Valuation MCQ Study Set

The Galley purchased some 3-year MACRS property two years ago at a cost of $19,800. The MACRS rates are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent. The firm no longer uses this property so is selling it today at a price of $13,500. What is the amount of the aftertax profit on the sale? Assume the firm applies bonus depreciation and has a tax rate of 21 percent. -$8,295.00 -$10,702.40 -$9,140.48 -$7,187.78 -$10,665.00

$10,665.00

Samoa's Tools has annual sales of $760,000 and a profit margin of 8 percent. The annual depreciation expense is $50,000. What is the amount of the annual operating cash flow if the company has no long-term debt? -$810,000 -$50,000 -$110,800 -$930,000 -$60,800

$110,800

For next year, By-Way has projected sales of $435,000, costs of $254,000, depreciation of $35,000, interest expense of $22,000, and taxes of $28,500. What is the amount of the projected operating cash flow? -$181,000 -$130,500 -$152,500 -$157,900 -$161,500

$152,500

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

$16,103.98

For this year, Wilbert's Cakes has costs of $187,400, depreciation of $32,700, interest expense of $14,800, dividends paid of $5,600, taxes of $17,600, and an operating cash flow of $101,900. What is the sales amount? -$269,800 -$264,200 -$322,100 -$324,200 -$306,900

$306,900

Angie's expects annual sales of 2,400 units, ± 3 percent, of a new product at a price of $59 a unit, ± 2 percent. The expected variable cost per unit is $27.20, ± 2 percent, annual fixed costs are $32,500, and depreciation is $4,400 per year. What is the total annual expense per unit under the pessimistic scenario? Ignore taxes. -$43.59 -$44.55 -$40.02 -$41.70 -$42.51

$43.59

The projections for a new one-year project show sales of 8,500 units, ± 5 percent; variable costs per unit of $28.62, ± 3 percent; and fixed costs of $164,000, ± 3 percent. Depreciation is $62,000 and the tax rate is 23 percent. The sale price is $55 a unit, ± 2 percent. The company bases its sensitivity analysis on the expected scenario. What is the operating cash flow for a sensitivity analysis using total fixed costs of $170,000? -$58,219.90 -$62,406.67 -$52,048.80 -$56,017.10 -$61,311.07

$56,017.10

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

$844.36

A firm has an equity beta of 1.2, the risk-free rate is 3.4 percent, the market return is 15.7 percent, and the pretax cost of debt is 9.4 percent. The debt-equity ratio is .47. If you apply the common beta assumptions, what is the firm's asset beta? -.82 -.73 -.67 -.61 -.58

.82

Phil's Carvings wants to have a weighted average cost of capital of 9.5 percent. The firm has an aftertax cost of debt of 6.5 percent and a cost of equity of 12.75 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital? -.84 -.92 -.67 -.76 -1.08

1.08

Clancy's just paid its annual dividend of $1.48 per share. Analysts expect the stock price to increase by 2.1 percent annually and value the stock at $14.65 per share currently. What is the cost of equity for this firm? -14.06 percent -13.32 percent -12.41 percent -12.20 percent -13.87 percent

12.41 percent

An investment with an initial cost of $4,000 produces cash flows of $3,400, −$500, $2,800, −$100, and $6,000 for Years 1 to 5, respectively. How many IRRs does this project have? -2 -4 -5 -6 -3

5

The Upper Tier has a current debt-equity ratio of .52 and a target debt-equity ratio of .45. The cost of floating equity is 9.5 percent and the flotation cost of debt is 6.6 percent. What should the firm use as their weighted average flotation cost? -8.60 percent -8.33 percent -8.51 percent -8.01 percent -7.76 percent

8.60 percent

The cost of capital used to compute the present value of a project should be the rate that can be earned on: -the sponsoring firm's return on equity. -a financial asset of comparable risk. -the overall market portfolio. -a riskless asset with a similar life span. -the sponsoring firm's return on assets.

a financial asset of comparable risk.

