Finance exam 4
Assume a project has a sales quantity of 7,400 units, ±6 percent and a sales price of $59 a unit, ±1 percent. The expected variable cost per unit is $13, ±3 percent, and the expected fixed costs are $214,000, ±2 percent. The depreciation expense is $63,000 and the tax rate is 23 percent. What is the operating cash flow under the best-case scenario? $118,470 $136,759 $145,705 $124,220
$136,759 operating cash flow= (selling price per unit-vc per unit)(sales quantity-fc)(1-tax)+tax * depreciation
JellyBean Inc. is considering a new five-year expansion project that requires an initial fixed asset investment of $6.089 million. The fixed asset will be depreciated straight-line to zero over the project's life, after which time it will be worthless. The project is estimated to generate $4,389,000 in annual sales, with costs of $1,731,200. The tax rate is 24 percent. What is the annual operating cash flow for this project? $2,312,200 $1,727,570 $936,000 $2,848,315
$2,312,200
Assume an investment has cash flows of −$39,700, $21,750, $18,500, and $12,500 for Years 0 to 3, respectively. What is the NPV if the required return is 12.9 percent? Should the project be accepted or rejected? $2,764.89; accept $1,684.22; reject $2,264.95; accept $2,264.95; reject
$2,764.89; accept
A project has an initial cash outflow of $42,600 and produces cash inflows of $17,680, $19,920, and $15,670 for Years 1 through 3, respectively. What is the NPV at a discount rate of 12 percent? $229.09 $311.16 $219.41 $186.95
$219.41
You did such a great job on the last analysis, the company you've just been hired for wants you to analyze another project! For this project, a new molding machine is expected to produce operating cash flows of $109,000 a year for 4 years. At the beginning of the project, you will need $6,000. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $319,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating an aftertax cash inflow of $51,600. What is the net present value of this project given a required return of 14.2 percent? $25,162.45 $24,061.87 $27,925.54 $22,863.16
$25,162.45
You are working for JB Associates. A proposed three-year project will require $589,000 for fixed assets and net working capital of $75,000. The fixed assets will be depreciated straight-line to a zero book value over five years. At the end of the project, the fixed assets can be sold for $225,000. The net working capital returns to its original level at the end of the project. The operating cash flow per year is $67,900. The tax rate is 21 percent and the discount rate is 12 percent. What is the total cash flow in the final year of the project? $361,000 $378,970 $410,520 $370,126
$370,126
You are once again working for JB Saddles, Inc evaluating a project will require $512,000 for fixed assets and $47,000 for net working capital. The fixed assets will be depreciated straight-line to a zero book value over the six-year life of the project. At the end of the project, the fixed assets will be worthless. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $965,000 and costs of $508,000. The tax rate is 21 percent and the required rate of return is 14.7 percent. What is the amount of the annual operating cash flow? $378,950.00 $447,826.67 $283,633.33 $198,300.00
$378,950.00
JB Machinery is analyzing a proposed project that is expected to have sales of 2,450 units, ±8 percent. The expected variable cost per unit is $246 and the expected fixed costs are $309,000. Cost estimates are considered accurate within a ±3 percent range. The depreciation expense is $106,000. The sales price is estimated at $599 per unit, ±2 percent. What is the amount of the total costs per unit under the worst-case scenario? (Reminder--don't forget to INCLUDE fixed costs....) $338.23 $448.58 $394.58 $404.16
$394.58 worst case fc=+ worst case vc/worst case sales (246)(.97)+(309,000)(.97)/(2450*.92)
JB Cheese Factor is considering the installation of a new cheese maker that will cut annual operating costs by $11,900. The system will cost $38,900 and will be depreciated to zero using straight-line depreciation over its five-year life. What is the amount of the earnings before interest and taxes for this project? (HINT: check out the bottom of page 331 to 332 in the textbook..... ) ($1,250) $4,120 $9,450 $19,680
$4,120
At the current time, JB Co. sells 42,600 saddlebags annually at an average price of $149 each. It is considering adding a lower-priced line of saddlebags that sell for $79 each. The firm estimates it can sell 21,000 of the lower-priced saddlebags but expects to sell 7,200 less of the higher-priced saddlebags by doing so. What is the amount of the annual sales that should be used when evaluating the addition of the lower-priced saddlebags? $823,400 $586,200 $659,000 $780,200
$586,200 amount of sales= 21000*79-7200*149
You are working for JB Inc as an analyst after graduating from UWEC. He's asked for some help with a project that had an initial asset cost of $168,000 with depreciation of that asset set as straight-line to zero over seven years. At the end of the project's four-year life the asset and be sold for $65,000. Use a combined federal and state tax rate of 24 percent. What is the aftertax salvage value? $66,680 $72,000 $68,100 $65,000
