Finance 320 Midterm #2 CSUF

44) The EBIT break-even point can be calculated using which of the following formulas? A) (Units Sold × Sale Price) — (Units Sold × Cost per unit) — SG&A — Depreciation = 0 B) (Units Sold × Sale Price) + (Units Sold × Cost per unit) — SG&A — Depreciation = 0 C) (Units Sold × Sale Price) — (Units Sold × Cost per unit) + SG&A + Depreciation = 0 D) (Units Sold × Sale Price) + (Units Sold × Cost per unit) + SG&A — Depreciation = 0

A) (Units Sold × Sale Price) — (Units Sold × Cost per unit) — SG&A — Depreciation = 0

11) The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value): Maturity (years) 1 2 3 4 5 Price (per $100 face value) 94.52 89.68 85.40 81.65 78.35 Based upon the information provided in the table above, you can conclude ________. The yield to maturity for the two year zero-coupon bond is closest to: A)5.6% B)6.0% C)5.8% D)5.5%

A) 5.6%, According to the given information, Face value of the bond = $100 Price of the bond in year-2 = $89.68 Coupon rate = 0% Number of years = 2 Calculating the YTM of the bond using excel sheet: YTM is nothing but the yield or rate of the bond. Step1: Go to excel and click "insert" to insert the function. Step2: Select the "Rate" function as we are finding the yield to maturity of the bond. Step3: Enter the values as Nper = 2; PMT = 0; PV = 89.68; FV = -100 Step4: Click "OK" to get the desired value. The value comes to "5.60%" Therefore, the YTM of the bond is 5.60%

6) Which of the following statements is FALSE? A. Fundamentally, interest rates are determined by the Federal Reserve. B. The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. C. The interest rates that banks offer on investments or charge on loans depend on the horizon of the investment or loan. D. The interest rates that are quoted by banks and other financial institutions are nominal interest rates.

A) Fundamentally, interest rates are determined by the Federal Reserve.

14) Which of the following statements is FALSE regarding profitable and unprofitable growth? A) If a firm wants to increase its share price, it must diversify. B) If a firm retains more earnings, it will pay out less of those earnings, reducing its dividends. C) A firm can increase its growth rate by retaining more of its earnings. D) Cutting a firm's dividend to increase investment will raise the stock price if the new investment has a positive net present value (NPV).

A) If a firm wants to increase its share price, it must diversify.

19) Which of the following is a limitation of the dividend-discount model? A) It cannot handle negative growth rates. B) It requires accurate dividend forecasts, which is not possible. C) It requires that the growth rate always be higher than the required rate of return, which is not realistic. D) It does not consider past earnings and performance.

A) It cannot handle negative growth rates.

8) How are investors in zero-coupon bonds compensated for making such an investment? A. Such bonds are purchased at a discount to their face value. B. The face value of these bonds is less than the value of the bond when the bond matures. C. Such bonds are purchased at their face value and sold at a premium at a later date. D. The bond makes regular interest payments.

A) Such bonds are purchased at a discount to their face value.

28) Which of the following best describes the Net Present Value rule? A) Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative. B) Take any investment opportunity where the net present value (NPV) exceeds the opportunity cost of capital; turn down any opportunity where the cost of capital exceeds the net present value (NPV) C) When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV). D) If the difference between the present cost of an investment and the present value (PV) of its benefits after a fixed number of years is positive the investment should be taken, otherwise it should be rejected

A) Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative.

16) Which of the following statements is FALSE of the dividend-discount model? A) We cannot use the dividend-discount model to value the stock of a firm with rapid or changing growth. B) As firms mature, their growth slows to rates more typical of established companies. C) The dividend-discount model values the stock based on a forecast of the future dividends paid to shareholders. D) The simplest forecast for the firm's future dividends states that they will grow at a constant rate, i.e., forever.

A) We cannot use the dividend-discount model to value the stock of a firm with rapid or changing growth. Explanation: A) A multistage dividend-discount model can be used to value the stock of a firm with rapid or changing growth.

39) Joe pre-orders a non-refundable movie ticket. He then reads a number of reviews of the movie in question that make him realize that he will not enjoy it. He goes to see it anyway, rationalizing that otherwise his money will have been wasted. Is Joe succumbing to the Sunk Cost Fallacy, and why? A) Yes, since he invested a valuable asset, his time, in a project based on its previous costs. B) No, because the cost of the movie was not recoverable and would have been lost whatever action he took. C) No, because going to see the movie means that the product of his initial investment was realized as originally planned. D) No, because he incurred no further costs by going to see the movie.

