Finance Exam 2- help
Which one of the following characteristics best describes a project that has a low degree of operating leverage?
High variable costs relative to the fixed costs
The internal rate of return is defined as the:
discount rate which causes the net present value of a project to equal zero.
The key means of defending against forecasting risk is to:
identify sources of value within a project.
Pro forma statements for a proposed project should generally do all of the following, except:
include interest expense.
The base-case values used in scenario analysis are the values considered to be the most:
likely to occur.
Efficient financial markets fluctuate continuously because:
the markets are continually reacting to new information.
Nasdaq has:
three separate markets.
A Treasury yield curve plots Treasury interest rates relative to:
time to maturity.
Variable costs can be defined as the costs that:
vary directly with sales.
A company that utilizes the MACRS system of depreciation but does not use bonus depreciation:
will have a greater depreciation tax shield in Year 2 than in Year 1.
Rossdale Flowers has a new greenhouse project with an initial cost of $365,000 that is expected to generate cash flows of $48,600 for 10 years and a cash flow of $64,000 in Year 11. If the required return is 8.4 percent, what is the project's NPV?
−$18,338.06 ch9 excel NPV
Watson Landscaping is considering a project that will require additional inventory of $12,000 and will increase accounts payable by $19,000. Accounts receivable is currently $302,000 and is expected to increase by 5 percent if this project is accepted. What is the project's initial cash flow for net working capital?
−$8,100 NWC requirement = −$12,000 + 19,000 − $302,000(.05) NWC requirement = −$8,100
Whatever, Incorporated, has a bond outstanding with a coupon rate of 5.98 percent and semiannual payments. The yield to maturity is 5.5 percent and the bond matures in 18 years. What is the market price if the bond has a par value of $1,000?
$1,054.41 Ch 7 excel current price semiannual calculator
A bond that pays interest semiannually has a coupon rate of 5.35 percent and a current yield of 4.85 percent. The par value is $1,000. What is the bond's price?
$1,103.09 Coupon payment = .0535 × $1,000 = $53.50 Price = $53.50/.0485 = $1,103.09
Gugenheim, Incorporated, has a bond outstanding with a coupon rate of 6.1 percent and annual payments. The yield to maturity is 7.3 percent and the bond matures in 17 years. What is the market price if the bond has a par value of $2,000?
$1,770.47 ch 7 excel annual current price calc
King Nothing is evaluating a new 6-year project that will have annual sales of $420,000 and costs of $290,000. The project will require fixed assets of $520,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, 11.52 percent, and 5.76 percent, respectively. The company has a tax rate of 34 percent. What is the operating cash flow for Year 3?
$119,746 OCF = ($420,000 − 290,000)(1 − .34) + .34(.1920)($520,000) OCF = $119,746
Fazekas Companies is preparing to pay annual dividends of $1.48, $1.60, and $1.75 per share over the next three years, respectively. After that, the annual dividend will be $1.90 per share indefinitely. What is this stock worth to you per share if you require a return of 14.6 percent?
$12.32 P3 = $1.90/.146 P3= $13.01 P0 = $1.48/1.146 + $1.60/1.146^2 + ($1.75 + 13.01)/1.146^3 P0 = $12.32
Sew 'N More just paid an annual dividend of $1.42 per share. The firm plans to pay annual dividends of $1.45, $1.50, and $1.53 over the next 3 years, respectively. After that time, the dividends will be held constant at $1.60 per share. What is this stock worth today at a discount rate of 11.7 percent?
$13.41 P3 = $1.60/.117 P3 = $13.68 P0 = $1.45/1.117 + $1.50/1.117^2 + ($1.53 + 13.68)/1.117^3 P0 = $13.41
ParkCrest, Incorporated, is considering a new 10-year expansion project with an initial fixed asset investment of $132,900. The fixed asset will be depreciated straight-line to zero over its 10-year tax life, after which time it will be worthless. No bonus depreciation will be taken. The project is estimated to generate $99,000 in annual sales, with costs of $34,300. The tax rate is 22 percent and the required return is 14.8 percent. What is the net present value of this project?
