Corp Fin Final
Which of the following investment criteria does not take the time value of money into consideration? A)Book rate of return B)Net present value C)Profitability index D)Internal rate of return for borrowing projects
A)Book rate of return
What is the present value of the following payment stream, discounted at 8% annually: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end of year 3? A) $5,022.11 B) $5,144.03 C) $5,423.87 D) $5,520.00
A) $5,022.11
What is the rate of return for an investor who pays $1,054.47 for a three-year bond (par value $1,000) with a 7% coupon and sells the bond one year later for $1,037.19? A) 5.00% B) 5.33% C) 6.46% D) 7.00%
A) 5.00%
Which item indicates a flaw in the efficient market hypothesis? A) A bubble in asset prices B) Inflation fears increase interest rates C) Insiders earn excess returns D) Market indexes drop when GDP falls
A) A bubble in asset prices
What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate? A) The price of the bond increases. B) The coupon rate of the bond increases. C) The par value of the bond decreases. D) The coupon payments will be adjusted to the new discount rate.
A) The price of the bond increases.
The NPV break-even level of sales will be higher than the accounting break-even level. A)True B)False
A) True
Which of the following are real assets? a. A patent. b. A share of stock issued by Bank of New York. c. A blast furnace in a steel-making factory. d. A mortgage loan taken out to help pay for a new home. e. After a successful advertising campaign, potential customers' belief that your brand of potato chips is extra crispy. f. An IOU ("I owe you") from your brother-in-law. A) a, c and e B) a, b, c and d C) a, c, d and e D) b, c and f
A) a, c and e
Which of the following statements about bonds are incorrect? a. Bond prices are subject to interest rate risk. b. Long-term bonds exhibit less interest rate risk than short-term bonds. c. Bond prices rise when market interest rates fall and fall when market rates rise. d. Because present values are lower when discount rates are higher, price and yield to maturity vary inversely. A) a. B) b. C) c. D) d.
A) a.
Which of the following statements regarding accounting income and cash flow are incorrect? a. Accounting income is the same as cash flow. b. Investment in fixed assets is not deducted immediately from income but is instead spread over the expected life of the equipment. c. The accountant records revenues when the sale is made, rather than when the customer actually pays the bill, and at the same time deducts the production costs even though those costs may have been incurred earlier. A) a. B) b. C) c. D) a and b.
A) a.
The minimum, acceptable rate of return on corporate investments is determined by: A) investors in financial markets. B) information from accounting statements. C) the financial manager. D) the senior managers of the company.
A) investors in financial markets.
Which of these statements is correct? Free cash flow A) is available to be paid out to investors as interest or dividends, or to repay debt or buy back stock. B) is positive if the company is issuing debt or stock. C) is equal to net income. D) is another term for retained earnings.
A) is available to be paid out to investors as interest or dividends, or to repay debt or buy back stock.
As new information is available, financial markets A) reflect this new information immediately in the prices of securities traded. B) publish this information. C) provide the information to financial intermediaries. D) decide how best to tell the public.
A) reflect this new information immediately in the prices of securities traded.
The term "capital structure" refers to: A) the manner in which a firm obtains its long-term sources of funding. B) the length of time needed to repay debt. C) whether the firm invests in capital budgeting projects. D) which specific assets the firm should invest in.
A) the manner in which a firm obtains its long-term sources of funding.
How much does each additional sales dollar contribute toward profit for a firm with $5 million break-even level of revenues and $1.5 million in fixed costs including depreciation? A)$0.30 B)$0.33 C)$0.50 D)$0.67
A)$0.30
What is the maximum that should be invested in a project at time zero if the inflows are estimated at $40,000 annually for three years, and the cost of capital is 9%? A)$101,251.79 B)$109,200.00 C)$117,871.97 D)$130,800.00
A)$101,251.79
An investor receives a 15% total return by purchasing a stock for $40 and selling it after one year with a 10% capital gain. How much was received in dividend income during the year? A)$2.00 B)$2.20 C)$4.00 D)$6.00
A)$2.00
What is the approximate IRR for a project that costs $100,000 and provides cash inflows of $30,000 for 6 years? A)19.9% B)30.0% C)32.3% D)80.0%
A)19.9%
What is the expected return on a portfolio that will decline in value by 13% in a recession, will increase by 16% in normal times, and will increase by 23% during boom times if each scenario has equal likelihood? A)8.67% B)13.00% C)13.43% D)17.33%
A)8.67%
Which of the following changes will increase the NPV of a project? A)A decrease in the discount rate B)A decrease in the size of the cash inflows C)An increase in the initial cost of the project D)A decrease in the number of cash inflows
A)A decrease in the discount rate
Which of the following methods will provide a correct analysis for capital budgeting purposes? A)Discounting real cash flows with real rates. B)Discounting real cash flows with nominal rates. C)Discounting nominal cash flows with real rates. D)All of the above methods will provide similar results.
A)Discounting real cash flows with real rates.
If a project is expected to increase inventory by $15,000, increase accounts payable by $10,000, and decrease accounts receivable by $1,000, what effect does working capital have during the life of the project? A)Increases investment by $4,000. B)Increases investment by $5,000. C)Increases investment by $6,000. D)Working capital has no effect during the life of the project.
A)Increases investment by $4,000.
An asset in the MACRS 5-year class life will have depreciation expense in six different years. A)True B)False
A)True
If one portfolio's variance exceeds that of another portfolio, its standard deviation will also be greater than that of the other portfolio. A)True B)False
A)True
The greater the DOL, the greater the protection against operating losses during economic downturns. A)True B)False
A)True
The option to abandon a project becomes more valuable as the possible outcomes become more varied. A)True B)False
A)True
Which of the following is incorrect regarding managerial flexibility in capital budgeting? A. Some projects may take on added value because they give the firm the option to bail out if things go wrong or to capitalize on success by expanding. These options are known as real options. B. Real options include options to expand, abandon, delay investment, or make use of flexible production facilities. C. Decision trees turn out to be useless in setting out the possible choices/options. A)a and b. B)a and c. C)c. D)a, b and c.
A)a and b.
Which of the following is incorrect regarding a company's tax bill and depreciation? A. Depreciation is a cash flow. And, because depreciation reduces taxable income, it reduces taxes. B. The tax reduction caused by depreciation is called the depreciation tax shield. C. Modified accelerated cost recovery system (MACRS) depreciation schedules allow more of the depreciation allowance to be taken in early years than is possible under straight-line depreciation. This increases the present value of the tax shield. A)a. B)b. C)c. D)d.
A)a.
Which of the following is incorrect regarding the difference between unique risk and market risk? A. Even if you hold a well-diversified portfolio, you will eliminate all risk. B. You will be exposed to macroeconomic changes that affect most stocks and the overall stock market. C. The macro risks combine to create market risk—that is, the risk that the market as a whole will slump. D. Stocks are not all equally risky. A)a. B)b. C)c. D)d.
A)a.
If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then: A)fixed costs should be traded for variable costs. B)variable costs should be traded for fixed costs. C)the project should not be undertaken. D)additional marketing analysis may be beneficial before proceeding.
A)fixed costs should be traded for variable costs.
The difference between an NPV break-even level of sales and an accounting break-even level of sales is: A)the consideration of opportunity cost. B)the consideration of depreciation expense. C)allowing the sales level to vary in response to changes in demand. D)the inclusion of income taxes.
A)the consideration of opportunity cost.
The appropriate opportunity cost of capital is the return that investors give up on alternative investments with: A)the same risk. B)the risk-free return. C)the expected return on the S&P 500 index. D)the normal, common stock risk premium.
A)the same risk.
The variance of an investment's returns is a measure of the: A)volatility of the rates of return. B)probability of a negative return. C)historic return over long periods. D)average value of the investment.