$66,680
Your company is reviewing a project with estimated labor costs of $14.68 per unit, estimated raw material costs of $43.18 a unit, and estimated fixed costs of $18,000 a month. Sales are projected at 15,500 units, ±5 percent, over the one-year life of the project. Cost estimates are accurate within a range of ±3 percent. What are the total variable costs for the best-case scenario? $861,560 $869,925 $913,421 $951,906
$913,421
JB Instruments is analyzing a proposed project. The company expects to sell 1,600 units, ±3 percent. The expected variable cost per unit is $220 and the expected fixed costs are $438,000. Cost estimates are considered accurate within a ±2 percent range. The depreciation expense is $64,000. The sales price is estimated at $647 per unit, ±2 percent. What is the sales revenue under the worst-case scenario? $984,061 $1,086,825 $896,201 $932,017
$984,061 (1600)(0.97)(647)(.98)
You've been hired as an analyst for a local manufacturing firm. A project they are evaluating will produce an operating cash flow of $56,200 a year for 5 years. The initial fixed asset investment in the project will be $238,900. The net aftertax salvage value is estimated at $67,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 15.2 percent? ($18,374.86) $18,384.86 $5,120.52 ($20,627.54)
($18,374.86)
Painted Hollow Farm is considering expanding on some land that it currently owns. The initial cost of the land was $364,500 and it is currently valued at $357,900. The company has some unused equipment that it currently owns valued at $29,000 that could be used for this project if $8,200 is spent for equipment modifications. Other equipment costing $157,900 will also be required. What is the amount of the initial cash flow for this expansion project? ($585,600) ($530,600) ($553,000) ($559,600)
($553,000) PV of current value+PV of unused equipment cost+equipment modifications+other equipment costs
JB's Feedmill purchased a lot in Eau Claire six years ago at a cost of $98,700. Today, that lot has a market value of $128,900. At the time of the purchase, the company spent $6,500 to level the lot and another $12,000 to install storm drains. The company now wants to build a new facility on the site at an estimated cost of $494,200. What amount should be used as the initial cash flow for this project? ($641,600) ($611,400) ($592,900) ($623,100)
($623,100) market value of lot+new facility at estimated cost 128,900+494,200
JB Bakeries just paid its annual dividend of $.48 a share. The stock has a market price of $17.23 and a beta of .93. The return on the U.S. Treasury bill is 3.1 percent and the market risk premium is 7.6 percent. What is the cost of equity? 10.30% 8.55% 10.17% 9.88%
10.17%
JB Fashions has a growth rate of 3.2 percent and is equally as risky as the market while its stock is currently selling for $32 a share. The overall stock market has a return of 10.9 percent and a risk premium of 6.8 percent. What is the expected rate of return on this stock? 11.8% 9.2% 10.9% 11.3%
10.9%
JB Cookie Dough Manufacturing has a target debt-equity ratio of .76. Its cost of equity is 15.3 percent, and its pretax cost of debt is 9 percent. What is the WACC given a tax rate of 21 percent? 13.11% 12.53% 11.76% 12.78%
11.76%
JB's has a debt-equity ratio of .62 and a tax rate of 21 percent. The cost of equity is 16.3 percent and the aftertax cost of debt is 5.21 percent. What is the weighted average cost of capital? 11.38% 12.15% 12.06% 11.57%
12.06%
Projects A and B are mutually exclusive and have an initial cost of $78,000 each. Project A has annual cash flows for Years 1 to 3 of $28,300, $31,500, and $22,300, respectively. Project B has annual cash flows for Year 1 of $36,900, $40,500 for Year 2, and $0 for year 3. What is the crossover rate? 17.32% 16.99% Can't determine; not enough information 15.20%
16.99%
A company evaluates all of its projects by applying the IRR rule. The current proposed project has cash flows of −$37,048, $16,850, $15,700, and $19,300 for Years 0 to 3, respectively. The required return is 18 percent. What is the project IRR? Should the project be accepted or rejected? 16.05%; reject 18.42%; reject 16.05%: accept 18.42%; accept
18.42%; accept
It will cost $9,600 to acquire an ice cream cart that is expected to produce cash inflows of $3,600 a year for three years. After the three years, the cart is expected to be worthless. What is the payback period? 2.82 years 1.79 years 1.82 years 2.67 years
2.67 years
Jellybean Inc manufactures sunglasses for dogs and cats (they don't sell very many to cats). The variable materials cost is $1.38 per unit, and the variable labor cost is $.92 per unit. Suppose the firm incurs fixed costs of $348,000 during a year in which total production is 136,000 units and the selling price is $19.50 per unit. What is the cash break-even point? 20,233 units 22,435 units 18,907 units 16,453 units