$137,106 OCF = ($99,000 − 34,300)(1 − .22) + ($132,900/10)(.22) OCF = $53,389.80 NPV = −$132,900 + $53,389.80{[1 − (1/1.148^10)]/.148} NPV = $137,106
Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $8,100 per year and will cut annual operating costs by $12,600. The system will cost $44,100 to purchase and install. This system is expected to have a 4-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 21 percent and the required return is 10.1 percent. What is the NPV of purchasing the pressure cooker?
$14,948 OCF = ($8,100 + 12,600)(1 − .21) + .21($44,100/4) OCF = $18,668 NPV = −$44,100 + $18,668(PVIFA10.1%, 4) NPV = $14,948
Moody Properties is going to reduce its annual dividend by 10 percent a year for the next two years. After that, it will maintain a constant dividend of $2 per share. Last year, the company paid an annual dividend of $3 per share. What is the market value of this stock if the required return is 13.7 percent?
$15.55 P2 = $2/.137 P2 = $14.60 P0 = [$3(1 − .10)]/1.137 + {[$3(1 − .10)^2] + $14.60}/1.137^2 P0 = $15.55
Galloway, Incorporated, just paid a dividend of $3 per share and has announced that it will increase its dividend by $1 per share for each of the next 4 years, and then never pay another dividend. What is the current per share value at a required return of 12.7 percent?
$16.02 P0 = $4/1.127 + $5/1.127^2 + $6/1.127^3 + $7/1.127^4 P0 = $16.02
Maud'Dib Intergalactic has a new project available on Arrakis. The cost of the project is $35,000 and it will provide cash flows of $19,000, $24,300, and $22,800 over each of the next three years, respectively. Any cash earned in Arrakis is "blocked" and must be reinvested in the country for one year at an interest of 3.3 percent. The project has a required return of 8.3 percent. What is the project's NPV?
$18,616.15 Year 2 cash flow = $19,000(1 + .033) = $19,627.00 Year 3 cash flow = $24,300(1 + .033) = $25,101.90 Year 4 cash flow = $22,800(1 + .033) = $23,552.40 NPV = −$35,000 + $0/(1 + .083) + $19,627.00/(1 + .083)^2 + $25,101.90/(1 + .083)^3 + $23,552.40/(1 + .083)^4 NPV = $18,616.15
Shook Fitness pays an annual dividend that increases by 1.8 percent per year, commands a market rate of return of 13.8 percent, and sells for $19.08 per share. What is the expected amount of the next dividend?
$2.29 $19.08 = D1/(.138 − .018) D1 = $2.29
One year ago, you purchased a stock at a price of $51.14 per share. Today, you sold your stock at a loss of 18.07 percent. Your capital loss was $12.10 per share. What was the total dividends per share paid on this stock over the year?
$2.86 Dividend yield = −.1807 − (−$12.10/$51.14) Dividend yield = .0559, or 5.59% Dividends per share = $51.14 × .0559 Dividends per share = $2.86
Knightmare, Incorporated, will pay a dividend of $4.95, $9.05, and $12.25 per share for each of the next three years, respectively. The company will then close its doors. Investors require a return of 10 percent on the company's stock. What is the current stock price?
$21.18 P = $4.95/(1 + .100) + $9.05/(1 + .100)^2 + $12.25/(1 + .100)^3 P = $21.18
A gym owner is considering opening a location on the other side of town. The new facility will cost $1.55 million and will be depreciated on a straight-line basis over a 20-year period. The new gym is expected to generate $575,000 in annual sales. Variable costs are 41 percent of sales, the annual fixed costs are $93,700, and the tax rate is 21 percent. What is the operating cash flow?
$210,260 OCF = [$575,000 − .41($575,000) − 93,700](1 − .21) + .21($1,550,000/20) OCF = $210,260
Seven months ago, you purchased 420 shares of Mitchum Trading for $63.09 per share. The stock pays a quarterly dividend of $.31 per share and is currently priced at $64.19. What is the total dividend income you received?
$260.40 Dividend income = $.31 × 2 × 420 Dividend income = $260.40
Bubbly Waters currently sells 530 Class A spas, 680 Class C spas, and 430 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that if it does, it can sell 605 units per year. However, if the new spa is added, Class A sales are expected to decline to 340 units while the Class C sales are expected to increase to 705. The sales of the deluxe model will not be affected. Class A spas sell for an average of $16,500 each. Class C spas are priced at $8,300 and the deluxe models sell for $19,300 each. The new mid-range spa will sell for $10,300. What annual sales figure should you use in your analysis?
