FNBSLW 344 Final Exam (Ch 8,9,12)
The pro forma income statements for a proposed investment should include all of the following except: forecasted sales. taxes. depreciation expense. fixed costs. changes in net working capital.
changes in net working capital.
The weighted average cost of capital is defined as the weighted average of a firm's: return on its investments. cost of equity and its aftertax cost of debt. pretax cost of debt and equity securities. bond coupon rates. dividend and capital gains yields.
cost of equity and its aftertax cost of debt.
Black Stone Furnaces wants to build a new facility. The cost of capital for this investment is primarily dependent upon which one of the following? a)Firm's overall source of funds b)Source of the funds used to build the facility c)Current tax rate d)The nature of the investment e)Firm's historical average rate of return
d)The nature of the investment
Which one of the following statements is correct? a. Net present value is equal to an investment's cash inflows discounted to today's dollars. b. The net present value is positive when the required return exceeds the internal rate of return. c. The net present value is a measure of profits expressed in today's dollars. d. If the internal rate of return equals the required return, the net present value will equal zero. e. If the initial cost of a project is increased, the net present value of that project will also increase.
d. If the internal rate of return equals the required return, the net present value will equal zero.
Dismal Outlook is unable to obtain financing for any new projects under any circumstances. This company is faced with: contingency planning. soft rationing. hard rationing. real options. sunk costs.
hard rationing.
Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates. The type of analysis that Jamie is doing is best described as: sensitivity analysis. erosion planning. scenario analysis. benefit planning. opportunity evaluation.
scenario analysis.
Kate is CFO of a major firm and has the job of assigning discount rates to each project that is under consideration. Kate's method of doing this is to assign an incrementally higher rate as the risk level of the project increases over that of the current firm. Likewise, she assigns lower rates as the risk level declines. What approache is Kate using to assign discount rates? Pure play Divisional rating subjective straight WACC equity rating
subjective
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost? Fixed Forgotten Variable Opportunity Sunk
sunk
Molly is considering a project with cash inflows of $811, $924, $638, and $510 over the next four years, respectively. The relevant discount rate is 11.2 percent. What is the net present value of this project if it the start-up cost is $2,700?
$-425.91 Computation of Net Present Value Year Cash inflows Discount rate 11.2% PV of cash flows 1 $811 0.899 $729.09 2 $924 0.809 $747.52 3 $638 0.727 $463.83 4 $510 0.654 $333.54 Total PV of cash flows $2273.98 Initial investment ($2700) NPV ($426.02)
What is the net present value of a project that has an initial cost of $42,700 and produces cash inflows of $9,250 a year for 9 years if the discount rate is 14.65 percent? $2,470.01 $1,240.23 $1,992.43 $2,111.41 $798.48
$1,992.43
Tennessee Valley Antiques would like to issue new equity shares if its cost of equity declines to 12.5 percent. The company pays a constant annual dividend of $2.10 per share. What does the market price of the stock need to be for the firm to issue the new shares? $15.10 $15.60 $18.40 $17.90 $16.80
$16.80
A cost-cutting project will decrease costs by $37,400 a year. The annual depreciation on the project's fixed assets will be $4,700 and the tax rate is 34 percent. What is the amount of the change in the firm's operating cash flow resulting from this project? A. $21,582 B. $26,791 C. $25,805 D. $23,610 E. $26,282
$26,282
A proposed project requires an initial cash outlay of $49,000 for equipment and an additional cash outlay of $18,700 in Year 1 to cover operating costs. During Years 2 through 4, the project will generate cash inflows of $42,500 a year. What is the net present value of this project at a discount rate of 11.6 percent? $25,810.33 $26,343.72 $23,602.18 $24,399.99 $26,391.08
$26,343.72
An all-equity firm has a net income of $46,420, depreciation of $3,758, and taxes of $23,915. What is the firm's operating cash flow? $47,850 $51,950 $46,250 $50,178 $46,750
$50,178 Operating Cash flow= Net Income + depreciation(non-cash operating expenditure)
Which one of the following will increase the cost of equity, all else held constant? A- Increase in the dividend growth rate B- Decrease in beta C- Decrease in future dividends D- Increase in stock price E- Decrease in market risk premium
A- Increase in the dividend growth rate
Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project's net present value. What type of analysis is being conducted? A- Sensitivity analysis B- Erosion planning C- Scenario analysis D- Benefit-cost analysis E- Opportunity cost analysis
A-Sensitivity analysis
A project has sales of $511,800, costs of $322,400, depreciation of $22,620, interest expense of $3,062, and a tax rate of 34 percent. What is the value of the depreciation tax shield? A. $7,690.80 B. $8,064.08 C. $6,652.40 D. $9,281.88 E. $10,805.39
A. $7,690.80
Which one of the following is most closely related to the net present value profile? A. Internal rate of return B. Average accounting return C. Profitability index D. Payback E. Discounted payback
A. Internal rate of return