A) Yes, since he invested a valuable asset, his time, in a project based on its previous costs.

12) Which of the following bonds is trading at a premium? A) a five-year bond with a $2,000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semiannually B) a ten-year bond with a $4,000 face value whose yield to maturity is 6.0% and coupon rate is 5.9% APR paid semiannually C) a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% and coupon rate is 7.8% APR paid semiannually D) a two-year bond with a $50,000 face value whose yield to maturity is 5.2% and coupon rate is 5.2% APR paid monthly

A) a five-year bond with a $2,000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semiannually

45) The manufacturer of a brand of kitchen knives is investigating the likely effects that an increase in the cost of the raw materials required to make these knives will have on the cost of manufacturing the knives, the selling price of the knives, the number of knives that will then be sold, and the projectʹs net present value (NPV). Which of the following best describes what type of analysis the manager is performing? A) scenario analysis B) sensitivity analysis C) break-even analysis D) EBIT-break even analysis

A) scenario analysis

9) Which of the following statements regarding bonds and their terms is FALSE? A) Bonds are securities sold by governments and corporations to raise money from investors today in exchange for a promised future payment. B) By convention, the coupon rate is expressed as an effective annual rate. C) Bonds typically make two types of payments to their holders. D) The time remaining until the repayment date is known as the term of the bond.

B) By convention, the coupon rate is expressed as an effective annual rate.

4) Which of the following situations would result in lowering of interest rates by the banking authority of a country? A. The level of investment is quite high. B. The economy is slowing down. C. The rate of saving is quite low. D. Inflation is rising rapidly.

B) The economy is slowing down.

5) Which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate? A. Long-term loans typically have ongoing cost that accumulate over the life of the loan. B. The loan values are very sensitive to changes in market interest rates. C. There is a greater chance that inflation may fall in a longer time-frame. D. The penalties for closing out a long term loan early make them unattractive to many investors.

B) The loan values are very sensitive to changes in market interest rates

26) A lawn maintenance company compares two ride-on mowersthe Excelsior, which has an expected working-life of six years, and the Grassassinator, which has a working life of four years. After examining the equivalent annual annuities of each mower, the company decides to purchase the Excelsior. Which of the following, if true, would be most likely to make them change that decision? A) Fuel prices are expected to rise and raise the annual running costs of all mowers. B) The mower is only expected to be needed for three years. C) The prices of equivalent mowers are expected to grow in the future as lawnmower manufacturers consolidate. D) The number of customers requiring lawn-mowing services is expected to sharply increase in the near future.

B) The mower is only expected to be needed for three years.

18) Which of the following statements is FALSE? A) As firms mature, their earnings exceed their investment needs and they begin to pay dividends. B) Total return equals earnings multiplied by the dividend payout rate. C) Cutting the firm's dividend to increase investment will raise the stock price if, and only if, the new investments have a positive net present value (NPV). D) We cannot use the constant dividend growth model to value the stock of a firm with rapid or changing growth.

B) Total return equals earnings multiplied by the dividend payout rate.

21) Which of the following statements is FALSE? A) As firms mature, their earnings exceed their investment needs and they begin to pay dividends. B) Total return equals earnings multiplied by the dividend payout rate. C) Cutting the firmʹs dividend to increase investment will raise the stock price if, and only if, the new investments have a positive net present value (NPV). D) We cannot use the constant dividend growth model to value the stock of a firm with rapid or changing growth.

B) Total return equals earnings multiplied by the dividend payout rate.

35) Which of the following statements is FALSE? A) Many projects use a resource that the company already owns. B) When evaluating a capital budgeting decision, we generally include interest expense. C) Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. D) As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting

B) When evaluating a capital budgeting decision, we generally include interest expense.

38) Which of the following costs would you consider when making a capital budgeting decision? A) sunk cost B) opportunity cost C) interest expense D) fixed overhead cost

B) opportunity cost

25) When comparing two projects with different lives, why do you compute an annuity with an equivalent present value (PV) to the net present value (NPV)? A) so that you can see which project has the greatest net present value (NPV) B) so that the projects can be compared on their cost or value created per year C) to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter timeframe D) to ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are considered

B) so that the projects can be compared on their cost or value created per year

34) Which of the following best defines incremental earnings? A) cash flows arising from a particular investment decision B) the amount by which a firm's earnings are expected to change as the result of an investment decision C) the earnings arising from all projects that a company plans to undertake in a fixed timespan D) the net present value (NPV) of earnings that a firm is expected to receive as the result of an investment decision

B) the amount by which a firm's earnings are expected to change as the result of an investment decision

10) The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 10.0% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at A) par B) a discount C) a premium D) none of the above

C) As the coupon rate of 10.0% is more than the YTM of 7.5% on the bonds, so the bonds will trade at a premium.