A)volatility of the rates of return.
An investor divides her portfolio into three equal parts, with one part in Treasury bills, one part in a market index, and one part in a mutual fund with beta of 1.50. What is the beta of the investor's overall portfolio? A. 0.83 B. 1.00 C. 1.17 D. 1.25
A. 0.83 βPortfolio = (0 + 1 + 1.5) / 3 = 0.83
Sue purchased a stock for $25 a share, held it for one year, received a $1.34 dividend, and sold the stock for $26.45. What nominal rate of return did she earn? A. 11.16% B. 14.23% C. 12.09% D. 10.55%
A. 11.16%
The weighted-average cost of capital for a firm with a 65/35 debt/equity split, 8% pre-tax cost of debt, 15% cost of equity, and a 21% tax rate is: A. 9.36%. B. 9.94%. C. 10.45%. D. 13.80%.
A. 9.36%. WACC = [0.65 × 0.08 × (1 − 0.21)] + (0.35 × 0.15) = 0.0936, or 9.36%
Which company is likely to have high operating leverage? A. A company with high fixed costs. B. A company with high variable costs. C. A company with low fixed costs. D. A company financed largely by debt
A. A company with high fixed costs.
Which one of the following changes will increase the NPV of a project? A. A decrease in the discount rate B. A decrease in the size of the cash inflows C. An increase in the initial cost of the project D. A decrease in the number of cash inflows
A. A decrease in the discount rate
Volatility is likely to be highest in which of the following investments? A. Common stocks B. Preferred stock C. Corporate bonds D. Treasury bonds
A. Common stocks
A firm with 60% of sales going to variable costs, $1.5 million fixed costs, and $500,000 depreciation and sales of $3 million. How does the current level of sales compare to the accounting break-even sales level? A. Current sales are $2 million below the break-even level. B. Current sales are $333,333 below the break-even level. C. Current sales are $800,000 below the break-even level. D. Current sales exceed the break-even level by $360,000.
A. Current sales are $2 million below the break-even level.
Which of the following describes where the money that corporations invest ultimately originates? A. From savings from investors. B. From stock markets. C. From financial intermediaries. D. From foreign exchange markets.
A. From savings from investors.
Macro events only are reflected in the performance of the market portfolio because: A. the market portfolio contains only risk-free securities. B. only macro events are tracked by economists. C. the specific risks have been diversified away. D. the firm-specific events would be too numerous to quantify
A. the specific risks have been diversified away.
Which one of the following statements is correct concerning sensitivity analysis? A. It ignores interrelationships between variables. B. Several variables are allowed to change concurrently. C. It considers all feasible variable combinations. D. It can guarantee a project's success
A. It ignores interrelationships between variables.
Which of the following values treats the firm as a going concern? A. Market value B. Book value C. Liquidation value D. Both market and book values
A. Market value
Which of the following is true regarding real and financial assets? A. Real assets can be intangible. B. Real assets are tangible; financial assets are not. C. Real assets represent claims to income that are generated by financial assets. D. Financial assets appreciate in value; real assets depreciate in value.
A. Real assets can be intangible.
Analysis indicates that a project's level of success is primarily dependent upon the firm controlling the variable costs. What type of analysis was conducted? A. Sensitivity analysis B. Break-even analysis C. Ratio analysis D. Real option analysis
A. Sensitivity analysis
Which one of the following statements is correct for a project with a positive NPV? A. The IRR must be greater than 0. B. Accepting the project has an indeterminate effect on shareholders. C. The discount rate exceeds the cost of capital. D. The profitability index equals 1.
A. The IRR must be greater than 0.
Real rates of return are typically less than nominal rates of return due to: A. inflation. B. capital gains. C. dividend payments. D. depreciation.
A. inflation.
Which of these statements is correct? Free cash flow A. is available to be paid out to investors as interest or dividends, or to repay debt or buy back stock. B. is positive if the company is issuing debt or stock. C. is equal to net income. D. is another term for retained earnings.
A. is available to be paid out to investors as interest or dividends, or to repay debt or buy back stock.
Break-even revenues on an accounting basis typically indicate a: A. negative NPV. B. positive NPV. C. high degree of operating leverage. D. downturn in the business cycle.
A. negative NPV.
The option to abandon a project inexpensively has particular value when: A. the equipment has a ready second-hand value. B. you can be confident about future profits. C. the project looks to have a very large NPV. D. has a low degree of operating leverage.
A. the equipment has a ready second-hand value.
A project's opportunity cost of capital is: A. the return that shareholders could expect to earn by investing in the financial markets. B. the return earned by investing in the project. C. equal to the average return on all company projects. D. designed to be less than the project's IRR.
A. the return that shareholders could expect to earn by investing in the financial markets.
How much interest is earned in the third year on a $1,000 deposit that earns 7% interest compounded annually? A) $ 70.00 B) $ 80.14 C) $105.62 D) $140.00
B) $ 80.14
What is the present value of your trust fund if it promises to pay you $50,000 on your 30th birthday (7 years from today) and earns 10% compounded annually? A) $25,000.00 B) $25,657.91 C) $28,223.70 D) $29,411.76
B) $25,657.91
If a borrower promises to pay you $1,900 nine years from now in return for a loan of $1,000 today, what effective annual interest rate is being offered? A) 5.26% B) 7.39% C) 9.00% D) 10.00%
B) 7.39%
Which of the following items should not be included in a listing of current assets? A) Marketable securities B) Accounts payable C) Accounts receivable D) Inventories
B) Accounts payable
What happens when moving from net income to cash flows from operations as the result of an increase in inventory balances? A) Cash flows increase. B) Cash flows decrease. C) Cash flows are unchanged. D) The change in cash flows cannot be determined.
B) Cash flows decrease.
Net present value is the present value of the cash flows subtracted from the initial investment. A) True B) False
B) False
Projects with an NPV of zero decrease shareholders' wealth by the cost of the project. A)True B)False
B) False
When shareholder A sells its Ford stock to shareholder B in the secondary market, such as on the New York Stock Exchange, how much money is received by Ford? A) Ford will receive most of the funds, except for commissions. B) Ford will receive nothing. C) Ford will receive only the commissions on the sale of stock. D) Ford will receive a portion of the funds for every stock traded on the secondary market
B) Ford will receive nothing.
Which of the following is more likely to be correct if market value of equity is less than book value of equity? A) Investors anticipate excellent earning potential. B) Investors anticipate low earning potential. C) Assets have been fully depreciated. D) The company is bankrupt.
B) Investors anticipate low earning potential.
Which of the following is correct for a fully depreciated asset that still has some salvage value? A) Market value is zero. B) Market value is greater than book value. C) Book value is greater than market value. D) The relationship between market and book values is indeterminable.
B) Market value is greater than book value.
Which of the following are NOT capital budgeting decisions? a. Intel decides to spend $1 billion to develop a new microprocessor. b. Volkswagen borrows 350 million euros (€350 million) from Deutsche Bank. c. BP constructs a pipeline to bring natural gas onshore from a production platform in the Gulf of Mexico. d. Budweiser spends €200 million to launch a new brand of beer in European markets. e. Pfizer to buy a small biotech company. A) a, b and d B) b C) c D) a, c, d and e
B) b
Which of the following statements regarding bonds are incorrect? a. A bond can be long-term debt of a government or corporation. b. When you own a bond, you receive a variable interest payment each year until the bond matures. This payment is known as the coupon. c. The coupon rate is the annual coupon payment expressed as a fraction of the bond's face value. d. At maturity the bond's face value is repaid. A) a. B) b. C) c. D) d.
B) b.