Which one of the following indicates that an independent project is definitely acceptable? A. Profitability index greater than 1.0 B. Negative net present value C. Modified internal rate of return that is lower than the requirement D. Zero internal rate of return E. Positive average accounting return
A. Profitability index greater than 1.0
Northern Companies has three separate divisions. Each year, the company determines the amount it can afford to spend in total for capital expenditures and then allocates one-third of that amount to each division. This allocation process is called: A. Soft rationing B. Hard rationing C. Opportunity cost allocation D. Divisional separation E. Strategic planning
A. Soft rationing
The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation: A. Tax shield B. Credit C. Erosion D. Opportunity Cost E. Adjustment
A. Tax shield
Which one of the following statements is correct? A. The payback period ignores the time value of money. B. A longer payback period is preferred over a shorter payback period. C. The payback rule is biased in favor of long-term projects. D. The payback rule states that you should accept a project if the payback period is less than one year. E. The payback period considers the timing and amount of all of a project's cash flows.
A. The payback period ignores the time value of money.
The net present value: A. decreases as the required rate of return increases. B. is equal to the initial investment when the internal rate of return is equal to the required return. C. method of analysis cannot be applied to mutually exclusive projects. D. ignores cash flows that are distant in the future. E. is unaffected by the timing of an investment's cash flows.
A. decreases as the required rate of return increases.
The average accounting return: A. measures profitability rather than cash flow. B. discounts all values to today's dollars. C. is expressed as a percentage of an investment's current market value. D. will equal the required return when the net present value equals zero. E. is used more often by CFOs than the internal rate of return.
A. measures profitability rather than cash flow.
Northern Companies has three separate divisions. Each year, the company determines the amount it can afford to spend in total for capital expenditures and then allocates one-third of that amount to each division. This allocation process is called: A. soft rationing. B. hard rationing. C. opportunity cost allocation. D. divisional separation. E. strategic planning.
A. soft rationing.
Which one of the following refers to a method of increasing the rate at which an asset is depreciated? Noncash expense Straight-line depreciation Depreciation tax shield Accelerated cost recovery system Market-based depreciation
Accelerated cost recovery system
Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC? Weighted average cost of capital Pure play cost Cost of equity Subjective cost Cost of debt
Cost of equity
If a project with conventional cash flows has a profitability of 1.0, the project will: Never pay back Have a negative net present value Have a negative internal rate of return Produce more cash inflows than outflows in today's dollars Have an internal rate of return that equals the required return
Have an internal rate of return that equals the required return
The net present value profile illustrates how the net present value of an investment is affected by which one of the following? A. Project's initial cost B. Discount rate C. Timing of the project's cash inflows D. Inflation rate E. Real rate of return
B. Discount rate
Which one of the following is the primary advantage of payback analysis? A. Incorporation of the time value of money concept B. Ease of use C. Research and development bias D. Arbitrary cutoff point E. Long-term bias
B. Ease of use
Assume a firm has a beta of 1.2. All else held constant, the cost of equity for this firm will increase if the: A. Market risk premium decreases B. Risk-free rate decreases C. Market rate of return decreases D. Beta decreases E. Either the rich-free rate or the market rate of return decreases
B. Risk-free rate decreases
Which one of the following statements is correct? A. The internal rate of return is the most reliable method of analysis for any type of investment decision. B. The payback method is biased toward short-term projects. C. The modified internal rate of return is most useful when projects are mutually exclusive. D. The average accounting return is the most difficult method of analysis to compute. E. The net present value method is applicable only if a project has conventional cash flows."
B. The payback method is biased toward short-term projects.
Old Town Industries has three divisions. Division X has been in existence the longest and has the most stable sales. Division Y has been in existence for five years and is slightly less risky than the overall firm. Division Z is the research and development side of the business. When allocating funds, the firm should probably: A. require the highest rate of return from division X since it has been in existence the longest. B. assign the highest cost of capital to division Z because it is most likely the riskiest of the three divisions. C. use the firm's WACC as the cost of capital for division Z as it provides analysis for the entire firm. D. use the firm's WACC as the cost of capital for divisions A and B because they are part of the revenue-producing operations of the firm. E. allocate capital funds evenly amongst the divisions to maintain the current capital structure of the firm.