$3,304,000 Sales = 605($10,300) + (340 − 530)($16,500) + (705 − 680)($8,300) Sales = $3,304,000
A company is considering a project with a cash break-even point of 26,394 units. The selling price is $19 per unit, the variable cost per unit is $7, and depreciation is $89,800. What is the projected amount of fixed costs?
$316,728 FCCash break-even = 26,394($19 − 7) FCCash break-even = $316,728
Your local toy store just announced its annual dividend will be $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 per share in Year 3. At a discount rate of 18 percent, what should one share sell for today?
$33.54 P0 = $4/1.18 + $3/1.18^2 + $46/1.18^3 P0 = $33.54
A proposed project has fixed costs of $39,480, depreciation expense of $8,724, and a sales quantity of 1,330 units. The total variable costs are $5,607. What is the contribution margin per unit if the projected level of sales is the accounting break-even point?
$36.24 Contribution margin = ($39,480 + 8,724)/1,330 Contribution margin = $36.24
New Gadgets, Incorporated, currently pays no dividend but is expected to pay its first annual dividend of $4.50 per share exactly 5 years from today. After that, the dividends are expected to grow at 2.7 percent forever. If the required return is 10.5 percent, what is the price of the stock today?
$38.70 P4 = $4.50/(.105 − .027) = $57.69 P0 = $57.69/1.105^4 P0 = $38.70
Six years ago, Hendershot Stables paid $84,000 in cash for equipment. Last year, the company spent $7,600 on equipment upgrades. The company no longer uses this equipment and has received a cash offer of $39,600 from a buyer. The current book value of the equipment, including all updates, is $32,200. If the company decides to keep the equipment and use it for a new project, what value, if any, should the company assign to the equipment?
$39,600
Character, Incorporated, is analyzing a proposed project that is expected to have sales of 2,450 units, ±8 percent. The expected variable cost per unit is $246 and the expected fixed costs are $309,000. Cost estimates are considered accurate within a ±3 percent range. The depreciation expense is $106,000. The sales price is estimated at $599 per unit, ±2 percent. What is the amount of the total costs per unit under the worst-case scenario?
$394.58 Total costs per unitWorst case = [2,450(.92)($246)(1.03) + $309,000(1.03)]/[2,450(.92)]Total costs per unitWorst case = $394.58
The semiannual, 8-year bonds of Blum and Blum are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000?
$42.45 EAY = .086285 = (1 + r/2)2 − 1r = .0845, or 8.45% Because the bond is selling at par, the APR and the coupon rate are equal. Semiannual interest payment = [.0845($1,000)]/2 Semiannual interest payment = $42.25
Erna Company is expected to pay a dividend of $2.51 one year from today and $2.66 two years from today. The company's sales in two years are expected to be $15,700,000. The company has a PS ratio of 1.69 times, and 524,000 shares outstanding. If the required return on the company's stock is 10.9 percent, what is the current stock price?
$45.60 Sales per share2 = $15,700,000/524,000 = $29.96 P = $2.51/1.109 + $2.66/1.109^2 + ($29.96 × 1.69)/1.109^2 = $45.60
A bond with a par value of $5,000 is quoted at 106.163. What is the dollar price of the bond?
$5,308.15 Price = 106.163/100 × $5,000 = $5,308.15
The Red Bud Company pays a constant dividend of $3.30 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 8.9 percent?
$5.81 P0 = $3.30/1.089 + $3.30/1.089^2 = $5.81
Bennett Company has a potential new project that is expected to generate annual revenues of $267,500, with variable costs of $146,400, and fixed costs of $63,100. To finance the new project, the company will need to issue new debt that will have an annual interest expense of $27,500. The annual depreciation is $26,400 and the tax rate is 21 percent. What is the annual operating cash flow?
$51,364 OCF = ($267,500 − 146,400 − 63,100)(1 − .21) + .21($26,400) OCF = $51,364
The Ronnie Company has sales per share of $26.06. If the PS ratio is 2.14 times, what is the stock price?