A times interest earned ratio of 5.0 indicates that the firm: A) pays 5 times its earnings in interest expense. B) earns significantly more than its interest obligations. C) has interest expense equal to 5% of EBIT. D) has low tax liability.
B) earns significantly more than its interest obligations.
If the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholders' equity, then the firm has: A) no retained earnings. B) long-term debt. C) no accumulated depreciation. D) current assets.
B) long-term debt.
ABC Corp.'s balance sheet shows their long-term debt to be $10 million. The debt was issued with a 10% coupon rate, and the current market interest rate is 7%. Based on this information, the market value of this debt will most likely be: A) less than $10 million. B) more than $10 million. C) equal to $10 million. D) unknown without knowing the maturity of the debt.
B) more than $10 million.
Primary markets can be distinguished from secondary markets in that primary markets sell: A) lower valued shares. B) previously unsold shares. C) only the shares of large firms. D) shares with greater profit potential.
B) previously unsold shares.
All but one of the following is an economic function of the financial system? A) provides a payments system and liquidity for investors B) provides a market for trading real assets C) provides a means to manage risk D) provides for the flow of savings to real investment
B) provides a market for trading real assets
The money market is the source for ______ financial assets, while the capital market is the source for ______ financing. A) investment; liquid B) short-term; long-term C) liquid; financial institution D) long-term; short-term
B) short-term; long-term
The discount rate that makes the present value of a bond's payments equal to its price is termed the: A) rate of return. B) yield to maturity. C)current yield. D) coupon rate.
B) yield to maturity.
Market demand allowed Acme Corp. to raise its price by 20% to $60. What is the new level of break-even revenues if fixed charges including depreciation are $1 million and variable costs were 70% of the old price? A)$2,000,000 B)$2,400,000 C)$2,857,143 D)$3,333,333
B)$2,400,000
Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and is currently worth $25,000. Ignoring taxes, the correct opportunity cost for this machine in capital budgeting decisions is: A)$75,000 B)$25,000 C)$20,000 D)$5,000
B)$25,000
What is the NPV of a project that costs $100,000 and returns $45,000 annually for three years if the opportunity cost of capital is 14%? A)$3,397.57 B)$4,473.44 C)$16,100.00 D)$35,000.00
B)$4,473.44
Which of the following is not accurate in depicting cash flows from operations? A)(revenues - expenses)(1 - tax rate) + (depreciation) B)(revenues - expenses - taxes paid) C)(net income + depreciation) D)(revenues - cash expenses - taxes paid)
B)(revenues - expenses - taxes paid)
Calculate the ratio of variable-costs-to-sales for a firm with: $3,000,000 accounting break-even revenues, $1.2 million fixed costs, and $450,000 depreciation. A)40% B)45% C)55% D)60%
B)45%
If a share of stock provided a 14.0% nominal rate of return over the previous year while the real rate of return was 6.0%, then the inflation rate was: A)1.89% B)7.55% C)8.00% D)9.12%
B)7.55%
Capital budgeting analysis focuses on profits as opposed to cash flows. A)True B)False
B)False
Market risk can be eliminated in a stock portfolio through diversification. A)True B)False
B)False
Evaluate the following project using an IRR criterion, based on an opportunity cost of 10%: CF0 = -6,000, CF1 = +3,300, CF2 = +3,300. A)Accept, since IRR exceeds opportunity cost. B)Reject, since opportunity cost exceeds IRR. C)Accept, since opportunity cost exceeds IRR. D)Reject, since IRR exceeds opportunity cost.
B)Reject, since opportunity cost exceeds IRR.
Which of the following techniques may be more appropriate to analyze projects with interrelated variables? A)Sensitivity analysis B)Scenario analysis C)Break-even analysis D)DOL analysis
B)Scenario analysis
Which of the following is incorrect regarding capital budgeting in large corporations? A. For most large corporations there are two stages in the investment process: the preparation of the capital budget, which is a list of planned investments, and the authorization process for individual projects. This process is usually a cooperative effort. B. Investment projects should be selected through a purely mechanical process. C. Managers need to ask why a project should have a positive NPV. A positive NPV is plausible only if the company has some competitive advantage that prevents its rivals from stealing most of the gains. A)a. B)b. C)c. D)a and b.
B)b.
Which of the following presents the correct relationship? As the coupon rate of a bond increases, the bond's: A) face value increases. B) current price decreases. C) interest payments increase. D) maturity date is extended.
C) interest payments increase.
The Modified Accelerated Cost Recovery System allows an increase: A)in total depreciation over the asset's life. B)in annual depreciation during earlier years. C)in real but not nominal depreciation expense. D)in the number of years in each recovery class.
B)in annual depreciation during earlier years.
The value of a proposed capital budgeting project depends upon the: A)total cash flows produced. B)incremental cash flows produced. C)accounting profits produced. D)increase in total sales produced.
B)incremental cash flows produced.
In addition to the number of stocks represented, a difference between the S&P 500 and the Dow is that the S&P 500: A)dates back to the 19th century while the Dow is a recent innovation. B)is value-weighted while the Dow is an price weighted index. C)includes foreign stocks while the Dow is domestic. D)index includes dividends in its return while the Dow does not.
B)is value-weighted while the Dow is an price weighted index.
Market interest rates have risen substantially in the five years since an investor purchased Treasury bonds that were offering a 7% return. If the investor sells now she is likely to receive: A)greater than a 7% total return. B)less than a 7% total return. C)a 7% total rate of return. D)a 7% nominal return but less than a 7% real return.
B)less than a 7% total return.
The benefits of portfolio diversification are highest when the individual securities have returns that: A)vary directly with the rest of the portfolio. B)vary indirectly with the rest of the portfolio. C)are uncorrelated with the rest of the portfolio. D)are counter cyclical.
B)vary indirectly with the rest of the portfolio.
Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and a market value of $25,000. Ignoring taxes, what is the opportunity cost of using this machine? A. $75,000 B. $25,000 C. $20,000 D. $5,000
B. $25,000
A firm has 120,000 shares of stock outstanding, a sustainable rate of growth of 3.8%, and $648,200 in next year's free cash flow. What value would you place on a share of this firm's stock if you require a 14% rate of return? A. $48.09 B. $52.96 C. $54.02 D. $61.58
B. $52.96
What is the maximum amount a firm should pay for a project that will return $15,000 annually for 5 years if the opportunity cost is 10%? A. $24,157.65 B. $56,861.80 C. $62,540.10 D. $48,021.19
B. $56,861.80
The capital structure for the CR Corporation includes bonds valued at $5,500 and common stock valued at $11,000. If CR has an after-tax cost of debt of 6%, and a cost of common stock of 16%, what is its WACC? A. 9.33% B. 12.67% C. 13.33% D. 14.67%
B. 12.67% WACC = [($5,500 / $16,500) × 6%] + [($11,000 / $16,500) × 16%] = 12.67%
What is a firm's weighted-average cost of capital for a firm that is financed 45% by debt? The debt has a 10% required return and the equity has a 17% required return. The tax rate is 21%. A. 13.85% B. 12.91% C. 13.50% D. 9.00%
B. 12.91% WACC = 0.45 × [10% × (1 − 0.21)] + 0.55 × 17% = 12.91%
If inflation in Wonderland averaged about 20% per month in 2000, what was the annual inflation rate? A. 20% B. 240% C. 790% D. 890%
B. 240%
What is the debt ratio of a firm that has outstanding $15 million in bonds and equity with a market value of $35 million? A. 15% B. 30% C. 35% D. 43%
B. 30% Debt ratio = $15m / ($15m + 35m) = 0.30, or 30%
Calculate the ratio of variable costs to sales for a firm with a $3 million accounting break-even revenue point, $1.2 million fixed costs, and $450,000 depreciation. A. 40% B. 45% C. 55% D. 60%
B. 45%
A mutual fund returns 14%. If the risk free rate is 2% and the beta of the fund is 1.60, what is the implied market risk premium? A. 6.50% B. 7.50% C. 8.50% D. 9.50%
B. 7.50% 14% = 2% + 1.60 (MRP) MRP = 7.50%
What is the maximum percentage of variable costs to sales that a firm could have and still break even with $5 million in revenues, $1 million in fixed costs, and $500,000 of depreciation? A. 30% B. 70% C. 80% D. 90%
B. 70%
You are considering the introduction of a new product that will require an investment in new machinery. Which one of these will lower the net present value of that project? A. A reduction in the firm's total variable costs due to the purchase of the new machine B. A loss of sales of existing products due to the introduction of the new product C. The increase in annual depreciation resulting from the asset purchase D. The sale of the machine after it is fully depreciated
B. A loss of sales of existing products due to the introduction of the new product
The growth of mature companies is primarily funded by: A) issuing new shares of stock. B) issuing new debt securities. C) reinvesting company earnings. D) increasing accounts payable.