Assume a firm has no interest expense or extraordinary items. Given this, the operating cash flow can be computed as: -EBIT − Taxes. -Net income + Depreciation. -EBIT − Depreciation + Taxes. -(Sales − Costs)(1 − Tax rate). -EBIT(1 − Tax rate) + Depreciation(Tax rate).

Net income + Depreciation.

Which one of these is a correct means of calculating an expected rate of growth? -ROE × Retention ratio -ROA × Retention ratio -ROA × Profit margin -ROE × Profit margin -ROA × Dividend payout ratio

ROE × Retention ratio

Which one of the following is the best example of two mutually exclusive projects? -Buying sufficient equipment to manufacture both desks and chairs simultaneously -Using the company's sales force to promote sales of both shoes and socks -Planning to build a warehouse and a retail outlet side by side -Renting out a company warehouse or selling it outright Buying both inventory and fixed assets using funds from the same bank loan

Renting out a company warehouse or selling it outright

Which one of the following should be excluded from the analysis of a project? -Opportunity costs -Incremental fixed costs -Sunk costs -Incremental variable costs -Erosion costs

Sunk costs

You are considering an investment project with an internal rate of return of 8.7 percent, a net present value of $393, and a payback period of 2.44 years. Which one of the following is correct given this information? -The discount rate used to compute the net present value is equal to the internal rate of return. -The discounted payback period will be less than 2.44 years. -The discount rate used in computing the net present value was less than 8.7 percent. -This project should be rejected based on the net present value. -The required payback period must be greater than 2.44 years.

The discount rate used in computing the net present value was less than 8.7 percent.

The net working capital of a firm will decrease if there is: -a decrease in fixed assets. -an increase in inventory. -a decrease in accounts receivable. -an increase in the checking account balance. -a decrease in accounts payable.

a decrease in accounts receivable.

How should a profitability index of zero be interpreted? -The project has an internal rate of return equal to the discount rate. -The project also has a net present value of zero. -The project's cash flows subsequent to the initial cash flow have a present value of zero. -The present value of the cash flows subsequent to the initial cash flow is equal to (−1 × Initial cash flow). -The project produces a net income of zero for every year of its life.

The project's cash flows subsequent to the initial cash flow have a present value of zero.

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

The tax due on the sale is $10,032.60.

The discounted payback period of a project will decrease whenever the: -time period of the project is increased. -amount of each cash inflow is increased. -initial cash outlay of the project is increased. -costs of the fixed assets utilized in the project increase. -discount rate applied to the project is increased.

amount of each cash inflow is increased.

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

amount of tax due on the sale of that asset.

If a project has a net present value equal to zero, then: -the discount rate exceeds the internal rate of return. -any delay in receiving the projected cash inflows will cause the project's NPV to be negative. -the internal rate of return exceeds the discount rate. -the project produces cash inflows that exceed the minimum required inflows. -the initial cost of the project exceeds the present value of the project's subsequent cash flows.

any delay in receiving the projected cash inflows will cause the project's NPV to be negative.

Fixed costs: -change as the quantity of output produced changes. -reflect the change in a variable when one more unit of output is produced. -are constant over the short-run regardless of the quantity of output produced. -are subtracted from sales to compute the contribution margin. -can be ignored in scenario analysis since they are constant over the life of a project.

are constant over the short-run regardless of the quantity of output produced.

All else equal, the payback period for a project will decrease whenever the: -initial cost increases. -duration of a project is lengthened. -assigned discount rate decreases. -cash inflows are moved earlier in time. -required return for a project increases.

cash inflows are moved earlier in time.

Variable costs: -are subtracted from fixed costs to compute the contribution margin. -change in direct relationship to the quantity of output produced. -are equal to the change in the fixed assets required to change the level of output. -are added to fixed costs on a per-unit basis to compute the contribution margin. -are constant in the short-run regardless of the quantity of output produced.

change in direct relationship to the quantity of output produced.