20,233 units
The JB Coffee Express has computed its fixed costs to be $.27 for every cup of coffee it sells given annual sales of 739,000 cups. The sales price is $.99 per cup while the variable cost per cup is $.12. How many cups of coffee must it sell to break even on a cash basis? 167,630 146,472 251,910 229,345
229,345 Annual fixed cost=.27*739000=199,530 Sales price per cup=.99 variable cost per cup=.12 .99-.12=.87 contribution per cup Cash break even sales= fixed cost/contribution per unit 199,530/.87
A project has a unit price of $29.99, a variable cost per unit of $9.06, fixed costs of $487,020, and depreciation expense of $38,009. Ignore taxes. What is the accounting break-even quantity? 28,269 units 31,966 units 29,306 units 25,085 units
25,085 units
The Motor Works is considering an expansion project with estimated fixed costs of $127,000, depreciation of $16,900, variable costs per unit of $41.08, and an estimated sales price of $79.90 per unit. How many units must the firm sell to break even on a cash basis? 2,928 units 3,272 units 4,206 units 3,510 units
3,272 units
JB Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 13 years to maturity that is quoted at 105.2 percent of face value. The issue makes semiannual payments with a 6% annual coupon rate. What is the aftertax cost of debt if the tax rate is 21 percent? 4.31% 2.16% 5.43% 3.68%
4.31%
Hydro Systems has bonds outstanding with a face value of $1,000, 13 years to maturity, and a coupon rate of 6.5 percent, paid annually. What is the company's pretax cost of debt if the bonds currently sell for $1,056? 6.42% 5.36% 5.55% 5.87%
5.87%
JB Inc has 168,000 shares of common stock outstanding valued at $53 a share along with 13,000 bonds selling for $1,008 each. What weight should be given to the debt when the company computes its weighted average cost of capital? 48.27% 59.54% 46.67% 51.79%
59.54%
JB Fashions is expected to pay an annual dividend of $1.26 a share next year. The market price of the stock is $24.09 and the growth rate is 2.6 percent. What is the cost of equity? 8.45% 7.99% 7.83% 7.54%
7.83%
A project has cash flows of -$148,400, $42,500, $87,300, and $43,200 for Years 0 to 3, respectively. The required rate of return is 11 percent. Based on the internal rate of return of _____ percent for this project, you should _____ the project. 8.03%; reject 7.91; reject 7.91; accept 6.67; reject
8.03%; reject
JB Sweet Treats common stock is currently priced at $36.72 a share. The company just paid $2.18 per share as its annual dividend. The dividends have been increasing by 2.2 percent annually and are expected to continue doing the same. What is the cost of equity? 8.27% 8.82% 8.14% 9.51%
8.27%
JB Home Rentals has a beta of 1.06, a stock price of $17, and recently paid an annual dividend of $.92 a share. The dividend growth rate is 2.2 percent. The market has a rate of return of 11.2 percent and a risk premium of 7.3 percent. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model? 10.30% 9.13% 9.68% 8.67%
9.68%
Which of these are ways to calculate the percentage of debt and equity (weights): A. percentages are given B. market value of current debt and equity C. book value of current debt and equity D. ratios E. economic probabilities All of these are correct A, B and D are correct A, D and E are correct C is correct
A, B and D are correct
Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be? Accept Project A and reject Project B based on their AARs Accept Project A because it has the shortest payback period Accept both projects because both NPVs are positive Accept Project B and reject Project A based on the NPVs
Accept Project B and reject Project A based on the NPVs
Which of the following are added back at the end of a project? Recovery of raw materials inventory related to the project Change in working capital All of these are correct After tax impact, if any, of selling equipment related to the project
All of these are correct
The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? Variable Total Incremental Sunk
Incremental
Which one of these costs should NOT be included in the cash flows of a project? Opportunity costs Side effects Interest paid All of these should be included
Interest paid
In actual practice, managers most frequently use which two types of investment criteria? IRR and payback NPV and payback NPV and IRR NPV and profitability index
NPV and IRR
A suggested project requires initial fixed assets of $227,000, has a life of 4 years, and has no salvage value. Assume depreciation is straight-line to zero over the life of the project. Sales are projected at 31,000 units per year, the price per unit is $47, variable cost per unit is $23, and fixed costs are $842,900 per year. The tax rate is 23 percent and the required return is 11.5 percent. Suppose the projections given for price and quantity can vary by ±4 percent while variable and fixed cost estimates are accurate to within ±2 percent. What is the best-case NPV? (Assume each of the 4 years is the same for the project.) Negative $132,194 Positive $127,511 Positive $82,409 Positive $4,613
