Final Review

Projects A and B are mutually exclusive and have an initial cost of $82,000 each. Project A provides cash inflows of $34,000 per year for three years while Project B produces a cash inflow of $115,000 in Year 3. Which project(s) should be accepted if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent?

Accept B at 11.7 percent and neither at 13.5 percent

Project A costs $47,800 with cash inflows of $34,200 in Year 1 and $28,700 in Year 2. Project B costs $63,200 with cash inflows of $21,900 in Year 1 and $59,200 in Year 2. These projects are independent and have an assigned discount rate of 15 percent. Based on the profitability index, what is your recommendation concerning these projects?

Accept both projects.

Which one of the following is a current liability?

An invoice payable to a supplier in 45 days

Which one of the following is a project cash inflow? Ignore any tax effects.

Decrease in inventory

Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows?

Discounted cash flow valuation

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?

Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

On the statement of cash flows, which one of the following is considered a financing activity?

Dividends paid

When computing the adjusted cash flow from assets, the tax amount is calculated as:

EBIT(TC).

Decreasing which one of the following will increase the acceptability of a project?

Equivalent annual cost

Which of the following statements are accurate? I. Nondiversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for nondiversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.

I and III only

Real rates are defined as nominal rates that have been adjusted for which of the following?

Inflation

Which of the following statements is accurate regarding the dividend growth model?

It is only as reliable as the estimated rate of growth.

Which of the following statements regarding the weighted average cost of capital is accurate?

It is the return investors require on the total assets of the firm.

This morning, Clayton deposited $2,500 into an account that pays 5 percent interest, compounded annually. Also this morning, Jayda deposited $2,500 at 5 percent interest, compounded annually. Clayton will withdraw his interest earnings and spend it as soon as possible. Jayda will reinvest her interest earnings into her account. Given this information, which one of the following statements is true?

Jayda will earn more interest in Year 2 than Clayton will earn.

Which one of the following statements correctly applies to the period 1926-2019?

Long-term corporate bonds outperformed long-term government bonds.

A project has projected cash flows of −$148,500, $32,800, $64,200, −$7,500 and $87,300 for Years 0 to 4, respectively. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 10.5 percent? Why or why not?

No; The MIRR is 8.04 percent.

You are comparing two investment options that each pay 6 percent interest compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)

Option B has a higher present value at Time 0.

Which one of the following methods of analysis provides the best information on the benefits to be received from a project per dollar invested?

Profitability index

Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management?

Proxy fight for control of the board

Assume that last year T-bills returned 2.2 percent while your investment in large-company stocks earned an average of 8.1 percent. Which one of the following terms refers to the difference between these two rates of return?

Risk premium

Which one of the following is a primary market transaction?

Sale of a new share of stock from a corporation to an individual investor

Which one of the following statements concerning scenario analysis is correct?

Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions.

Public offerings of debt and equity must be registered with the:

Securities and Exchange Commission.

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?

Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?

The cash flow in Year 2 is valued just as highly as the cash flow in Year 1.

The capital structure of Pendekanti Products is 58 percent common stock, 2 percent preferred stock, and 40 percent debt. The firm maintains a dividend payout ratio of 24 percent, has a beta of 1.08, and has an income tax rate of 21 percent. Given this information, which one of the following statements is accurate?

The cost of equity is unaffected by a change in the company's tax rate.

Which one of the following statements is correct concerning the NYSE?

The listing requirements for the NYSE are more stringent than those of Nasdaq.

________ risk is measured using the standard deviation.

Total

All else constant, an increase in which of the following must increase the return on equity?

Total asset turnover and debt-equity ratio

A six-year, $1,000 face value bond issued by Nguyen Corporation pays interest semiannually on February 1 and August 1. Assume today is October 1. What is the current difference, if any, between this bond's clean and dirty prices?

Two months' interest

Which one of the following statements regarding corporations is correct?

Which one of the following statements regarding corporations is correct?

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:

a decrease in all stock values.

Assume a stock experiences an actual return that is above the security market line. An analyst can safely conclude that the stock has:

a higher return than expected for the level of risk assumed.

The interest rate that is most commonly quoted by a lender is referred to as the:

annual percentage rate.

A(n) ________ loan has regular payments that include both principal and interest but these payments are insufficient to pay off the loan.

balloon

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:

crossover rate.

All other things beings equal, and assuming all ratios have positive values, an increase in current liabilities will:

decrease the quick ratio.

Cash flow to stockholders is defined as:

dividend payments less net new equity raised.

Charles owns a reverse convertible bond. At maturity, the principal amount will be repaid in:

either cash or shares of stock.

You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the:

financial break-even point.

Cash flow from assets is also known as the firm's:

free cash flow.

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:

incremental cash flows.

The Baker Supply would like to offer special sale prices to the firm's best customers under the following terms: The prices will apply only to units purchased in excess of the quantity normally purchased by a customer. The units purchased must be paid for in cash at the time of sale. The total quantity sold under these terms cannot exceed the excess capacity of the firm. The net profit of the firm should not be affected. The prices will be in effect for one week only. Given these conditions, the special sale price should be set equal to the:

marginal cost of all variable inputs.

When calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on the:

market value of the investment in each stock.

Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n):

portfolio.

With an interest-only loan the principal is:

repaid in one lump sum at the end of the loan period.

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis.

sensitivity

Ultimately, the ______ control(s) the corporation.

shareholders

Monroe Partners has received requests for capital investment funds for next year from each of its five divisions. All requests represent positive net present value projects. All projects are independent. Senior management has decided to allocate the available funds based on the profitability index of each project since the company has insufficient funds to fulfill all of the requests. Management is following a practice known as:

soft rationing.

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information.

Usually, the treasurer of a corporation reports directly to the:

vice president of finance.

Arnold Belt and Bearing has identified two mutually exclusive projects. Project A has cash flows of −$40,000, $21,200, $16,800, and $14,000 for Years 0 to 3, respectively. Project B has a cost of $38,000 and annual cash inflows of $25,500 for 2 years. At what rate would you be indifferent between these two projects?

−4.38%