The discounted payback method: -discounts the initial cost. -is preferred to the NPV method. -discounts the cutoff point. -considers the time value of money. -ignores project risks.

considers the time value of money.

All else constant, as the variable cost per unit for a project increases, the: -sensitivity to fixed costs decreases. -net profit increases. -contribution margin decreases. -accounting break-even point decreases. -project's net present value increases.

contribution margin decreases.

Proposed projects should be accepted when those projects: -have a positive rate of return. -return the initial cash outlay within the life of the project. -have required cash inflows that exceed the actual cash inflows. -have an initial cost that exceeds the present value of the future cash flows. -create value for the owners of the firm.

create value for the owners of the firm.

A project's operating cash flow will increase when the: -net working capital requirement increases. -sales projections are lowered. -interest expense is lowered. -earnings before interest and taxes decreases. -depreciation expense increases.

depreciation expense increases.

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

depreciation tax shield.

When estimating the cost of equity using the DDM, the factor that is the most apt to add error to this estimate is the: -current stock price. -firm's tax rate. -value of the last dividend. -historical beta. -dividend growth rate.

dividend growth rate.

Using the internal rate of return method, a conventional investment project should be accepted if the internal rate of return is: -less than the discount rate. -positive. -equal to, and only if it is equal to, the discount rate. -negative. -equal to or greater than the discount rate.

equal to or greater than the discount rate.

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

financial

The point where a project produces a rate of return equal to the required return is known as the: -point of zero profit. -financial break-even point. -internal break-even point. -accounting break-even point. -income break-even point.

financial break-even point.

For a levered firm the equity beta is _____ the asset beta. -unrelated to -sometimes greater than and sometimes less than -less than -equal to -greater than

greater than

An independent investment is acceptable if the profitability index (PI) of the investment is: -greater than 1.0. -greater than the internal rate of return. -greater than a pre-specified rate of return. -less than the internal rate of return. -less than 1.0.

greater than 1.0.

The terminal value of a firm is also commonly referred to as the: -cash value. -final value. -horizon value. -non-constant value. -estimated value.

horizon value.

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

ignores all noncash items.

The modified internal rate of return: -is computed by combining cash flows until only one change in sign remains. -is used to make accept/reject decisions when no discount rate can be assigned. -applies only to profitability calculations. -assumes all projects are financing projects. -is used as the discount rate for all NPV calculations.

is computed by combining cash flows until only one change in sign remains.

For investment projects, the internal rate of return (IRR): -is used primarily to rank projects of varying sizes. -rule indicates acceptance of an investment when the IRR is less than the discount rate. -is the rate that causes the net present value of a project to equal the project's initial cost. -is the rate generated solely by the cash flows of the investment. -can effectively be used to compare all types and sizes of mutually exclusive projects.

is the rate generated solely by the cash flows of the investment.

The salvage value of an asset creates an aftertax cash flow in an amount equal to the sales price: -minus the remaining book value. -plus the remaining book value. -minus [Tax rate × (Book value − Sales price)]. -minus [Tax rate × (Sales price − Book value)]. -of the asset.

minus [Tax rate × (Sales price − Book value)].

As the degree of sensitivity of a project to a single variable rises, the: -more attention management should place on accurately forecasting that variable. -lower the forecasting risk of the project. -smaller the range of possible outcomes given a pre-defined range of values for the input. -lower the maximum potential value of the project. -lower the maximum potential loss of the project.

more attention management should place on accurately forecasting that variable.

The term "tax shield" refers to a reduction in taxes created by: -a project's incremental expenses. -a reduction in sales. -opportunity costs. -an increase in interest expense. -noncash expenses.

noncash expenses.