Negative $132,194
By definition, which one of the following must equal zero at the accounting break-even point? Net present value Net income Depreciation Operating cash flow
Net income
Two mutually exclusive projects have an initial cost of $47,500 each. Project A produces cash inflows of $25,300, $37,100, and $22,000 for Years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for Years 1 through 3, respectively. The required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which project(s) should be accepted and why? Project A because it has the higher required rate of return Project B because it has the largest cash inflow in year 1 Project B because it has the larger NPV Project A because it has the larger NPV
Project A because it has the larger NPV
Project A has a required return on 9.2 percent and cash flows of −$87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of −$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive? Accept Project A and reject Project B Reject Project A and accept Project B Accept both projects Reject both projects
Reject Project A and accept Project B
A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes. Fixed costs Sales price per unit Variable labor costs per unit Management salaries
Sales price per unit
Which one of the following best illustrates erosion (which is a type of side effect) as it relates to a restaurant at the fair? Selling fewer hamburgers because tacos were added to the menu Losing sales due to bad weather Providing both ketchup and mustard for customers' use Adding picnic tables to improve sales
Selling fewer hamburgers because tacos were added to the menu
Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? Scenario Simulation Sensitivity Break-even
Sensitivity
Which one of the following types of analysis is the most complex to conduct? Simulation Sensitivity Scenario Break-even
Simulation
Which one of the following characteristics relates to the cash break-even point for a given project? The NPV is equal to zero. The IRR equals the required rate of return. The project never pays back. The operating cash flow is equal to the depreciation expense.
The project never pays back.
Why does the yield to maturity need to be adjusted by the tax rate when calculating WACC? a. interest expense is tax deductible so the effect of it must be removed b. None of these are correct c. only straight line depreciation can be used when calculating WACC d. taxes must be computed for valuation purposes based on the marginal tax rate
a. interest expense is tax deductible so the effect of it must be removed
A company's weighted average cost of capital: a. is the return investors require on the total assets of the firm b. is equivalent to the aftertax cost of the outstanding liabilities c. remains constant d. is unaffected by changes in the corporate tax rates
a. is the return investors require on the total assets of the firm
Which one of the following is an example of a sunk cost? a.$1,200 paid to repair a machine last year b.$4,500 reduction in current shoe sales if a store commences selling sandals c.$1,500 of lost sales because an item was out of stock d.$20,000 project that must be forfeited if another project is accepted
a.$1,200 paid to repair a machine last year
JB Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return? a.Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows b.Increasing the initial investment in year 0 c.Decreasing the amount of the final cash inflow d.Decreasing the required discount rate
a.Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows
All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0 (CF0)? a.Initial investment in inventory to support the project b.Loan obtained to finance the project c.Net working capital recovery d.Aftertax salvage value
a.Initial investment in inventory to support the project
Which one of the following should NOT be included in the analysis of a new product? a.Money already spent for research and development of a the new product b.Market value of a machine owned by the firm which will be used to produce the new product c.Reduction in sales for a current product once the new product is introduced d.Increase in accounts payable for inventory purchases of the new product
a.Money already spent for research and development of a the new product
JB Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods? a.NPV b.IRR c.Payback d.Profitability Index
a.NPV
JB Mills borrows money at a rate of 8.7 percent. This interest rate is referred to as the: a.cost of debt b.current yield c.cost of capital d.compound rate
a.cost of debt
All else constant, which one of the following will increase a company's cost of equity if the company computes that cost using the CAPM? Assume the company currently pays an annual dividend of $1 a share and has a beta of 1.2. a. An increase in the dividend amount. b. A reduction in the risk-free rate. c. A reduction in the company's beta. d. A reduction in the market rate of return.
b. A reduction in the risk-free rate.