B. assign the highest cost of capital to division Z because it is most likely the riskiest of the three divisions.
The opportunities that a manager has to modify a project once it has started are called: A. sensitivity choices. B. managerial options. C. scenario adjustments. D. restructuring options. E. erosion control measures
B. managerial options.
Scenario analysis is best described as the determination of the: A. most likely outcome for a project. B. reasonable range of project outcomes. C. variable that has the greatest effect on a project's outcome. D. effect that a project's initial cost has on the project's net present value E. change in a project's net present value given a stated change in projected sales
B. reasonable range of project outcomes.
The cost of capital for a project depends primarily on which one of the following? Source of funds used for the project Division within the firm that undertakes the project Project's modified internal rate of return How the project uses its funds Project's fixed costs
How the project uses its funds
Which of the following should be included in the analysis of a proposed investment? I. erosion effects II. opportunity costs III. sunk costs IV. side effects I only II only I and IV only I, II, and IV only I, II, III, and IV
I, II, and IV only (also include tax effects)
Which one of the following will decrease the aftertax cost of debt for a firm? Decrease in the firm's beta Increase in tax rates Increase in the risk-free rate of return Decrease in the market price of the debt Decrease in a bond's yield-to-maturity
Increase in tax rates
Trendsetters has a cost of equity of 14.6 percent. The market risk premium is 8.4 percent and the risk-free rate is 3.9 percent. The company is acquiring a competitor, which will increase the company's beta to 1.4. What effect, if any, will the acquisition have on the firm's cost of equity capital? No effect Decrease of .62 percent Decrease of .84 percent Increase of 1.06 percent Increase of .13 percent
Increase of 1.06 percent cost of equity = Rf + beta x market premium
The profitability index reflects the value created per dollar: Invested Of Sales Of Net Income Of Taxable Income Of Shareholders' Equity
Invested
Generally speaking, payback is best used to evaluate which type of projects? Low-cost, short-term High-cost, short-term Low-cost, long-term High-cost, long-term Any size of long-term project
Low-cost, short-term
Which one of the following is a correct value to use if you are conducting a best-case scenario analysis? Sales price that is most likely to occur Lowest expected level of sales quantity Lowest expected salvage value Highest expected need for net working capital Lowest expected value for fixed costs
Lowest expected value for fixed costs
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? Dual return Conventional Crosswise Multiple choice Mutually exclusive
Mutually Exclusive
EKG, Inc. is considering a new project that will require an initial cash investment of $419,000. The project will produce no cash flows for the first two years. The projected cash flows for Years 3 through 7 are $69,000, $98,000, $109,000, $145,000, and $165,000, respectively. How long will it take the firm to recover its initial investment in this project? 3.81 years 3.98 years 5.57 years The project never pays back. 5.99 years
5.99 years
Judy's Boutique just paid an annual dividend of $1.48 on its common stock and increases its dividend by 2.2 percent annually. What is the rate of return on this stock if the current stock price is $29.60 a share? 7.31% 8.37% 7.54% 8.19% 8.33%
7.31% Price = Dividend/ ke-g D1= dividend at year 1 = 1.48*102.2% Ke = Required rate of return 1.51256 g = Growth Rate 29.60= 1.513/Ke-.022 1.513 = 29.60Ke- 0.6512 29.60 Ke = 1.513+.6512 29.60 Ke = 2.1642 Ke= 2.1642/29.60 Ke = 7.31% The required rate of return is 7.31%
Corner Restaurant is considering a project with an initial cost of $211,600. The project will not produce any cash flows for the first three years. Starting in Year 4, the project will produce cash inflows of $151,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 18.6 percent. What is the project's net present value? Should the restaurant accept the project? $113,585.57 $-4591.11 $51,786.86 $2,255.56 $-16,670.67
$-16,670.67 NPV = -$211,600 + $151,000 / 1.1864+ $151,000 / 1.1865+ $151,000 / 1.1866NPV = -$16,670.67 No because NPV is less than 0
The market rate of return is 11.8 percent and the risk-free rate is 3.45 percent. Galaxy Co. has 36 percent more systematic risk than the overall market and has a dividend growth rate of 3.5 percent. The firm's stock is currently selling for $42 a share and has a dividend yield of 2.8 percent. What is the firm's cost of equity? 19.82 percent 10.55 percent 15.31 percent 16.28 percent 21.11 percent
10.55 percent
