Chapter 12
Which of the following cannot be calculated on a financial spreadsheet? A. present value of a stream of future payments B. present value of a single lump sum to be received in the future C. future value of a series of payments made D. future value of a single lump sum deposited today E. all of these can be calculated on a financial spreadsheet
E
Which of the following is a potential source of capital for a company to invest in long-term assets? A. bank loans B. net income from past years C. issuing additional common stock D. issuing bonds E. all of the above
E
The "time value" of money implies that money today is worth less than the same amount in the future. true or false
false reason: the time value of money means that the right to receive an amount of money today is worth more than the right to receive the same amount of some future date, because a current receipt can be invested to earn interest over the intervening..
Which of the following affect the weighted average cost of capital? A. interest on bank loans B. dividends expected by investors C. expected increases in the value of stock in the company D. bond interest payments E. all of the above
E
In a financial calculator PMT stands for: A. a period cash inflow or outflow of equal amounts B. the amount of the initial investment C. the number of accounting periods that the investment will cover D. the interest rate that is required by the company E. none of the above
A
The present value of a single song is: A. the amount that would be paid today to receive a single amount at a specific date in the future B. the amount that would be paid today to receive a single amount at an unspecified date in the future C. the amount that would be paid at a specific date in the future to receive a single amount today D. the amount that would be paid at an unspecified date in the future to receive a single amount today E. none of the above
A
Which of the following is not one of the three step for a typical approved capital expenditure projects? A. investment selection B. initial investment C. operating cash flows D. project termination E. none of the above are steps in a capital expenditure project
A
because of the time value of money a company would prefer to receive a payment due to them: A. as early as possible B. as late as possible C. it does not make a difference when the payment is received D. it depends on the discount rate E. none of the above
A
In a financial spreadsheet calculation the interest rate must be entered as: A. a whole number B a decimal with the decimal point C. a percentage (with the percent sign %) D. a fraction with the division sign E. none of the above
B
The present value of an ordinary annuity is: A. the amount that would be paid today in order to receive a series of unequal payments in the future B. the amount that would be paid today in order to receive a series of equal payments in the future C. the amount that would be paid in the future in order to receive a series of equal payments leading up to that point D. the amount that would be paid in the future in order to receive a series of equal payments leading up to that point E. none of the above
B
Which of the following items is typically not impacted by taxes when considering Net Present Value? A. cash receipts from future sales B. cash outlays for initial investment C. cash outlays for future expenses D. cash receipts for disposal of fully depreciated assets E. none of the above, all are impacted by taxes
B
Which of the following would be considered a capital expenditure? A. purchasing inventory for resale B. replacing a defective piece of equipment C. depreciation expense D. repurchasing company shares as treasury stock E. none of the above
B
because of the time value of money, a company would prefer to make a payment that they owe: A. as early as possible B. as late as possible C. it does not make a difference when the payment is made D. it depends on the discount rate E. none of the above
B
the time value of money dictates that money received today will be worth_______________in the future then it is worth today? A. less B. more C. the same D. it depends on the discount
B
In a financial spreadsheet calculation, "Nper" stands for: A. the expected return on the investment B. the amount of the initial investment C. the number of accounting periods that the investment will cover D. the interest rate that is required by the company E. none of the above
C
The average rate of return: A. is not as understandable for management as NPV B. is based strictly on the value of the initial investment C. considers the financial statement impact of an investment rather than cash flows consequences D. takes into account the time value of money E. none of the above
C
The cash payback period is: A. the number of years of positive after-tax cash flow needed to make the net present value of an investment equal 0 B. number of years of positive after-tax cash flows, discounted to the present., needed to equal the original investment C. the number of years needed on an investment for the after-tax cash flows to equal the original investment D. the total time that an investment will return positive after-tax cash flows E. none of the above
C
The formula for calculating an after-tax cash inflow is: A. pre-tax cash inflow /1 minus tax rate B. pre-tax cash inflow / tax rate-1 C. pre-tax cash inflow times 1 -tax rate D. pre-tax cash inflow X Tax Rate - 1 E. none of the above
C
The formula for calculating an after-tax cash outflow is: A. pre-tax cash outflow divided by 1 minus tax rate B. pre-tax cash outflow /tax rate - 1 C. pre-tax cash flow 1 minus tax rate D. pre-tax cash flow times tax rate - 1 E. none of the above
C
Which of the following is not one of the three steps in the capital budgeting process? A. identify potential investments B. select Investments to be undertaken C. hedge selected Investments D. monitor selected investments E. all of the above are steps in the capital budgeting process
C
The average rate of return is equal to: A Net Present Value / by initial investment B. average present value of future cash flows / initial investment C. average annual net income from investment / initial investment D. average annual net income from investment / average investment E. none of the above
D
The cash payback method: A. is preferable to The Net Present Value method for evaluating relative profitability B. considers discounted cash flows C. reflects the total life of the investment project D. includes calculations of depreciation tax shields E. none of the above
D
The formula for calculating the depreciation tax shield is: A. depreciation expense / (1- tax rate) B. depreciation expense / tax rate C. depreciation expense x (1 - tax rate) D. depreciation expense x tax rate E. none of the above
D