C) reinvesting company earnings.
Which of the following is not a typical reason for differences between profit and cash flow? A. Depreciation expense B. Income taxes C. Changing levels of accounts receivable D. Accrual accounting practices
B. Income taxes
Which one of these represents a cash outflow for a project? A. A sunk cost B. Increase in accounts receivable C. Depreciation D. Accrued expenses
B. Increase in accounts receivable
Which of the following is not typically considered a function of financial intermediaries? A. Providing a payment mechanism B. Investing in real assets C. Accumulating funds from smaller investors D. Spreading, or pooling risk among individuals
B. Investing in real assets
What happens to the NPV of a two-year project if sales less costs are increased in each year from $1,000 to $1,500? Assume the firm has a 21% tax rate, and a 15% cost of capital. A. NPV increases by $812.85. B. NPV increases by $642.16. C. NPV increases by $500.00. D. NPV increases by $282.61.
B. NPV increases by $642.16.
Which one of the following techniques may be more appropriate to analyze projects with interrelated variables? A. Sensitivity analysis B. Scenario analysis C. Break-even analysis D. DOL analysis
B. Scenario analysis
Which of the following information would one find on the balance sheet of a corporation? A. The firm's revenues, expenses, and net income over a period of time. B. The firm's assets and liabilities at a particular point in time. C. The firm's cash receipts and cash payments over a period of time. D. All of the above
B. The firm's assets and liabilities at a particular point in time.
The slope of the line fitted to a plot of a stock's returns versus the market's returns measures the: A. security market line. B. beta of the stock. C. market risk premium. capital asset pricing model
B. beta of the stock. β = 1.6% / 1.2% = 1.33
Capital structure decisions refer to the: A. dividend yield of the firm's stock. B. blend of equity and debt used by the firm. C. capital gains available on the firm's stock. D. maturity date for the firm's securities.
B. blend of equity and debt used by the firm.
As the discount rate is increased, the NPV of a specific project will: A. increase. B. decrease. C. remain constant. D. decrease to zero, then remain constant.
B. decrease.
Firms with valuable intangible assets are more likely to show a(n): A. excess of book value over market value of equity. B. high going-concern value. C. low liquidation value. D. low P/E ratio.
B. high going-concern value.
When the overall market experiences a decline of 8%, investors with portfolios of aggressive stocks will probably experience portfolio: A. losses of less than 8%. B. losses greater than 8%. C. gains of less than 8%. D. gains greater than 8%.
B. losses greater than 8%.
The primary goal of corporate management should be to: A. maximize the number of shareholders. B. maximize shareholders' wealth. C. minimize the firm's costs. D. maximize the firm's profit.
B. maximize shareholders' wealth.
If the net present value of a project that costs $20,000 is $5,000 when the discount rate is 10%, then the: A. project's IRR equals 10%. B. project's rate of return is greater than 10%. C. net present value of the cash inflows is $4,500. D. project's cash inflows total $25,000.
B. project's rate of return is greater than 10%.
A firm's liquidation value is the amount: A. necessary to repurchase all outstanding shares of common stock. B. realized from selling all assets and paying off all creditors. C. a purchaser would pay to acquire all of the firm's assets. D. shown on the balance sheet as total owners' equity.
B. realized from selling all assets and paying off all creditors.
Sensitivity analysis evaluates projects by: A. forecasting changes in interest rates that would increase financing costs. B. recording profitability changes while changing one variable at a time. C. ensuring that the project sponsor has the proper incentives. D. testing for interrelated variables.
B. recording profitability changes while changing one variable at a time.
Risks that are peculiar to a single firm: A. are called market risks B. cannot be diversified away C. are called specific risks D. tend to cause stocks to move together
C. are called specific risks
A stock's beta measures the: A. average return on the stock. B. sensitivity of the stock's returns to those of the market portfolio. C. difference between the return on the stock and the return on the market portfolio. D. market risk premium on the stock.
B. sensitivity of the stock's returns to those of the market portfolio.
The opportunity cost of an asset: A. should be depreciated annually. B. should be included in the project cash flows. C. is typically ignored in capital budgeting. D. is important only for parcels of land.
B. should be included in the project cash flows
The capital budget should be consistent with the firm's: A. historical growth in sales. B. strategic plans. C. current level of debt. D. dividend policy.
B. strategic plans.
What is the percentage return on a stock that was purchased for $48.40, paid a $1.67 dividend, and was then sold after one year for $46.20? A. −2.50% B. −1.10% C. 0.23% D. −0.33%
B. −1.10%
The yield curve depicts the current relationship between: A) bond yields and default risk. B) bond maturity and bond ratings. C) bond yields and maturity. D) promised yields and default premiums.
C) bond yields and maturity.
How does the Du Pont formula help identify the determinants of the firm's return on its assets and equity? a. The formula states that the return on equity is the product of the firm's leverage ratio, asset turnover, operating profit margin, and debt burden. b. The formula states that the return on assets is the product of the firm's asset turnover and operating profit margin. A) a. B) b. C) both a and b are correct. D) neither a nor b is correct.
C) both a and b are correct.
The most important service provided by mutual funds to mutual fund investors is: A) the opportunity to buy corporate securities at a discounted price. B) high expenses and trading costs which increase the rate of return for investors. C) diversification. D) a higher than average rate of return
C) diversification.
While corporations provide shareholders returns from _______, capital markets provide returns to shareholders from ______. A) capital gains; dividends B) appreciation; capital gains C) dividends; capital gains D) earnings; capital appreciation
C) dividends; capital gains
An asset's liquidity measures its: A) potential for generating a profit. B) cash requirements. C) ease and cost of being converted to cash. D) proportion of debt financing.
C) ease and cost of being converted to cash.
Financial markets are used for trading: A) both real assets and financial assets. B) the goods and services produced by a firm. C) securities, such as shares of IBM. D) the raw materials used in manufacturing.
C) securities, such as shares of IBM.
A board of directors is elected as a representative of the corporation's: A) top management. B) stakeholders. C) shareholders. D) customers.
C) shareholders.
For a profitable firm in the 35% marginal tax bracket with $100,000 of annual depreciation expense, the depreciation tax shield would be: A)$10,500 B)$30,000 C)$35,000 D)$65,000
C)$35,000
Which of the following best illustrates the problem imposed by capital rationing? A)Accepting projects with the highest NPVs first B)Accepting projects with the highest IRRs first C)Bypassing projects that have positive NPVs D)Bypassing projects that have positive IRRs
C)Bypassing projects that have positive NPVs
What effect will a reduction in the cost of capital have on the accounting break-even level of revenues? A)It raises the break-even level. B)It reduces the break-even level. C)It has no effect on the break-even level. D)This cannot be determined without knowing the length of the investment horizon.