The Steel Factory is considering a project that will produce annual cash flows of $43,800, $40,200, $46,200, and $41,800 over the next four years, respectively. What is the internal rate of return if the initial cost of the project is $127,900? 13.00% 10.19% 11.28% 12.24% 12.83%
13.00%
Services United is considering a new project that requires an initial cash investment of $26,000. The project will generate cash inflows of $2,500, $11,700, $13,500, and $10,000 over each of the next four years, respectively. How long will it take to recover the initial investment? 2.74 years 2.87 years 2.99 years 3.27 years 3.68 years
2.87 years
The Golden Goose is considering a project with an initial cost of $46,700. The project will produce cash inflows of $10,000 a year for the first two years and $12,000 a year for the following three years. What is the payback period? 2.87 years 3.23 years 3.41 years 3.79 years 4.23 years
4.23 years
Diamond Enterprises is considering a project that will produce cash inflows of $41,650 a year for three years followed by $49,000 in Year 4. What is the internal rate of return if the initial cost of the project is $219,000? 9.43 percent 8.29 percent 7.81 percent 8.42 percent 7.55 percent
8.42 percent
When using the pure play approach for a proposed investment, a firm is primarily seeking a rate of return that: A) reflects the size and life of the project. B) best matches the risk level of the proposed investment. C) most closely correlates with the proposed investment's internal rate of return. D) is based on the actual source of funds that will be used to fund the project. E) creates a positive net present value for the project
B) best matches the risk level of the proposed investment.
Scenario analysis asks questions such as: A- How will changing the number of units sold affect the outcome of this project? B- What is the best outcome that should reasonably be expected? C- How much will a $1 increase in the variable cost per unit change the net present value? D- Will the net present value increase or decrease if the quantity sold increases by 100 units? E- How will the operating cash flow change if the depreciation method is changed?
B- What is the best outcome that should reasonably be expected?
Which one of the following is the primary determinant of an investment's cost of capital? A- Life of the investment B- Amount of the initial cash outlay C- The investment's level of risk D- The source of funds used for the investment E- The investment's net present value
C- The investment's level of risk
Which one of the following methods of analysis ignores cash flows? A. Profitability index B. Net present value C. Average accounting return D. Modified internal rate of return E. Internal rate of return
C. Average accounting return
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? A. Internal rate of return B. Profitability index C. Average accounting return D. Net present value E. Payback
C. Average accounting return
Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following? A. Eroded cash flows B. Deviated projections C. Incremental cash flows D. Directly impacted flows E. Assumed flows
C. Incremental cash flows
Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of eight years. A. New tires that will be purchased this winter B. Costs of repairs needed so the truck can pass inspection next month C. Money spent last month repairing a damaged front fender D. Engine tune-up that is scheduled for this afternoon E. Cost for a truck driver for the remainder of the truck's useful life
C. Money spent last month repairing a damaged front fender
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive? A. Internal rate of return B. Profitability index C. Net present value D. Modified internal rate of return E. Average accounting return
C. Net Present Value
Kelly's uses the firm's WACC as the required return for some of its projects. For other projects, the firms uses a rate equal to WACC plus 1 percent, while another set of projects is assigned rates equal to WACC minus some amount. Which one of the following factors should be the key factor the firm uses to determine the amount of the adjustment it will make when assigning the project a discount rate? A. The current market rate of interest B. Actual source of funds used to finance the project C. The perceived risk level of the project D. The division within the firm that will be assigned to manage the project E. The firm's current debt-equity ratio
C. The perceived risk level of the project
The net present value of an investment represents the difference between the investment's: A. cash inflows and outflows. B. cost and its net profit. C. cost and its market value. D. cash flows and its profits. E. assets and liabilities.
C. cost and its market value.
Chasteen, Inc., is considering an investment with an initial cost of $145,000 that would be depreciated straight-line to a zero book value over the life of the project. The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years. What is the internal rate of return?