Which of the following is not a potential source of capital for a company to invest in long-term assets? A. Bank loans B. net income from past years C. issuing additional common stock D. credit terms from inventory suppliers E. all of the above are potential sources of capital
D
Which of the following is not a step required in the determination of the net present value of a capital investment project? A. determine the net after-tax cash flow B. determine the net after-tax cash flows in future periods C. discount future cash flows to present values D subtract future cash flows from current cash flows E. none of the above, all are steps in the determination of Net Present Value
D
If the cash method of accounting is used rather than the accrual method comma which of the following adjustments be made to net income to arrive after-tax cash inflows? A. change in accounts receivable B. change in accounts payable C. change an expense liability accounts D. depreciation expense E. none of the above
E
Which of the following is a step required in the determination of the net present value of a capital investment project? A. determine the net after-tax cash flow of initial outlay B. determine the net after-tax cash flows in future periods C. discount future cash flows to present values D. net present value of future cash flows with current cash flows E. all of the above
E
Which of the following items are impacted by taxes when considering Net Present Value? A. cash receipts from future sales B. depreciation expense C. cash outlays for future expenses D. cash receipts for disposal of fully depreciated assets E. all of the above
E
which of the following is not one of the considerations given two Capital budgeting proposals? A. whether there is an immediate need to replace or repair critical assets B. whether the proposal is in compliance with capital budgeting policies C. whether the proposal would meet the established minimum return on Capital D. whether they proposal is congruent with the firm's long-term goals E. all of the above are considerations given to Capital budgeting proposals
E
A "buffer margin" is the number of percentage points by which the cost of a capital May exceed the expected rate of return for a project, with a company will still accept the project. true or false
false reason: a buffer margin is when a firm requires a rate of return at least a certain number of percentage points higher than the cost of capital
The cash payback method analyzes the relative profitability of various Investments. true or false
false reason: a primary limitation of cash payback analysis is that the relative profitability of various Investments is not specifically considered
The present value of a single sum is equal to the amount that, if invested today at the specified discount rate, would return the value of the single some every year for a specified number of years. true or false
false reason: a single sum is one payment expected to be received in a specified number of years
After-tax cash flows for a cash outflow is equal to the related outflow multiplied by the tax rate. true or false
false reason: after-tax cash flows = expense x 1(1 - tax rate)
The present value of an annuity is equal to the amount that, if invested today at the specified discount rate, would return the value of the annuity in a specific number of years. true or false
false reason: an annuity is a yearly payment
On a financial calculator, the PMT value must always be entered. true or false
false reason: if the PMT or the FV value is left blank then the calculator assumes that the value is 0
The disposal value of an asset is always subject to taxes. true or false
false reason: if the asset is disposed of at Book value, there is no tax impact. If the disposal value is less than the book value of the assets, or the remaining amount to be depreciated, then the transaction represents a loss and can actually generate a tax shield.
Excess present value index is a measure to determine whether a project meets the required rate of return, and is equal to the NPV of the project divided by the initial investment. true or false
false reason: it is equal to the present value of future cash flows divided by the initial investment
All capital budgeting proposals require the authorization of upper management. true or false
false reason: proposals for relatively small cash outlays may require the approval of low-level management only
Rate of return = investment / Returns on the investment. true or false
false reason: rate of return = returns/ investment
It is not possible to calculate the internal rate of return on a project using a financial spreadsheet. true or false
false reason: spreadsheets have IRR functions built into them
A tax shield is equal to the related non-cash expense multiplied by (1 - tax rate). true or false
false reason: tax shield = expense x tax rate
If two Investments have the same average rate of return, they will be considered to be equally attractive to management. true or false
false reason: the projects may have different Net Present values despite having the same average rate of return
A higher rate of return usually makes a proposal more attractive to a company. true or false
true
A loss recognized on the disposal of an asset is the end of the project creates a tax shield. true or false
true
After-tax cash flows for a cash inflow is equal to the related inflow multiplied by (1 - tax rate) true or false
true
Capital budgeting has to do with the acquisition of long-term assets. true or false
true
Cash outflows should be represented as negative amounts when being entered into a financial calculator. true or false
true
Comparing current returns with future returns, without accounting for the time value of money, will overstate the relative value of the future returns. true or false
true
It is possible to calculate the internal rate of return on a project with a financial calculator. true or false
true
The " hurdle rate" is the minimum rate of return that a company expects to receive from any investment that they undertake. true or false
true
The after-tax cash flows for depreciation expense is the same amount as the depreciation tax shield. true or false
true
The average rate of return focuses on accrual net income figures rather than cash flows. true or false
true
The cash payback period is the number of years it takes for non discounted cash flows to equal the amount of the original investment. true or false
true
The present value of a single sum is equal to the amount that, if invested today at the specified discount rate, would return the value of the single some in a specific number of years. true or false
true
The present value of an annuity is equal to the amount that, if invested today at the specified discount rate, would return the value of the annuity every year for a specified number of years. true or false
true
When disposing of a fully depreciated asset, the net after-tax is equal to the Proceeds x (1- tax rate). true or false
true