C)It has no effect on the break-even level.
In what manner does depreciation expense affect investment projects? A)It reduces cash flows by the amount of the depreciation expense. B)It increases interest expense by the amount of the depreciation expense. C)It reduces taxable income by the amount of the depreciation expense. D)It reduces taxes by the amount of the depreciation expense.
C)It reduces taxable income by the amount of the depreciation expense.
Which of the following statements is correct for a project with a positive NPV? A)IRR exceeds the cost of capital. B)Accepting the project has an indeterminate effect on shareholders. C)The discount rate exceeds the cost of capital. D)The profitability index equals one.
C)The discount rate exceeds the cost of capital.
The decision rule for net present value is to: A)accept all projects with cash inflows exceeding initial cost. B)reject all projects with rates of return exceeding the opportunity cost of capital. C)accept all projects with positive net present values. D)reject all projects lasting longer than 10 years.
C)accept all projects with positive net present values.
Which of the following are some principal tools that managers use to answer what-if questions? A. Break-even analysis, where the focus is on how far sales could fall before the project begins to lose money. Often the phrase "lose money" is defined in terms of accounting losses, but it makes more sense to define it as "failing to cover the opportunity cost of capital"—in other words, as a negative NPV. B. Operating leverage, the degree to which costs are fixed. A project's break-even point will be affected by the extent to which costs can be reduced as sales decline. If the project has mostly fixed costs, it is said to have high operating leverage. High operating leverage implies that profits are more sensitive to changes in sales. A)a. B)b. C)both a and b. D)neither a nor b.
C)both a and b.
Which of the following is incorrect regarding diversification and risk reduction? A. The standard deviation of returns is generally higher on individual stocks than it is on the market. B. Because individual stocks do not move in exact lockstep, much of their risk can be diversified away. C. The risk that can be eliminated through diversification is known as market risk. D. By spreading your portfolio across many investments, you smooth out the risk of your overall position. A)a. B)b. C)c. D)d.
C)c.
Which of the following is incorrect regarding operating leverage? A. Operating leverage is the degree to which costs are fixed. B. A project's break-even point will be affected by the extent to which costs can be reduced as sales decline. C. If the project has mostly variable costs, it is said to have high operating leverage. D. High operating leverage implies that profits are more sensitive to changes in sales. A)a. B)b. C)c. D)a, b and c.
C)c.
Which of the following is incorrect regarding the standard deviation of returns for individual common stocks or for a stock portfolio? A. The spread of outcomes on different investments is commonly measured by the variance or standard deviation of the possible outcomes. B. The variance is the average of the squared deviations around the average outcome, and the standard deviation is the square root of the variance. C. The standard deviation of the returns on a market portfolio of common stocks has averaged 200 percent a year. A)a. B)b. C)c. D)a and c.
C)c.
Perhaps the best way to reduce macro risk in a stock portfolio is to invest in stocks that: A)have only unique risks. B)have diversified away the macro risk. C)have low exposure to business cycles. D)pay guaranteed dividends.
C)have low exposure to business cycles.
The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks: A)offer higher returns. B)have more systematic risk. C)have no diversification of risk. D)do not have unique risk.
C)have no diversification of risk.
For a firm with a DOL of 3.5, an increase in sales of 6% will: A)increase pre-tax profits by 3.5%. B)decrease pre-tax profits by 3.5%. C)increase pre-tax profits by 21.0%. D)increase pre-tax profits by 1.71%.
C)increase pre-tax profits by 21.0%.
If the IRR for a project is 15%, then the project's NPV would be: A)negative at a discount rate of 10%. B)positive at a discount rate of 20%. C)negative at a discount rate of 20%. D)positive at a discount rate of 15%.
C)negative at a discount rate of 20%.
What is the maximum that should be invested in a project at time zero if the inflows are estimated at $50,000 annually for 3 years, and the cost of capital is 9%? A. $101,251.79 B. $109,200.00 C. $126,564.73 D. $130,800.00
C. $126,564.73
What is the NPV of a project that costs $100,000 and returns $50,000 annually for 3 years if the opportunity cost of capital is 14%? A. $13,397.57 B. $14,473.44 C. $16,081.60 D. $33,748.58
C. $16,081.60 NPV = −$100,000 + $50,000[(1 / 0.14) − 1 / 0.14(1.14)^3] = 16,081.60
.What is the effect on a firm's net working capital if a new project requires a $30,000 increase in inventory, a $10,000 increase in accounts receivable, a $35,000 expenditure on machinery, and a $20,000 increase in accounts payable? A. −$5,000 B. $10,000 C. $20,000 D. $55,000
C. $20,000
What is the market value of equity for a firm that issued 250,000 shares if the shares currently selling for $25 per share. A. $1,250,000 B. $5,000,000 C. $6,250,000 D. $7,500,000
C. $6,250,000
.A firm has fixed costs of $1.2 million and depreciation of $1 million. Variable costs are 64% of sales. What is the accounting break-even level of sales? A. $5.23 million B. $3.44 million C. $6.11 million D. $4.87 million
C. $6.11 million
The weighted-average cost of capital for a firm with a 40/60 debt/equity split, 8% cost of debt, 15% cost of equity, and a 21% tax rate is: A. 12.20%. B. 8.63%. C. 11.53%. D. 13.80%.
C. 11.53%. WACC = [0.40 × 0.08 × (1 − 0.21)] + (0.60 × 0.15) = 0.1153, or 11.53%
A credit card account that charges interest at the rate of 1.25% per month would have an annually compounded rate of _______ and an APR of _______. A. 16.08%; 15.00% B. 14.55%; 16.08% C. 12.68%; 15.00% D. 15.00%; 14.55%
C. 12.68%; 15.00%
A stock is selling for $37.50 and is expected to pay a dividend of $3 at the end of the year. If investors expect a return of 14%, what must be the sustainable growth rate? A. 4% B. 5% C. 6% D. 7%
C. 6%
What nominal return was received by an investor when inflation averaged 3.46% and the real rate of return was 2.5%? A. 0.96% B. 5.96% C. 6.05% D. 5.47%
C. 6.05%
Which of the following statements regarding financial intermediaries is incorrect? A. Banks considered financial intermediaries. B. Mutual funds pool the savings of many investors and invest in a portfolio of securities. C. A Hedge fund is another name for a mutual fund. D. Insurance companies are considered financial intermediaries.
C. A Hedge fund is another name for a mutual fund.
Which one of the following changes in working capital is least likely if sales increase? A. An increase in inventories B. An increase in accounts payable C. A decrease in accounts receivable D. An increase in notes payable
C. A decrease in accounts receivable
A stock investor owns a diversified portfolio of 15 stocks. What will be the most likely effect on the portfolio's standard deviation if one more stock is added? A. A slight increase will occur. B. A large increase will occur. C. A slight decrease will occur. D. A large decrease will occur.
C. A slight decrease will occur.
Which of the following is correct for a firm with EPS of $2 per share and a 45% payout ratio? A. 45% of earnings will be plowed back into the firm. B. Dividends will equal $1.10 per share. C. Book value per share of equity will increase by $1.10. D. Retained earnings will be unchanged.
C. Book value per share of equity will increase by $1.10.
Given the various investment options listed, what investment criteria concept might make an investor select Project B over other projects? A. The Gold Standard B. The Rate of Return Rule C. Capital rationing D. Selection bias criteria
C. Capital rationing
Which one of the following descriptions is representative of scenario analysis? A. One variable at a time is allowed to change. B. It isolates the unknowns that belong in the model. C. Different combinations of variables are analyzed. D. It represents the "top-down" approach.