The capital structure weights used in a computing a company's weighted average cost of capital: a. are based on the book values of debt b. are based on the market values of the outstanding securities c. are restricted to debt and common stock d. remain constant over time unless new securities are issued
b. are based on the market values of the outstanding securities
JB's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? a.Utilizing the basket manager to oversee wreath production b.Hiring additional employees to handle the increased workload should the firm accept the wreath project c.All of these are incremental d.Researching the market to determine if wreath sales might be profitable before deciding to proceed
b.Hiring additional employees to handle the increased workload should the firm accept the wreath project
The length of time a firm must wait to recoup the money it has invested in a project is called the: a.internal return period b.None of these are correct c.profitability period d.net present value period
b.None of these are correct correct answer is payback period
JB Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule? a.Either, but not both projects b.Project A only c.Project B only d.Both A and B
b.Project A only As per the payback rule only those projects having payback lower than/equal to 3 years should be accepted.Hence since B has an expected payback of 3.1 years;it should not be accepted
A company's pretax cost of debt: a. has to be estimated as it cannot be directly observed in the market b. is based on the current yield to maturity of the company's outstanding bonds c. is based on the original yield to maturity on the latest bonds issued by a company d. is equal to the coupon rate on the latest bonds issued by the company
c. is based on the original yield to maturity on the latest bonds issued by a company
You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph? a.Present value sequence b.Project tract c.NPV profile d.NPV route
c.NPV profile
Which one of the following statements concerning scenario analysis is correct? a.The pessimistic case scenario determines the maximum loss, in current dollars, that a firm could possibly incur from a given project. b.Management is guaranteed a positive outcome for a project when the worst-case scenario produces a positive NPV. c.Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions. d.Scenario analysis defines the entire range of results that could be realized from a proposed investment project.
c.Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions.
Which one of the following will be used in the computation of the best-case analysis of a proposed project? a.Minimal number of units that are expected to be produced and sold b.The highest level of fixed costs that is actually anticipated c.The lowest variable cost per unit that can reasonably be expected d.The lowest anticipated sales price per unit
c.The lowest variable cost per unit that can reasonably be expected
A company's current cost of capital is based on: a.the company's original debt-equity ratio. b.the current market rate of return on equity shares. c.both the returns currently required by its debtholders and stockholders. d.None of these are correct
c.both the returns currently required by its debtholders and stockholders.
The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the: a.break-even rate b.net present value rate c.crossover rate d.required rate
c.crossover rate
If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be: a.None of these are correct b.interdependent c.mutually exclusive d.independent
c.mutually exclusive
How is the WACC for a company used in Finance? a. Value an investment b. Value a share of stock c. Determine whether an investment is worth pursuing d. All of these are correct
d. All of these are correct
The aftertax cost of debt: a. is unaffected by changes in the market rate of interest b. will generally exceed the cost of equity if the relevant tax rate is zero c. None of these are correct d. is highly dependent upon a company's tax rate
d. is highly dependent upon a company's tax rate
Which one of the following will decrease the net present value of a project? a.Decreasing the required discount rate b.Increasing the amount of the final cash inflow c.Moving each cash inflow forward one time period, such as from Year 3 to Year 2 d.Increasing the project's initial cost at time zero
d.Increasing the project's initial cost at time zero
Pro forma financial statements can best be described as financial statements: a.where all accounts are expressed as a percentage of last year's values. b.where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales. c.expressed in a foreign currency. d.showing projected values for future time periods.
d.showing projected values for future time periods.
Increasing which one of the following will increase the operating cash flow of a profitable, tax paying company? fixed expenses salaries taxes depreciation expense
depreciation expense
You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the: financial break-even point none of these are correct accounting break-even point cash break-even point
financial break-even point
The base case values used in scenario analysis are the values considered to be the most: pessimistic desired by management likely to occur optimistic
likely to occur
JB is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is he using? scenario analysis simulation testing break-even analysis sensitivity analysis
scenario analysis