NPV = 0 = -$145,000 + $76,000 / (1 + IRR) + $76,000 / (1 + IRR)2+ $30,000 / (1 + IRR)3+$30,000 / (1 + IRR)4IRR = 21.29 percent
A debt-free firm has net income of $107,400, taxes of $38,700, and depreciation of $19,300. What is the operating cash flow? A. $88,000 B. $123,500 C. $127,100 D. $126,700 E. $118,900
D. $126,700
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? A. Internal Rate of Return B. Payback C. Average Accounting Rate of Return D. Net Present Value E. Profitability Index
D. Net Present Value
Which one of the following indicates that a project should be rejected? A. Average accounting return that exceeds the requirement B. Payback period that is shorter than the requirement period C. Positive net present value D. Profitability index less than 1.0 E. Internal rate of return that exceeds the required return
D. Profitability index less than 1.0
The net working capital invested in a project is generally: A. A sunk cost B. An opportunity cost C. Recouped in the first year of the project D. Recouped at the end of the project E. Depreciated to a zero balance over the life of the project
D. Recouped at the end of the project
The payback method of analysis ignores which one of the following? A. Initial cost of an investment B. Arbitrary cutoff point C. Cash flow direction D. Time value of money E. Timing of each cash inflow
D. Time value of money
The results of the dividend growth model: A. vary directly with the market rate of return. B. can only be applied to projects that have a growth rate equal to that of the current firm. C. are highly dependent upon the beta used in the model. D. are sensitive to the rate of dividend growth. E. are most reliable when the growth rate exceeds 10 percent.
D. are sensitive to the rate of dividend growth.
The average net income of a project divided by the project's average book value is referred to as the project's: A. required return. B. market rate of return. C. internal rate of return. D. average accounting return. E. discounted rate of return.
D. average accounting return.
Contingency planning focuses on the: A. opportunity costs involved with a project. B. sunk costs related to a project. C. economic effects on a project's profitability. D. managerial options implicit in a project. E. optional capital requirements of a project.
D. managerial options implicit in a project.
A cost-cutting project will decrease costs by $37,400 a year. The annual depreciation on the project's fixed assets will be $4,700 and the tax rate is 34 percent. What is the amount of the change in the firm's operating cash flow resulting from this project? A. $21,582 B. $26,791 C. $25,805 D. $23,610 E. $26,282
E. $26,282
In which one of the following situations would the payback method be the preferred method of analysis? A. A long-term capital-intensive project B. Two mutually exclusive projects C. A proposed expansion of a firm's current operations D. Different-sized projects E. Investment funds available only for a limited period of time
E. Investment funds available only for a limited period of time
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? A. Payback B. Profitability index C. Accounting rate of return D. Internal rate of return E. Net present value
E. Net present value
Which one of the following methods of analysis has the greatest bias toward short-term projects? A. Net present value B. Internal rate of return C. Average accounting return D. Profitability index E. Payback
E. Payback
The reinvestment approach to the modified internal rate of return: A. individually discounts each separate cash flow back to the present. B. reinvests all the cash flows, including the initial cash flow, to the end of the project. C. discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project. D. discounts all negative cash flows back to the present and combines them with the initial cost. E. compounds all of the cash flows, except for the initial cash flow, to the end of the project.
E. compounds all of the cash flows, except for the initial cash flow, to the end of the project.
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to: A. produce a positive annual cash flow. B. produce a positive cash flow from assets. C. offset its fixed expenses. D. offset its total expenses. E. recoup its initial cost.
E. recoup its initial cost.
The analysis of a new project should exclude: A. side effects. B. tax effects. C. opportunity costs. D. erosion effects. E. sunk costs.
E. sunk costs
Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project? Opportunity cost Sunk cost Erosion Replicated flows Pirated flows
Erosion
You are considering an investment for which you require a rate of return of 8.5 percent. The investment costs $67,400 and will produce cash inflows of $25,720 for three years. Should you accept this project based on its internal rate of return? Why or why not? No'; because the IRR is 9.51 percent Yes; because the IRR is 6.67 percent Yes; because the IRR is 7.08 percent Yes; because the IRR is 9.51 percent No; because the IRR is 7.08 percent
No; because the IRR is 7.08 percent and required return is 8.5%
Which one of the following terms refers to the best option that was foregone when a particular investment is selected? Side effect Erosion Sunk cost Opportunity cost Marginal cost
Opportunity cost
Which one of the following methods of analysis ignores the time value of money? Net Present Value Internal Rate of Return Discounted Cash Flow Analysis Payback Profitability Index
Payback
Which one of the following indicators offers the best assurance that a project will produce value for its owners? Positive AAR Positive IRR Negative rate of return Positive NPV PI equal to zero
Positive NPV
Which one of the following represents the rate of return a firm must earn on its assets if it is to maintain the current value of its securities? Cost of equity Internal rate of return Aftertax cost of debt Weighted average cost of capital Debt-equity ratio
Weighted average cost of capital
Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows? Forecast assumption principle Base assumption principle Fallacy principle Erosion principle Stand-alone principle
Stand-alone principle
Which one of the following refers to the option to expand into related businesses in the future? Strategic option Contingency option Soft rationing Hard rationing Capital rationing option
Strategic option
Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, Weston can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost? Book Erosion Market Sunk Opportunity
Sunk
The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? -The cash flows are conventional. -The initial cash flow is negative. -The investment is mutually exclusive with another investment of a different size. -The investment has cash inflows that occur after the required payback period. -One of the time periods within the investment period has a cash flow equal to zero.