C. Different combinations of variables are analyzed.
The primary difference between U.S. Treasury bills and U.S. Treasury bonds is that the bills: A. do not have default risk. B. have more price volatility. C. have a shorter maturity at time of issue. D. offer a higher return.
C. Have a shorter maturity at time of issue
What effect will a reduction in the cost of capital have on the accounting break- even level of revenues? A. It raises the break-even level. B. It reduces the break-even level. C. It has no effect on the break-even level. D. This cannot be determined without knowing the length of the investment horizon.
C. It has no effect on the break-even level.
Which one of the following statements is incorrect concerning stock indexes? A. Indexes have been developed for foreign stocks. B. Some indexes cover only a specific market sector. C. Most indexes include all of the publicly-traded common stocks. D. Some indexes are equally weighted.
C. Most indexes include all of the publicly-traded common stocks.
How is it possible for real rates of return to increase during times when the rate of inflation increases? A. Inflation increased more than the real return. B. Nominal returns actually decreased. C. Nominal returns increased more than inflation. D. Nominal returns increased less than inflation.
C. Nominal returns increased more than inflation.
When a depreciable asset is ultimately sold, the sales price is: A)fully taxable. B)non-taxable. C)not taxable only if accelerated depreciation was used. D) taxable if the sakes price exceeds book value
D) taxable if the sakes price exceeds book value
In which of the following cases will a cash investment in net working capital be most likely? A. Inventory levels will be reduced when the project is introduced. B. All sales related to the project will be cash sales to a subsidiary. C. The project will increase inventory more than accounts payable. D. The project will require additional inventory which will be financed by a supplier.
C. The project will increase inventory more than accounts payable.
Which one of these is the safest investment? A. Corporate bonds B. Common stock C. U.S. Treasury bills D. Preferred stock
C. US Treasury Bills
The decision rule for net present value is to: A. accept all projects with cash inflows exceeding the initial cost. B. reject all projects with rates of return exceeding the opportunity cost of capital. C. accept all projects with positive net present values. D. reject all projects lasting longer than 10 years
C. accept all projects with positive net present values.
If the adoption of a new product will reduce the sales of an existing product, then the project cash flows should: A. reflect only the sales of the new product. B. include only the reduction amount. C. be reduced by the cash that would have been generated by those sales. D. be adjusted upward by the reduction amount.
C. be reduced by the cash that would have been generated by those sales.
Last month a stock with a beta of 1.0 lost 20% while the S&P 500 had a 10% gain. Given this, it is most likely that the: A. stock's beta has been calculated incorrectly. B. S&P 500 cannot represent the overall market. C. firm released some negative information about itself. D. the market index had an exceptionally good month.
C. firm released some negative information about itself.
The rationale for not including sunk costs in capital budgeting decisions is that they: A. are usually small in magnitude. B. revert at the end of the investment. C. have no incremental effect on project cash flows. D. reduce the project's net present value.
C. have no incremental effect on project cash flows.
The correct method to handle overhead costs in capital budgeting is to: A. allocate a portion to each project. B. allocate them to projects with the highest NPVs. C. ignore all except incremental amounts. D. ignore them in all cases.
C. ignore all except incremental amounts.
If a security plots below the security market line, it is: A. ignoring all of the security's specific risk. B. underpriced, a situation that should be temporary. C. offering too little return to justify its risk. D. a defensive security, which expects to offer lower returns.
C. offering too little return to justify its risk.
.Corporate income statements are designed primarily to show: A. cash flows during a period. B. account balances at the end of a period. C. performance during a period. D. market values of assets and liabilities.
C. performance during a period.
Corporate income statements are designed primarily to show: A. cash flows during a period. B. account balances at the end of a period. C. performance during a period. D. market values of assets and liabilities
C. performance during a period.
The basic tenet of the CAPM is that a stock's expected risk premium should be: A. greater than the expected market return. B. proportionate to the market return. C. proportionate to the stock's beta. D. greater than the risk-free rate of return.
C. proportionate to the stock's beta.
As long as the NPV of a project declines smoothly with increases in the discount rate, the project is acceptable if its: A. internal rate of return is positive. B. payback period is greater than one. C. rate of return exceeds the cost of capital. D. cash inflows equal the initial cost.
C. rate of return exceeds the cost of capital.
The growth of mature companies is primarily funded by: A. issuing new shares of stock. B. issuing new debt securities. C. reinvesting company earnings. D. increasing accounts payable.
C. reinvesting company earnings.
As you add more stocks to a portfolio: A. specific risk at first falls, then rises. B. market risk is increasingly diversified away. C. specific risk is increasingly diversified away. D. market risk declines but specific risk rises.
C. specific risk is increasingly diversified away.
An example of a financing decision would be: A. acquisition of a competitive firm. B. how much to pay for a specific asset. C. the issuance of ten-year versus twenty-year bonds. D. whether or not to increase the price of its products.
C. the issuance of ten-year versus twenty-year bonds.
One way to increase the NPV of a project is to decrease the: A. project's payback period. B. profitability index. C. time until the receipt of cash inflows. D. number of project IRRs.
C. time until the receipt of cash inflows.
The semi-strong form of the efficient market hypothesis states that: A) the efficient market hypothesis is only half true. B) professional investors make superior profits but amateurs can't. C) stock prices do not follow a random walk. D) prices reflect all publicly available information.
D) prices reflect all publicly available information.
What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book value of equity of $3,000,000, and a market/book ratio of 3.5? A) $8.57 B) $30.00 C) $85.70 D) $105.00
D) $105.00
Wilt's has earnings per share of $2.98 and dividends per share of $0.35. What is the firm's sustainable rate of growth if its return on assets is 14.6% and its return on equity is 18.2%? A) 2.14% B) 1.71% C) 12.89% D) 16.06%
D) 16.06%
Which of the following statements is NOT correct? A) Agency problems arise when managers and shareholders have different objectives. B) Managers may empire-build with excessive investment and growth. C) Managers may be unduly risk averse, or they may try to take excessive salaries or perquisites. D) Agency problems may arise even when managers and shareholders have exactly the same objectives.
D) Agency problems may arise even when managers and shareholders have exactly the same objectives.
The present value of a perpetuity can be determined by: A) Multiplying the payment by the interest rate. B) Dividing the interest rate by the payment. C) Multiplying the payment by the number of payments to be made. D) Dividing the payment by the interest rate.
D) Dividing the payment by the interest rate.
Which of the following statements is most likely correct for a firm with an average collection period of 90 days? A) Its average daily sales are low. B) Its average daily sales are high. >Initial Answer C) Its current ratio will be high. D) It is providing financing for approximately 25% of its annual sales.
D) It is providing financing for approximately 25% of its annual sales.
Which of the following would be most detrimental to a firm's current ratio if that ratio is currently 2.0? A) Buy raw materials on credit. B) Sell marketable securities at cost. C) Pay off accounts payable with cash. D) Pay off a portion of long-term debt with cash.
D) Pay off a portion of long-term debt with cash.
Which of the following would be considered an advantage of the sole proprietorship form of organization? A) Wide access to capital markets B) Unlimited liability C) A pool of expertise D) Profits taxed at only one level
D) Profits taxed at only one level
Under which of the following conditions will a future value calculated with simple interest exceed a future value calculated with compound interest at the same rate? A) The interest rate is very high. B) The investment period is very long. C) The compounding is annually. D) This is not possible with positive interest rates.
D) This is not possible with positive interest rates.
If the general sentiment of investors is pessimistic, stock prices are more apt to: A) increase significantly. B) increase slightly. C) remain constant. D) decline.
D) decline.
The current yield of a bond can be calculated by: A) multiplying the price by the coupon rate. B) dividing the price by the annual coupon payments. C) dividing the price by the par value. D) dividing the annual coupon payments by the price.