32) The capital budgeting process begins by ________. A) By analyzing alternate projects B)By evaluating the net present value (NPV) of each projects cash flows C) By compiling a list of potential projects D) By forecasting the future consequences for the firm of each potential project

C) By compiling a list of potential projects

36) Which of the following statements is FALSE? A) We begin the capital budgeting process by determining the incremental earnings of a project. B) The marginal corporate tax rate is the tax rate the firm will pay on an incremental dollar of pretax income. C) Investments in plant, property, and equipment are directly listed as expense when calculating earnings. D) The opportunity cost of using a resource is the value it could have provided in its best alternative use.

C) Investments in plant, property, and equipment are directly listed as expense when calculating earnings.

24) Which of the following statements is FALSE? A) The actual return kept by an investor will depend on how the interest is taxed. B) The equivalent after-tax interest rate is r(1 - τ). C) The highest interest rate for a given horizon is the rate paid on U.S. Treasury securities. D) It is important to use a discount rate that matches both the horizon and the risk of the cash flows.

C) The highest interest rate for a given horizon is the rate paid on U.S. Treasury securities.

42) A consumer good company is developing a new brand of organic toothpaste. Above is the sensitivity analysis for this product. The assumptions regarding which parameter should be scrutinized most carefully in the estimation process? Use the image on the back to solve A) units sold B) sales price C) cost of goods D) cost of capital

C) cost of goods

1) Which of the following statements is FALSE about interest rates? A. The effective annual rate indicates the amount of interest that will be earned at the end of the year. B. The annual percentage rate indicates the amount of simple interest earned in one year. C. The annual percentage rate indicates the amount of interest including the effect of compounding. D. Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows.

C. The annual percentage rate indicates the amount of interest including the effect of compounding.

31) Which of the following is true regarding the profitability index? A. It is a relatively simple approach to comparing independent alternative projects. B. A profitability index of 1 signifies a positive net present value for the investment. C. This method takes into account both the size of the original investment and the discounted cash flows. D. All of the above statements are true.

C. This method takes into account both the size of the original investment and the discounted cash flows.

20) Which of the following statements is FALSE? A) Estimating dividends, especially for the distant future, is difficult. B) A firm can only pay out its earnings to investors or reinvest their earnings. C) Successful young firms often have high initial earnings growth rates. D) According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate.

D) According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital adjusted by the growth rate.

15) Which of the following statements is FALSE? A) Estimating dividends, especially for the distant future, is difficult. B) A firm can only pay out its earnings to investors or reinvest their earnings. C) Successful young firms often have high initial earnings growth rates. D) According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate.

D) According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate. Explanation: D) According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital adjusted by the growth rate.

17) Which of the following statements is FALSE about dividend payout and growth? A) A common approximation is to assume that in the long run, dividends will grow at a constant rate. B) The dividend each year is the firm's earnings per share (EPS) multiplied by its dividend payout rate. C) There is a tremendous amount of uncertainty associated with any forecast of a firm's future dividends. D) During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.

D) During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends. Explanation: D) During periods of high growth, it is not unusual for these firms to retain 100% of their earnings to exploit profitable investment opportunities.

23) Which of the following statements is FALSE? A) The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted. B) Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk. C) The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment. D) For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.

D) For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.

22) Which of the following statements is FALSE? A) The interest rates that banks offer on investments or charge on loans depend on the horizon of the investment or loan. B) The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. C) The interest rates that are quoted by banks and other financial institutions are nominal interest rates. D) Fundamentally, interest rates are determined by the Federal Reserve.

D) Fundamentally, interest rates are determined by the Federal Reserve.

43) The graph above shows the break-even analysis for the cost of making a certain good. Based on this chart, which of the following is true? *Graph is on back of card A) The net present value (NPV) of the project increases with increased cost of goods sold. B) The project should not be undertaken if the predicted cost of goods sold is less than $110. C) The net present value (NPV) of the project will be positive if the cost of good sold is greater than $110. D) If the good costs $110 to make, the net present value (NPV) of the project will be zero.