$55.77 P = $26.06(2.14) = $55.77
Flex Company just paid total dividends of $550,000 and reported additions to retained earnings of $1,650,000. The company has 505,000 shares of stock outstanding and a benchmark PE of 15.2 times. What stock price would you consider appropriate?
$66.22 EPS = ($550,000 + 1,650,000)/505,000 = $4.36 P = $4.36(15.20) = $66.22
Armour Consulting is downsizing. The company paid an annual dividend of $4.20 last year and has announced plans to lower the dividend by 25 percent each year. Once the dividend amount becomes zero, the company will go out of business. You have a required rate of return of 18 percent on this particular stock. What are your shares in this firm worth today on a per share basis?
$7.33 P0 = $4.20(1 − .25)/(.18 + .25) P0 = $7.33
Marques River Cruises purchased a building for $544,700 and made repairs costing $73,400. The annual taxes on the property are $6,600. The building has a current market value of $712,500 and a current book value of $278,000. The building is mortgage-free. If the company decides to use this building for a new project, what value, if any, should be included in the initial cash flow of the project related to this building?
$712,500
Alina's Cafe is expanding and expects the expansion to cause an increase in operating cash flows of $42,000 per year for seven years. This expansion requires $78,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires an investment of $6,000 in net working capital at the start of the project, which will be recovered at the end of the project. What is the net present value of this expansion project at a required rate of return of 14 percent?
$98,507 NPV = −$78,000 − 6,000 + $42,000{[1 − (1/1.14^7)]/.14} + $6,000/1.14^7 NPV = $98,507
Projects A and B are mutually exclusive. Project A has cash flows of −$10,000, $5,100, $3,400, and $4,500 for Years 0 to 3, respectively. Project B has cash flows of −$10,000, $4,500, $3,400, and $5,100 for Years 0 to 3, respectively. What is the crossover rate for these two projects?
0% ch9 excel crossover rate
A project with an initial cost of $61,200 is expected to provide annual cash flows of $12,450 over the 7-year life of the project. If the required return is 8.7 percent, what is the project's profitability index?
1.034 PI = [$12,450(PVIFA8.7%, 7)]/$61,200 PI = 1.034
Tucker's Trucking is considering a project with a discounted payback period just equal to the project's life. The projections include a sales price of $39, variable costs per unit of $14, and fixed costs of $238,000. The operating cash flow is $24,300. What is the break-even quantity?
10,492 units QFinancial break-even = ($238,000 + 24,300)/($39 − 14) QFinancial break-even = 10,492 units
A stock just paid a dividend of $4.01 and is expected to maintain a constant dividend growth rate of 4.7 percent indefinitely. If the current stock price is $66, what is the required return on the stock?
11.06% Dividend yield = [$4.01(1 + .047)]/$66 = .0636, or 6.36% Required return = 4.7% + 6.36% = 11.06%
You purchased 1,400 shares of stock in Natural Chicken Wings, Incorporated, at a price of $43.61 per share. Since you purchased the stock, you have received dividends of $1.11 per share. Today, you sold your stock at a price of $47.79 per share. What was your total percentage return on this investment?
12.13% Total return = ($47.79 − 43.61 + 1.11)/$43.61 Total return = .1213, or 12.13%
You purchased GARP stock one year ago at a price of $67.09 per share. Today, you sold your stock and earned a total return of 18.71 percent. The stock paid dividends of $2.84 per share over the year. What was the capital gains yield on your investment?
14.48%
A stock had returns of 17.09 percent, −10.91 percent, 22.39 percent, and 13.49 percent for the past four years. What is the standard deviation of the returns?
14.74% Average return = (.1709 − .1091 + .2239 + .1349)/4 Average return = .1052, or 10.52% Variance = 1/3[(.1709 − .1052)^2 + (−.1091 − .1052)^2 + (.2239 − .1052)^2 + (.1349 − .1052)^2] Variance = .02174 Standard deviation = .02174^1/2 Standard deviation = .1474, or 14.74%
Last year, you purchased 610 shares of Forever, Incorporated, stock at a price of $47.64 per share. You received $854 in dividends and a total of $33,593 when you sold the stock. What was the capital gains yield on this stock?