D) dividing the annual coupon payments by the price.
Which of the following statements are incorrect regarding the differences between book values and market values? a. It is important to distinguish between the book values that are shown in the company accounts and the market values of the assets and liabilities. b. Book values are historical measures based on the original cost of an asset. c. The assets in the balance sheet are shown at their historical cost less an allowance for depreciation. d. The figure for shareholders' equity measures the cash that shareholders have contributed in the past or that the company has reinvested on their behalf. A) a. B) b. C) c. D) none of the above.
D) none of the above.
The common stock of publicly traded corporations is usually traded: A) by the company placing orders to purchase outstanding shares. B) by investors contacting other investors directly. C) between directors of the corporation. D) on an organized exchange or over-the-counter.
D) on an organized exchange or over-the-counter.
What is the amount of the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate? A)$260,000 B)$325,000 C)$360,000 D)$425,000
D)$425,000
How much could NPV be affected by a worst-case scenario of 25% reduction from the $3 million in expected annual cash flows on a five-year project with 10% cost of capital? A)$2,843,090 B)$3,750,000 C)$4,578,825 D)$6,155,274
D)$6,155,274
Your forecast shows $500,000 annually in sales for each of the next three years. If your second and third year predictions have failed to incorporate 5% expected annual inflation, how far off in total dollars is your three-year forecast? A)$25,000 B)$50,000 C)$52,550 D)$76,250
D)$76,250
Which of the following statements is correct for an investor starting with $1,000 in common stocks over a 20-year investment horizon in which stocks averaged 11% in annual nominal terms and 4% in real terms? The portfolio value is now approximately: A)$1,800 in real terms. B)$3,679 in real terms. C)$3,870 in nominal terms. D)$8,062 in nominal terms.
D)$8,062 in nominal terms.
A firm with 60% of sales going to variable costs, $1.5 million fixed costs, and $500,000 depreciation would show what accounting profit with sales of $3 million? Ignore taxes. A)zero loss B)$370,000 loss C)$666,667 loss D)$800,000 loss
D)$800,000 loss
If a stock is purchased for $25 per share and held one year, during which time a $3.50 dividend is paid and the price climbs to $28.25, the nominal rate of return is: A)13.00% B)14.00% C)23.01% D)27.00%
D)27.00%
How do changes in working capital affect project cash flows? A)Increases in net working capital such as accounts receivable or inventory are investments and therefore use cash. B)Increases in net working capital reduce the net cash flow provided by the project in that period. C)When working capital is run down, cash is freed up, so cash flow increases. D)All of the above are correct.
D)All of the above are correct.
What is the effect on the break-even level of revenues for each dollar of increase in fixed costs plus depreciation for a firm with 70% variable costs? A)An increase of $0.30. B)An increase of $1.00. C)An increase of $1.43. D)An increase of $3.33
D)An increase of $3.33
When is it appropriate to include sunk costs in the evaluation of a project? A)Include sunk costs when they are relatively large. B)Include sunk costs if it improves the project's NPV. C)Include sunk costs if they are considered to be overhead costs. D)It is never appropriate to include sunk costs.
D)It is never appropriate to include sunk costs.
Which of the following statements is incorrect regarding the payback period rule? A The payback rule always makes shareholders better off. B. The net present value rule and the rate of return rule both properly reflect the time value of money. But companies sometimes use rules of thumb to judge projects. One is the payback rule, which states that a project is acceptable if you get your money back within a specified period. C. The payback rule takes no account of any cash flows that arrive after the payback period and fails to discount cash flows within the payback period. A)a. B)b. C)c. D)a and b.
D)a and b.
Which of the following are some principal tools that good managers use to answer what-if questions? A. Sensitivity analysis, where one variable at a time is changed. B. Scenario analysis, where the manager looks at the project under alternative scenarios. C. Simulation analysis, an extension of scenario analysis in which a computer generates hundreds or thousands of possible combinations of variables. A)a. B)b. C)c. D)a, b and c.
D)a, b and c.
How can the net present value rule be used to analyze three common problems that involve competing projects? A. Sometimes a project may have a positive NPV if undertaken today but an even higher NPV if the investment is delayed. Choose between these alternatives by comparing their NPVs today. B. When you have to choose between projects with different lives, you should put them on an equal footing by comparing the equivalent annual annuity or benefit of the two projects. C. When you are considering whether to replace an aging machine with a new one, you should compare the annual cost of operating the old one with the equivalent annual annuity of the new one. A)a. B)b. C)c. D)all of the above are correct.
D)all of the above are correct.
What are the three problems that often involve competing projects? A. "When to postpone an investment expenditure?" B. "How to choose between projects with equal lives?" C. "When to replace equipment?""When to exit from an investment?" A)a. B)b. C)c. D)all of the above.
D)all of the above.
Which of the following is not correct when we calculate the cash flows of a proposed new project? A Discount cash flows, not profits. B. Estimate the project's incremental cash flows—that is, the difference between the cash flows with the project and those without the project. C Include all indirect effects of the project, such as its impact on the sales of the firm's other products. D. Count sunk costs. A)a. B)b. C)c. D)d.
D)d.
Which of the following are incorrect when we calculate the cash flows of a proposed new project? A. Include opportunity costs, such as the value of land that you could otherwise sell. B. Beware of allocated overhead charges for heat, light, and so on. These may not reflect the marginal effects of the project on these costs. C. Remember the investment in working capital. As sales increase, the firm may need to make additional investments in working capital, and as the project finally comes to an end, it will recover these investments. D. Treat inflation consistently. If cash flows are forecast in nominal terms (including the effects of future inflation), use a nominal discount rate. Discount real cash flows at a real rate. E. Do include debt interest or the cost of repaying a loan. When calculating NPV, do not assume that the project is financed entirely by the shareholders and that they receive all the cash flows. This separates the investment decision from the financing decision. A)a. B)b. C)c and d. D)e.
D)e.
The purpose of sensitivity analysis is to show: A)the optimal level of the capital budget. B)how price changes affect break-even volume. C)seasonal variation in product demand. D)how variables in a project affect profitability.
D)how variables in a project affect profitability.
When managers cannot determine whether to invest now or wait until costs decrease later, the rule should be to: A)postpone until costs reach their lowest. B)invest now to maximize the NPV. C)postpone until the opportunity cost reaches its lowest. D)invest at the date that gives the highest NPV today.
D)invest at the date that gives the highest NPV today.
If a project has a cost of $50,000 and a profitability index of 0.4, then: A)its cash inflows are $70,000. B)the present value of its cash inflows is $30,000. C)its IRR is 20%. D)its NPV is $20,000.
D)its NPV is $20,000.
Which of the following is incorrect regarding opportunity cost of capital for an "average-risk" project? A. Over the past century the return on the Standard & Poor's Composite Index of common stocks has averaged 7.6 percent a year higher than the return on safe Treasury bills. This is the risk premium that investors have received for taking on the risk of investing in stocks. Long-term bonds have offered a higher return than Treasury bills but less than stocks. B. If the risk premium in the past is a guide to the future, we can estimate the expected return on the market today by adding that 7.6 percent expected risk premium to today's interest rate on Treasury bills. This would be the opportunity cost of capital for an average-risk project, that is, one with the same risk as a typical share of common stock. A)a. B)b. C)both a and b. D)neither a nor b is incorrect.
D)neither a nor b is incorrect.
Which of the following is not correct regarding cash flows of a project? A. Project cash flow does not equal profit. You must allow for changes in working capital as well as noncash expenses such as depreciation. B. If you use a nominal cost of capital, consistency requires that you forecast nominal cash flows—that is, cash flows that recognize the effect of inflation. A)a. B)b. C)a and b. D)neither a nor b is incorrect.