The investment is mutually exclusive with another investment of a different size.
Today, Sweet Snacks is investing $491,000 in a new oven. As a result, the company expects its cash flows to increase by $64,000 a year for the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment? 3.97 years 4.18 years 4.46 years 4.70 years The project never pays back
The project never pays back
The Tool Box needs to purchase a new machine costing $1.46 million. Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years. If management requires a minimum 12 percent rate of return, should the firm purchase this particular machine based on its IRR? Why or why not? Yes, because the IRR is 10.75 percent Yes, because the IRR is 12.74 percent No, because the IRR is 10.75 percent No, because the IRR is 12.74 percent The answer cannot be determined as there are multiple IRRs
Yes, because the IRR is 12.74 percent
China Importers would like to spend $215,000 to expand its warehouse. However, the company has a loan outstanding that must be repaid in 2.5 years and thus will need the $215,000 at that time. The warehouse expansion project is expected to increase the cash inflows by $60,000 in the first year, $140,000 in the second year, and $150,000 a year for the following 2 years. Should the firm expand at this time? Why or why not? Yes; because the money will be recovered in 1.69 years Yes; because the money will be recovered in 1.87 years Yes; because the money will be recovered in 2.10 years No; because the project never pays back No; because the money will not be recovered in time to repay the loan
Yes; because the money will be recovered in 2.10 years
If an investment is producing a return that is equal to the required return the investments net present value will be: Positive Greater than the project's initial investment Zero Equal to the project's net profit Less than, or equal to, zero
Zero
Boone Brothers remodels homes and replaces windows. Ace Builders constructs new homes. If Boone Brothers considers expanding into new home construction, it should evaluate the expansion project using which one of the following as the required return for the project? a) Boone Brothers' cost of capital b) Ace Builders' cost of capital c) Average of Boone Brothers' and Ace Builders' cost of capital d) Lower of Boone Brothers' or Ace Builders' cost of capital e) Higher of Boone Brothers' or Ace Builders' cost of capital
b) Ace Builders' cost of capital
Which statement is true? a. An increase in the market value of preferred stock will increase a firm's weighted average cost of capital. b. The cost of preferred stock is unaffected by the issuer's tax rate. c. Preferred stock is generally the cheapest source of capital for a firm. d. The cost of preferred stock remains constant from year to year. e. Preferred stock is valued using the capital asset pricing model.
b. The cost of preferred stock is unaffected by the issuer's tax rate.
Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional. a. Payback period that exceeds the required period b.Internal rate of return that exceeds the required return c.Negative average accounting return d.Profitability index of zero e.Modified internal rate of return that is equal to zero
b.Internal rate of return that exceeds the required return An investment is acceptable only if Internal rate of return is greater than required return or its Net present value is positive.
Forecasting risk is best defined as: reality risk. value risk. potential risk. management risk. estimation risk.
estimation risk.
In an efficient market, the cost of equity for a highly risky firm: - decreases as the beta of the firm's stock increases. - will be less than the market rate but higher than the risk-free rate. - must equal the market rate of return. - changes by 1 percent for every 1 percent change in the risk-free rate. - increases in direct relation to the stock's systematic risk.
increases in direct relation to the stock's systematic risk. => The cost of equity for a highly risky firm increases in direct relation to the stock's systematic risk. This is because in an efficient market the cost of equity increases in proportionate to stock's risk.
A pro forma financial statement is a financial statement that: expresses all values as a percentage of either total assets or total sales. compares actual results to the budgeted amounts. compares the performance of a firm to its industry. projects future years' operating results. values all assets based on their current market values.
projects future years' operating results.
Farmer's Supply, Inc. is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate that should be used to evaluate this proposed expansion. Which one of the following terms describes this evaluation approach? equity approach aftertax approach subjective approach market play pure play approach
pure play approach