15.60% Capital gains yield = [($33,593/610) − 47.64]/$47.64 Capital gains yield = .1560, or 15.60%
A project has the following cash flows : Year Cash Flows 0 -$11,600 1 5,050 2 7,270 3 4,720 4 −1,660 Assuming the appropriate interest rate is 10 percent, what is the MIRR for this project using the discounting approach?
16.22%
A 5-year project requires a $20,000 investment in machinery that will be depreciated on a straight-line basis to a value of $0 over its 5-year life. The project will have net income of $6,000 per year and operating cash inflows of $7,500 per year. What is the payback period?
2.7 years Payback = $20,000/$7,500 Payback = 2.7 years
Which one of the following bonds is the least sensitive to interest rate risk?
3-year; 6 percent coupon least year; greatest %
Plantowsky Homes is analyzing a new type of insulation for interior walls. The initial fixed asset requirement is $1.62 million, which would be depreciated straight-line to zero over the 7-year life of the project. Projected fixed costs are $287,400 and the anticipated operating cash flow is $136,300. What is the degree of operating leverage for this project?
3.11 DOL = 1 + ($287,400/$136,300) DOL = 3.11
One year ago, you purchased a stock at a price of $57.45 per share. Today, you sold your stock at a loss of 18.15 percent. Your capital loss was $12.32 per share. What was the dividend yield on this stock?
3.29% Dividend yield = −.1815 − (−$12.32/$57.45) Dividend yield = .0329, or 3.29%
A taxable bond has a coupon rate of 6.04 percent and a YTM of 5.67 percent. If an investor has a marginal tax rate of 39 percent, what is the equivalent aftertax yield?
3.46% Aftertax yield = 5.67% × (1 − .39) = 3.46%
There is a project with the following cash flows : Year Cash Flow 0 −$ 26,900 1 7,800 2 8,100 3 7,500 4 5,900 What is the payback period?
3.59 years ch9 excel payback
The average annual return on small-company stocks was about _____ percentage points greater than the average annual return on large-company stocks over the period 1926-2019.
4
Russell United has 28,500 shares of stock outstanding and has two open seats on its board of directors. Each share of common stock is granted one vote. How many additional votes are required to guarantee a seat on the board if the company were to use straight voting rather than cumulative voting?
4,750 Votes requiredStraight = 28,500/2 + 1 Votes requiredStraight = 14,251 Votes requiredCumulative = 28,500/(2 + 1) + 1 Votes requiredCumulative = 9,501 Difference = 14,251 − 9,501 Difference = 4,750
A $1,000 face value bond has a coupon rate of 7 percent, a market price of $989.40, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.2 percent, what is the yield to maturity when expressed in real terms?
4.84% ch7 excel YTM semiannual calc r = 1.0715/1.022 − 1r = .0484, or 4.84%
Chokkar Plastics is considering an expansion project with estimated fixed costs of $39,800, depreciation of $22,800, variable costs per unit of $5.74, and an estimated sales price of $12.99 per unit. How many units must the firm sell to break even on a cash basis?
5,490 units QCash break-even = $39,800/($12.99 − 5.74) QCash break-even = 5,490 units
The Ingraham Corporation has $1,000 par value bonds outstanding. The bonds have an annual coupon rate of 8.90 percent and an annual yield to maturity of 8.03 percent. The annual inflation rate is 2.66 percent. What is the real rate of return on the bonds?
5.23% r = 1.0803/1.0266 − 1 r = .0523, or 5.23%
Bretz Baskets would like to offer a special product to its best customers. However, the firm wants to limit its maximum potential loss on this product to the firm's initial investment. The fixed costs are estimated at $3,600, the depreciation expense is $870, and the contribution margin per unit is $6.89. What is the minimum number of units the firm should pre-sell to ensure its potential loss does not exceed the desired level?
522 units QCash break-even = $3,600/$6.89 QCash break-even = 522 units
An asset has an average return of 11.39 percent and a standard deviation of 24.27 percent. What is the most you should expect to earn in any given year with a probability of 2.5 percent?