D)neither a nor b is incorrect.
Which of the following is not correct regarding the difference between unique risk and market risk? A. When we talk about a "high-risk stock", we don't mean a stock that is risky if held in isolation; we mean a stock that makes an above average contribution to the risk of a diversified portfolio. B. Investors don't need to worry much about the risk that they can diversify away; they do need to worry about risk that can't be diversified. This depends on the stock's sensitivity to macroeconomic conditions. A)a. B)b. C)a and b. D)neither a nor b is incorrect.
D)neither a nor b is incorrect.
Which of the following statement is incorrect regarding the profitability index? A The profitability index can be used to choose between projects when funds are limited. B. If there is a shortage of capital, companies need to choose projects that offer the highest net present value per dollar of investment. This measure is known as the profitability index. A)a. B)b. C)a and b. D)neither a nor b is incorrect.
D)neither a nor b is incorrect.
Which of the following statements is incorrect regarding internal rate of return of a project? A.Instead of asking whether a project has a positive NPV, many businesses prefer to ask whether it offers a higher return than shareholders could expect to get by investing in the capital market. B. Return is usually defined as the discount rate that would result in a zero NPV. This is known as the internal rate of return, or IRR. The project is attractive if the IRR exceeds the opportunity cost of capital. C. There are some pitfalls in using the internal rate of return rule. Be careful about using the IRR when (1) the early cash flows are positive, (2) there is more than one change in the sign of the cash flows, or (3) you need to choose between two mutually exclusive projects. A)a. B)b. C)c. D)none of the above is incorrect.
D)none of the above is incorrect.
The major benefit of diversification is to: A)increase the expected return. B)remove negative risk assets from the portfolio. C)reduce the portfolio's systematic risk. D)reduce the expected risk.
D)reduce the expected risk.
Projects that are calculated as having negative NPVs should be: A)depreciated over a longer time period. B)charged less in overhead costs. C)discounted using lower rates. D)rejected or abandoned.
D)rejected or abandoned.
If two projects offer the same, positive NPV, then: A)they also have the same IRR. B)they have the same payback period. C)they are mutually exclusive projects. D)they add the same amount to the value of the firm.
D)they add the same amount to the value of the firm.
.Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12% for each project. A. "A" has a small, but negative, NPV. B. "B" has a positive NPV when discounted at 10%. C. "C's" cost of capital exceeds its rate of return. D. "D" has a zero NPV when discounted at 14%.
D. "D" has a zero NPV when discounted at 14%.
Which of the following is not an advantage to incorporating a business? A. Easier access to financial markets. B. Limited liability. C. Becoming a permanent legal entity. D. "Double Taxation"
D. "Double Taxation"
What is the current price of a share of stock for a firm with $5 million in balance- sheet equity, 500,000 shares of stock outstanding, and a price/book value ratio of 4? A. $2.50 B. $10.00 C. $20.00 D. $40.00
D. $40.00
If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year and the dividend payout ratio is 40%, what is the stock's current price? A. $24.30 B. $18.00 C. $22.22 D. $40.50
D. $40.50
A share of stock currently sells for $60, pays an annual dividend of $4.00, and earned a rate of return of 20% over the past year. What did this stock sell for one year ago? A. $42.00 B. $46.15 C. $48.46 D. $53.33
D. $53.33
Wilt's has earnings per share of $2.98 and dividends per share of $0.35. What is the firm's sustainable rate of growth if its return on assets is 14.6% and its return on equity is 18.2%? A. 2.14% B. 1.71% C. 12.89% D. 16.06%
D. 16.06%
Which one of the following changes might turn a negative NPV project into a positive NPV project? A. A decrease in the estimated annual sales B. An increase in the discount rate C. An increase in the initial investment D. A decrease in the fixed costs
D. A decrease in the fixed costs
Which one of these is a specific risk? A. Revision to the corporate tax laws. B. Inflation increase of 2.3%. C. Deterioration in the overall economic outlook. D. A fire at the company's main factory.
D. A fire at the company's main factory.
Who was responsible for the Financial Crisis of 2007-2009? A. The U.S. Federal Reserve for its policy of easy money B. The U.S. government for pushing banks to expand credit for low-income housing C. Bankers who aggressively promoted and resold subprime mortgages D. All of the above
D. All of the above
.Weston's has variable costs that average 68% of sales. If fixed costs increase by $1, what will be the increase in the break-even level of revenues? A. An increase of $0.68 B. An increase of $1.00 C. An increase of $1.471 D. An increase of $3.125
D. An increase of $3.125 ΔBreak-even revenues = $1 / (1 − 0.68) = $3.125
Which of the following statements regarding taxes in America is correct? A. Marginal tax rates refer to additional taxes owed per dollar of additional income. B. The average tax rate is calculated by dividing the amount of taxes paid by total income. C. Neither A nor B D. Both A and B.
D. Both A and B.
When is it appropriate to include sunk costs in the evaluation of a project? A. Whenever they are relatively large B. If they improve the project's NPV C. If they are considered to be overhead costs D. Never
D. Never
If a project's NPV is calculated to be negative what should a project manager do? A. The discount rate should be decreased. B. The profitability index should be calculated. C. The present value of the project cost should be determined. D. The project should be rejected.
D. The project should be rejected.
Which one of the following portfolios might be expected to exhibit less specific risk? A. Five random stocks; portfolio beta = 0.8 B. Three random stocks; portfolio beta = 1.2 C. Ten random stocks; portfolio beta = 1.0 D. Twelve random stocks; portfolio beta unknown
D. Twelve random stocks; portfolio beta unknown
In theory, the "market portfolio" should contain: A. the securities of the S&P 500. B. the securities of the Dow. C. the securities of the S&P 500 and Treasury bills. D. all risky assets.
D. all risky assets.
If the company cost of capital is 20% and a proposed project's cost of capital is 15%, then discounting the projects' cash flows at 20% would: A. determine where the project plots in relation to the security market line. B. make the project look more attractive than it should be. C. be correct from a theoretical perspective. D. be incorrect and could cause the project to be erroneously rejected.
D. be incorrect and could cause the project to be erroneously rejected.
The fact that historical returns on Treasury bonds are less volatile than common stock returns indicates that: A. the variance of Treasury bond returns is zero. B. the standard deviation of Treasury bond returns is negative. C. the real return on Treasury bonds has been negative. D. common stocks should offer a higher return than Treasury bonds.
D. common stocks should offer a higher return than Treasury bonds.
Increasing debt financing will do all of the following except: A. cause investors to demand a higher interest rate on debt. B. increase the risk to the firm's common stockholders. C. cause stockholders to demand a higher return. D. decrease the firm's cost of common equity.
D. decrease the firm's cost of common equity.
When a project's internal rate of return equals its opportunity cost of capital, then the: A. project should be rejected. B. project has no cash inflows. C. net present value will be positive. D. net present value will be zero.
D. net present value will be zero.
. Investments in working capital: A. are simply accounting entries and do not affect NPV. B. do not matter because the cash is generally recovered when the project ends. C. increase NPV because they make the project more valuable. D. reduce project NPV.
D. reduce project NPV.
Projects that have negative NPVs should be: A. depreciated over a longer time period. B. charged less in overhead costs. C. discounted using lower rates. D. rejected or abandoned.
D. rejected or abandoned.
The expected return on a security includes a reward for: A. market risk and specific risk. B. specific risk. C. diversification and portfolio risk. D. time value of money and market risk.
D. time value of money and market risk.
What is the change in the NPV of a one-year project if fixed costs are increased from $400 to $600, assuming the firm is profitable, has a 21% tax rate, and a 12% cost of capital? A. −$200.00 B. −$178.57 C. −$152.00 D. −$141.07
D. −$141.07