D) If the good costs $110 to make, the net present value (NPV) of the project will be zero

3) When the costs of an investment come before those investments benefits, what will be the effect of a rise in interest rates on the attractiveness of that investment to potential investors? A. It will make it more attractive, since it will increase the investment's net present value (NPV). B. It will make it more attractive, since it will decrease the investment's net present value (NPV). C. It will make it less attractive, since it will increase the investment's net present value (NPV). D. It will make it less attractive, since it will decrease the investment's net present value (NPV).

D) It will make it less attractive, since it will decrease the investment's net present value (NPV).

47) The difference between scenario analysis and sensitivity analysis is ________. A) Scenario analysis is based upon the internal rate of return (IRR) and sensitivity analysis is based upon net present value B) Only sensitivity analysis allows us to change our estimated inputs of our net present value (NPV) analysis. C) Scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters. D) Only scenario analysis breaks the net present value (NPV) calculation into its component assumptions.

D) Only scenario analysis breaks the net present value (NPV) calculation into its component assumptions.

30) Which of the following decision rules might best be used as a supplement to net present value (NPV) by a firm that favors liquidity? a.equivalent annual annuity b.MIRR c.profitability index d.payback period

D) Payback period

27) You are opening up a brand new retail strip mall. You presently have more potential retail outlets wanting to locate in your mall than you have space available. What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space? a. IRR b. payback period c. NPV d. profitability index

D) Profitability index

46) Which of the following statements is FALSE? A) We can use scenario analysis to evaluate alternative pricing strategies for our project. B) Scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters. C) The difference between the internal rate of return (IRR) of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision. D) Scenario analysis breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as each one of the underlying assumptions changes.

D) Scenario analysis breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as each one of the underlying assumptions changes.

41) Which of the following best explains why is it sensible for a firm to use an accelerated depreciation schedule such as MACRS rather than straight-line depreciation? A) The firm will substantially decrease its depreciation tax shield across all of the depreciation timeline. B) The firm can decide over how many years an item may be depreciated, thus allowing it full control of its depreciation expenses. C) The firm will have substantially fewer depreciation expenses later in the depreciation timeline. D) The firm will receive greater benefits to its cash flow earlier in the depreciation timeline and thus increase net present value (NPV).

D) The firm will receive greater benefits to its cash flow earlier in the depreciation timeline and thus increase net present value (NPV).

13) Which of the following bonds will be most sensitive to a change in interest rates? A) a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually B) a 15-year bond with a $5,000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually C) a 20-year bond with a $3,000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semiannually D) a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually

D) a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually

37) Which of the following would you NOT consider when making a capital budgeting decision? A. the additional taxes a firm would have to pay in the next year B. the opportunity to lease out a warehouse instead of using it to house a new production line C. the change in direct labor expense due to the purchase of a new machine D. the cost of a marketing study completed last year

D) the cost of a marketing study completed last year

40) An insurance office owns a large building downtown. The sixth floor of this building currently houses its entire Human Resources Department. After carrying out a survey to see whether the sixth floor could be rented and for what price, the company must decide whether to split the Human Resources Department between currently unoccupied spaces on several floors and rent out the entire sixth floor or to leave things as they currently are. Which of the following should NOT be considered when deciding whether to rent out the sixth floor? A) the amount obtained by renting the sixth floor B) the cost of refurbishing the new space to be occupied by the Human Resources Department C) cost involved with a loss of efficiency resulting from the Human Resources Department being split between several spaces D) the cost of the research into the feasibility of renting the sixth floor

D) the cost of the research into the feasibility of renting the sixth floor

33) The ultimate goal of the capital budgeting process is to ________. A) to determine how the consequences of making a particular decision affects the firm's revenues and costs B) to list the projects and investments that a company plans to undertake in the future C) to forecast the consequences of a list of future projects to the firm D) to determine the effect of the decision to accept or reject a project on the firm's cash flows

D) to determine the effect of the decision to accept or reject a project on the firm's cash flows

7) Term: 1 year 2 years 3 years 5 years 10 years 20 years Rate: 5.00% 5.20% 5.40% 5.50% 5.76% 5.9% Given the above term structure of interest rates, which of the following is most likely in the future? Option I. Interest rates will fall. Option II. Economic growth will slow. Option III. Long-term rates will rise relative to short term rates

Option I only

29) Which of the following is a disadvantage of the Net Present Value rule? a. can be misleading if inflows come before outflows b. not necessarily consistent with maximizing shareholder wealth c. ignores cash flows after the cutoff point d. relies on accurate estimate of the discount rate

d. relies on accurate estimate of the discount rate

2) Which of the following computes the growth in purchasing power?

growth of money / growth of prices