59.93% Maximum gain = 11.39% + (2 × 24.27%) Maximum gain = 59.93%
A bond had a price of $1,945.63 at the beginning of the year and a price of $1,976.98 at the end of the year. The bond's par value is $2,000 and its coupon rate is 4.6 percent. What was the percentage return on the bond for the year?
6.34% Bond return = ($1,976.98 − 1,945.63 + 92)/$1,945.63 Bond return = .0634, or 6.34%
The outstanding bonds of Pingale, Incorporated, provide a real rate of return of 3.6 percent. If the current rate of inflation is 2.68 percent, what is the actual nominal rate of return on these bonds?
6.38% R = (1.036)(1.0268) − 1 R = .0638, or 6.38%
There is a bond that has a quoted price of 94.941 and a par value of $2,000. The coupon rate is 6.54 percent and the bond matures in 14 years. If the bond makes semiannual coupon payments, what is the YTM of the bond?
7.12% .94941 x 2000 = 1989.82 $1,898.82 = $65.40{[1 − 1/(1 + r)14 × 2]/r} + $2,000/(1 + r)14 × 2r = .0356, or 3.56% YTM = 3.56% × 2 = 7.12%
A project will require spending $3,200,000 on new fixed assets that will be depreciated on a straight-line basis to a value of zero over five years, at which point the assets will be worthless. The project involves selling new products for $40,000 per unit, with a variable cost of $18,000 per unit. Annual fixed costs are expected to be $485,000. The company uses a 20 percent discount rate. What is the financial break-even point?
71 units EAC = $3,200,000/{[1 − (1/1.205)]/.20} EAC = $1,070,015 QFinancial break-even = ($485,000 + 1,070,015)/($40,000 − 18,000) QFinancial break-even = 71 units
A stock had returns of 10.01 percent, −14.83 percent, 20.27 percent, 25.68 percent, and 8.22 percent over the past five years. What was the geometric average return for this stock?
8.92% Geometric return = [(1 + .1001) × (1 − .1483) × (1 + .2027) × (1 + .2568) × (1 + .0822)]1/5 − 1 Geometric return = .0892, or 8.92%
You want a seat on the board of directors of Four Keys, Incorporated. The company has 190,000 shares of stock outstanding and the stock sells for $75 per share. There are currently 3 seats up for election. The company uses straight voting. How many shares do you need to guarantee that you will be elected to the board?
95,001 shares Shares necessary = 190,000/2 + 1 = 95,001 shares
A project with financing type cash flows is typified by a project that has which one of the following characteristics?
A cash inflow at Time 0
Which of the following statements is true based on the historical record for 1926-2019?
Bonds are generally a safer, or less risky, investment than are stocks.
A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?
Callable
Andrea is analyzing a project that currently has a projected NPV of zero. Which one of the following changes that she is considering is most apt to cause that project to produce a positive NPV instead? Consider each change independently.
Decrease the labor hours per unit produced
Bybee Printing makes custom posters and is currently considering making large-scale outdoor banners as well. Which one of the following is the best example of an incremental operating cash flow related to the banner project?
Hiring additional employees to handle the increased workload should the firm accept the banner project
The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?
Incremental
The operating cash flow for a project should exclude which one of the following?
Interest expense
Which of the following are advantages of the payback method of project analysis?
Liquidity bias; ease of use
Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 1926-2019? Rank from highest to lowest.
Long-term government bonds, long-term corporate bonds, intermediate-term government bonds
Which bond would you generally expect to have the highest yield?
Long-term, taxable junk bond
Which one of the following statements related to market efficiency tends to be supported by current evidence?
Markets tend to respond quickly to new information.
Assume interest expense is equal to zero. Which one of the following is a correct method for computing the operating cash flow of a project?
Net income + Depreciation
Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?
Net present value
Scott is considering a project that will produce cash inflows of $2,900 per year for 3 years. The required rate of return is 15.4 percent and the initial cost is $6,800. What is the discounted payback period?
Never PVA = $2,900{[1 − (1/1.154^3)]/.154} PVA = $6,577.68 This project never pays back on a discounted basis because the PV of the cash inflows is less than the initial cost.
A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?
Over-the-counter
Which one of the following characteristics is most associated with financing type projects?
