to use the approximate formula for estimating the real interest rate when the interest rate and the inflation rate are low. When they are high, the multiplicative number in the calculation of the precise formula is high, so the approximation is further from actual. the interest rate and inflation rate are very volatile Rationale: It is appropriate to use the approximate formula for estimating the real interest rate when the interest rate and the inflation rate are low.

Ch. 7 Mining operations almost always provide: negative NPV projects positive NPV projects timing options

timing options

Ch. 9 A calculated stock price that discounts earnings instead of dividends will usually be: too low too high more accurate

too high Rationale: A calculated stock price that discounts earnings instead of dividends will usually be too high, because some earnings must be retained to generate growth.

Ch. 7 Wilson's Meats has fixed costs of $.60 for every pound of meat it sells given a sales level of 32,500 pounds. It charges $3.89 per pound while the variable cost per pound is $2.99. If depreciation is $16,400, what is the accounting profit break-even point? 31,948 pounds 32,467 pounds 39,889 pounds 42,650 pounds 37,338 pounds

39,889 pounds Accounting break-even point = [$.60(32,500) + $16,400]/($3.89 − 2.99) Accounting break-even point = 39,889 pounds

Ch. 7 A project requires an initial fixed asset investment of $148,000, has annual fixed costs of $39,800, a contribution margin of $14.62, a tax rate of 21 percent, a discount rate of 15 percent, and straight-line depreciation over the project's 3-year life. The assets will be worthless at the end of the project. What is the present value break-even point in units per year? 6,086 7,613 7,504 7,438 7,911

7,438 EAC = $148,000/[(1 − 1/1.15^3)/.15] EAC = $64,820.59 Depreciation = $148,000/3 Depreciation = $49,333.33 PV break-even point = [$64,820.59 + $39,800(1 − .21) −$49,333.33(.21)]/[$14.62(1 − .21)] PV break-even point = 7,438 units per year

The common stock of Fine China sells for $38.42 a share. The stock is expected to pay an annual dividend of $1.80 next year and increase that amount by 4 percent annually thereafter. What is the market rate of return on this stock? 9.04 percent 9.13 percent 8.69 percent 9.22 percent 8.36 percent

8.69 percent R = $1.80/$38.42 + .04 R = .0869, or 8.69%

Ch. 7 What is the basic output of a Monte Carlo simulation? A probability for each future year A net present value A single cash flow for each future year A distribution of cash flow for each future year

A distribution of cash flow for each future year A probability for each future year Rationale: The basic output of a Monte Carlo simulation is a distribution of future cash flows. The probabilities are inputs, based on the distribution the user assumes for each input. A net present value Rationale: The basic output of a Monte Carlo simulation is a distribution of future cash flows. The expected cash flows are used to calculate the expected NPV. A single cash flow for each future year Rationale: The basic output of a Monte Carlo simulation is a distribution of future cash flows. A single cash flow for each future year is generated in the initial project cash flow estimates.

Ch. 7 What is a real option? The value of stock options awarded to project managers. The NPV of a project under conditions of absolute certainty using the risk-free rate as the discount rate. The NPV of a capital budgeting project stated in real dollars. A valuable managerial option that can affect both the future cash flows and feasibility of a project.

A valuable managerial option that can affect both the future cash flows and feasibility of a project.

Ch. 9 Select all that apply The price earnings (PE) ratio is a function of which three factors? Accounting practices Years of existence Risk level Growth opportunities

Accounting practices Risk level Growth opportunities

Ch. 8 As an investor in the bond market, why should you be concerned about changes in interest rates? Changes in interest rates cause changes in bond prices. You shouldn't be as interest rate changes do not affect bonds. Changes in interest rates change the interest payments on fixed coupon bonds. Changes in interest rates lead to changes in the par value of a bond.

Changes in interest rates cause changes in bond prices. You shouldn't be as interest rate changes do not affect bonds. Rationale: Changes in interest rates cause changes in bond prices, so you should consider interest rate risk in bond investing. Changes in interest rates change the interest payments on fixed coupon bonds. Rationale: Changes in interest rates cause changes in bond prices; fixed coupon bond rate is set when the bond is issued and does not change during the life of the bond. Changes in interest rates lead to changes in the par value of a bond. Rationale: Changes in interest rates cause changes in bond prices; par value is set when the bond is issued and does not change during the life of the bond.

Ch. 8 As an investor in the bond market, why should you be concerned about changes in interest rates? You shouldn't be as interest rate changes do not affect bonds. Changes in interest rates lead to changes in the par value of a bond. Changes in interest rates cause changes in bond prices. Changes in interest rates change the interest payments on fixed coupon bonds.

Changes in interest rates cause changes in bond prices. You shouldn't be as interest rate changes do not affect bonds. Rationale: Changes in interest rates cause changes in bond prices, so you should consider interest rate risk in bond investing. Changes in interest rates lead to changes in the par value of a bond. Rationale: Changes in interest rates cause changes in bond prices; par value is set when the bond is issued and does not change during the life of the bond. Changes in interest rates change the interest payments on fixed coupon bonds. Rationale: Changes in interest rates cause changes in bond prices; fixed coupon bond rate is set when the bond is issued and does not change during the life of the bond.

Ch. 9 Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ____. speculator retailer broker dealer

dealer

Ch. 9 Select all that apply Investors select a stock based on the cash they expect to receive from that stock. That cash comes in the form of ____. commissions interest payments dividends the future sales price

dividends the future sales price

Ch. 9 The constant-growth model assumes that _________. dividends change at a constant rate stock prices remain constant debt remains constant

dividends change at a constant rate

Ch. 9 Most trades on the NYSE occur ____. at DMM posts by brokers electronically without human intervention on the NASDAQ system physically on the floor of the exchange

electronically without human intervention

Ch. 8 If a $1,000 par value bond is trading at a premium, the bond is: trading for more than $1,000 in the market trading for less than $1,000 in the market trading for $1,000 in the market not actively traded due to its high price

trading for more than $1,000 in the market Rationale: If a $1,000 par value bond is trading at a premium, the bond is trading for more than $1,000 in the market. A bond that is trading for less than $1000 is called a discount bond.

Ch. 7 Stage 2 of a decision tree shows that if a project is successful, the payoff will be $53,000 with a 2/3 chance of occurrence. There is also the 1/3 chance of a −$24,000 payoff. The cost of getting to Stage 2 (1 year out) is $24,000. The cost of capital is 15 percent. What is the NPV of the project at Stage 1? −$349.16 −$231.88 $108.17 $133.33 $147.59

−$231.88 NPV = −$24,000 + {[2/3($53,000) + 1/3(−$24,000)]/1.15} NPV = −$231.88

Ch. 7 A distribution of cash flow for each future year are ______ of a Monte Carlo simulation and a probability for each future year are ______. inputs; inputs outputs; outputs inputs; outputs outputs; inputs

outputs; inputs

Ch. 7 The ______ break-even point adjusts for time value while the ______ break-even point does not. present value; accounting profits accounting profits; present value

present value; accounting profits

Ch. 9 The current price per share divided by last year's earnings per share gives you: 1+r price earnings ratio market to book ratio price to cash flow

price earnings ratio