If a firm is more concerned about the quick return of its initial investment than it is about the amount of value created, then the firm is most apt to evaluate a capital project using the _____ method of analysis. -payback -net present value -internal rate of return -profitability index -modified internal rate of return

payback

The net present value method of capital budgeting analysis does all of the following except: -discount all future cash flows to their current value. -consider the initial cost of the project. -incorporate risk into the analysis. -consider all relevant cash flow information. -provide a specific anticipated rate of return.

provide a specific anticipated rate of return.

Net present value: -cannot be relied upon when deciding between two mutually exclusive projects. -is not as widely used in practice as payback and discounted payback. -provides the means for considering the risks associated with a specific project. -rule for project acceptance must be modified when comparing projects of varying sizes. -is less commonly used in business than the profitability index method of analysis.

provides the means for considering the risks associated with a specific project.

The payback method: -determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule. -is irrelevant to the accept/reject decision. -varies the cutoff point with the market rate of interest. -determines a cutoff point equal to the point where all initial capital investments have been fully depreciated. -requires an arbitrary choice of a cutoff point.

requires an arbitrary choice of a cutoff point.

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

sunk cost.

The bottom-up approach to computing the operating cash flow applies only when: -the project is a cost-cutting project. -both the depreciation expense and the interest expense are equal to zero. -taxes are ignored and the interest expense is equal to zero. -the interest expense is equal to zero. -no fixed assets are required for the project.

the interest expense is equal to zero.

The investment timing decision relates to: -how frequently the cash flows of a project occur -the preferred starting date of a new project. -how long the cash flows last once a project is implemented. -how long a project should operate before an abandonment decision can be implemented. -how many times a project can be expanded.

the preferred starting date of a new project.

All else constant, the net present value of a typical investment project increases when: -all-cash inflows occur during the last year instead of periodically throughout the project's life. -the discount rate increases. -the initial cost of a project increases. -each cash inflow is delayed by one year. -the required rate of return decreases.

the required rate of return decreases.

When a firm commences a positive net present value project, you know: -the inherent risks within the project have been ignored. -that all the projected cash flows will occur as expected. -the present value of the expected cash flows is equal to the project's cost. -the project will pay back within the required payback period. -the stockholders' value in the firm is expected to increase.

the stockholders' value in the firm is expected to increase.

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are referred to as the: -scale and reversing flow problems. -discount rate and scale problems. -discount rate and timing problems. -timing and reversing flow problems. -timing and scale problems.

timing and scale problems.

Lesco's is evaluating a project that has a different level of risk than the overall firm. This project should be evaluated: -at the T-bill rate of return. -at the market rate of return. -using the overall firm's beta. -using a beta commensurate with the project's risks. -using the market beta.

using a beta commensurate with the project's risks.

The equivalent annual cost method is most useful in determining: -operating cash flows for cost-cutting projects of equal duration. -which one of two machines to acquire given equal machine lives but unequal machine costs. -the annual operating cost of an idle machine that is currently owned by a firm. -which one of two machines to purchase when the machines are mutually exclusive, have differing lives, and will be replaced. -the tax shield benefits of depreciation given the purchase of new assets for a project.

which one of two machines to purchase when the machines are mutually exclusive, have differing lives, and will be replaced.

The pro forma income statement for a cost reduction project: -will generally reflect no incremental sales. -will reflect a reduction in the sales of the firm. -has to be prepared reflecting the total sales and expenses of the entire firm. -will always reflect a negative project operating cash flow. -cannot be prepared due to the lack of any project related sales.

will generally reflect no incremental sales.

A company that opts to forego bonus depreciation and instead uses the MACRS system of depreciation: -can depreciate the cost of land, if it so desires. -will write off the entire cost of an asset over the asset's class life. -will expense the largest percentage of the cost during an asset's first year of life. -cannot expense any of the cost of a new asset during the first year of the asset's life. -will have equal depreciation costs for each year of an asset's life.

will write off the entire cost of an asset over the asset's class life.