Prepaid services
Scenario analysis is defined as the:
determination of changes in NPV estimates when what-if questions are posed.
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.
Which one of the following types of analysis is the most complex to conduct?
Simulation
Why is payback often used as the sole method of analyzing a proposed small project?
The benefits of payback analysis usually outweigh the costs of the analysis.
You are considering a project with conventional cash flows, an IRR of 13.28 percent, a PI of 1.16, an NPV of $1,408, and a payback period of 2.76 years. Which one of the following statements is correct given this information?
The discount rate used in computing the net present value was less than 13.28 percent.
Ellis-Clay is replacing a machine that has worn out. The replacement machine will not impact sales or operating costs and will not have any salvage value at the end of its five-year life. The firm has a tax rate of 22 percent, uses straight-line depreciation over an asset's life, ignores bonus depreciation options, and has a positive net income. Given this, which one of the following statements is correct?
The new machine will generate positive operating cash flows.
Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?
Weak
You have determined that an OCF of $151,406 will result in a zero net present value for a project, which is the minimum requirement for project acceptance. The fixed costs are $387,200 and the contribution margin per unit is $56.11. The company feels that it can realistically capture 8.5 percent of the 140,000 unit market for this product. The tax rate is 21 percent and the required rate of return is 13 percent. Should the company develop the new product? Why or why not?
Yes; The expected level of sales exceeds the required level of production. QFinancial break-even = ($387,200 + 151,406)/$56.11 QFinancial break-even = 9,599 units QExpected = 140,000(.085) QExpected = 11,900 units The project should be accepted because the expected level of sales exceeds the financial break-even quantity.
An investment costs $239,000 and has projected cash flows of $123,900, $78,400, and −$22,300 for Years 1 to 3, respectively. The required rate of return is 15.5 percent. Based solely on the internal rate of return rule, should you accept the project? Why or why not?
You should not apply the IRR rule in this case.
A project has average net income of $4,720 per year over its 4-year life. The initial cost of the project is $63,000 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project. The firm set a minimum average accounting return of 11.65 percent. The firm should _____ the project because the AAR is _____ percent.
accept; 14.98 AAR = $4,720/[$63,000 + 0)/2] AAR = .1498, or 14.98% The firm should accept the project because the AAR exceeds the requirement.
The depreciation tax shield is best defined as the:
amount of tax that is saved because of the depreciation expense.
Bonds issued by the U.S. government:
are considered to be free of default risk.
The return earned in an average year over a multiyear period is called the _____ average return.
arithmetic
Net working capital:
can create either an initial cash inflow or outflow.
Anya just completed analyzing a project. Her analysis indicates that the project will have a six-year life and require an initial cash outlay of $98,000. Annual sales are estimated at $64,000 and the tax rate is 21 percent. The net present value is negative $98,000. Based on this analysis, the project is expected to operate at the:
cash break-even point.
Recently, you discovered a convertible, callable bond with a semiannual coupon of 5 percent. If you purchase this bond you will have the right to:
convert the bond into equity shares.
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.
Sung Office Products just announced it is decreasing its annual dividend from $2.20 per share to $1.85 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price:
decreased proportionately with the dividend decrease.
You are evaluating a project and are concerned about the reliability of the cash flow forecasts. To reduce any potentially harmful results from accepting this project, you should consider:
lowering the degree of operating leverage.
A bond's principal is repaid on the ________ date.
maturity
A project's cash flow is equal to the project's operating cash flow:
minus both the project's change in net working capital and capital spending.
A project has a discounted payback period that is equal to the required payback period. Given this information, the project:
must have a profitability index that is equal to or greater than 1.0.
Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:
must still declare each dividend before it becomes an actual company liability.
The stream of customer orders coming in to the NYSE trading floor is called the:
order flow.
Municipal bonds:
pay interest that is free from federal taxation.
The primary purpose of Blume's formula is to:
project future rates of return.
The difference between the price that a dealer is willing to pay and the price at which he or she is willing to sell is called the:
spread.
Inside information has the least value when financial markets are:
strong form efficient.
A project that has a payback period exactly equal to the project's life is operating at:
the accounting break-even point.
The net present value of a project will increase if:
the aftertax salvage value of the fixed assets increases.
