IFM MID TERM

which one of the following is an example of a sunk cost? A) $1,200 paid to repair a machine last year. B) $1,800 increase in comic book sales if a store ceases selling puzzles. 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. E) $4,500 reduction in current shoe sales if a store commences selling sandals.

A) $1,200 paid to repair a machine last year.

A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith, Inc. What is the return that these individuals require on this investment called? A) Cost of equity. B) Dividend yield. C) Cost of capital. D) Income return. E) Capital gains yield.

A) Cost of equity.

Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement? A) Financial break-even. B) Internal break-even. C) Capital break-even. D) Accounting break-even. E) Cash break-even.

A) Financial break-even.

A firm's overall cost of equity is: A) Highly dependent upon the risk level of the firm. B) Unaffected by changes in the market risk premium. C) Inversely related to changes in the firm's tax rate. D) Generally less than the firm's WACC given a debt-equity ratio of .40. E) Generally less than the firm's after tax cost of debt

A) Highly dependent upon the risk level of the firm.

Kelley's baskets makes handmade baskets for distribution to upscale retail outlets. the firm 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) Hiring additional employees to handle the increased workload should the firm accept the wreath project. B) Utilizing the basket manager to oversee wreath production. C) Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt. D) Storing supplies in the same space currently used for materials storage. E) Researching the market to determine if wreath sales might be profitable before deciding to proceed.

A) Hiring additional employees to handle the increased workload should the firm accept the wreath project

The weighted average cost of capital for a wholesaler: A) Is the return investors require on the total assets of the firm. B) Should be used as the required return when analyzing a potential acquisition of a retail outlet. C) Remains constant when the debt-equity ratio changes. D) Is unaffected by changes in corporate tax rates. E) Is equivalent to the after tax cost of the firm's liabilities

A) Is the return investors require on the total assets of the firm.

The cost of preferred stock is computed the same as the: A) Rate of return on a perpetuity. B) Aftertax cost of debt. C) Pretax cost of debt. D) Cost of an irregular growth common stock. E) Rate of return on an annuity.

A) Rate of return on a perpetuity.

A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes. A) Sales price per unit. B) Initial fixed asset purchases. C) Management salaries. D) Fixed costs. E) Variable labor costs per unit.

A) Sales price per unit.

The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following? A) Tax due on the salvage value of that asset. B) Depreciation tax shield. C) Change in net working capital. D) Current year's operating cash flow. E) MACRS depreciation for the current year.

A) Tax due on the salvage value of that asset.

The capital asset pricing model approach to equity valuation: A) Assumes a firm's future risks will be higher than its current risks. B) Assumes the reward-to-risk ratio is constant. C) Assumes the reward-to-risk ratio increases as beta increases. D) Is dependent upon the unsystematic risk of a security. E) Can only be applied to dividend-paying firms.

B) Assumes the reward-to-risk ratio is constant.

Valerie just completed analyzing a project. Her analysis indicates that the project will have a six-year life and require an initial cash outlay of $320,000. Annual sales are estimated at $589,000 and the tax rate is 34%. The net present value is a negative $320,000. Based on this analysis, the project is expected to operate at the: A) Minimum possible level of production. B) Cash break-even point. C) Accounting break-even point. D) Maximum possible level of production. E) Financial break-even point.

B) Cash break-even point.

Assume a project has a discounted payback that equals the project's life. The project's sales quantity must be at which one of these break-even points? A) Cash B) Financial C) Leveraged D) Accounting E) Marginal

B) Financial

Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output? A) Net income and NPV. B) IRR and net income. C) OCF and NPV. D) IRR and OCF. E) Net income and contribution margin.

B) IRR and net income.

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's: A) Erosion effects. B) Incremental cash flows. C) Financing cash flows. D) External cash flows

B) Incremental cash flows.

Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale? A) Average total cost. B) Marginal cost. C) Average variable cost. D) Marginal revenue. E) Average total revenue.

B) Marginal cost.

The weighted average cost of capital for a firm with debt is the: A) Minimum discount rate the firm should require on any new project. B) Rate of return a firm must earn on its existing assets to maintain the current value of its stock. C) Discount rate that the firm should apply to all of the projects it undertakes. D) Coupon rate the firm should expect to pay on its next bond issue. E) Rate of return shareholders should expect to earn on their investment in this firm.

B) Rate of return a firm must earn on its existing assets to maintain the current value of its stock.

Dependable Motors just purchased some MACRS 5-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for years 1 to 3, respectively. Which one of the following will correctly give you the book value of this equipment at the end of year 2? A) $216,000 / (1 + .2 + .32) B) $216,000 / [(1 + .20)(1 + .32)] C) $216,000 × (1 - .2 - .32) D) [$216,000 × (1 - .20)] × (1 - .32) E) $216,000 × (.20 + .32)

C) $216,000 × (1 - .2 - .32)

All else constant, which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2. A) A reduction in the market rate of return. B) A reduction in the firm's beta. C) A reduction in the risk-free rate. D) A reduction in the dividend amount. E) An increase in the dividend amount.

C) A reduction in the risk-free rate

The cost of equity for a firm with a debt-equity ratio of .35: A) Increases as the unsystematic risk of the firm increases. B) Equals the firm's pretax weighted average cost of capital. C) Ignores the firm's risks when that cost is based on the dividend growth model. D) Tends to remain static for firms with increasing levels of risk. E) Equals the risk-free rate plus the market risk premium.

C) Ignores the firm's risks when that cost is based on the dividend growth model.

Three years ago, Knox Glass purchased a machine for a three-year project. The machine is being depreciated straight-line to zero over a five-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate) A) Sale price + (Book value - Sale price) × (1 - T) B) Sale price × (1 - T) C) Sale price + (Book value - Sale price) × T D) Sale price + (Sale price - Book value) × (1 - T) E) Sale price + (Sale price - Book value) × T

C) Sale price + (Book value - Sale price) × T

The dividend growth model cannot be used to compute the cost of equity for a firm that: A) Pays an increasing dividend. B) Pays a constant dividend year after year. C) Reduces its dividend on a regular basis. D) Has a retention ratio of 100 percent. E) Has a dividend payout ratio of 100 percent.

D) Has a retention ratio of 100 percent.

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0? A) Annual depreciation tax shield B) Loan obtained to finance the project C) Net working capital recovery D) Initial investment in inventory to support the project E) Aftertax salvage value

D) Initial investment in inventory to support the project

All of the following are related to a proposed project. Which one should be included in the cash flow at Time 0? A) Annual depreciation tax shield B) Loan obtained to finance the project C) Net working capital recovery D) Initial investment in inventory to support the project E) After-tax salvage value

D) Initial investment in inventory to support the project

The aftertax cost of debt: A) Is unaffected by changes in the market rate of interest. B) Will generally equal the cost of preferred if the tax rate is zero. C) Will generally exceed the cost of equity if the relevant tax rate is zero. D) Is highly dependent upon the firm's tax rate. E) Varies inversely to changes in market interest rates.

D) Is highly dependent upon the firm's tax rate.

Which one of these will increase a firm's aftertax cost of debt? A) An increase in the bond's credit rating. B) An increase in the firm's beta. C) a Decrease in the market value of the firm's outstanding bonds. D) a Decrease in the firm's tax rate. E) A Decrease in the market rate of interest.

D) a Decrease in the firm's tax rate

A project has a projected IRR of negative 100%. Which one of the following statements must also be true concerning this project? A) The discounted payback period equals the life of the project. B) The net present value of the project is equal to zero. C) The operating cash flow is positive and equal to the depreciation. D) The payback period is exactly equal to the life of the project. E) The net present value of the project is negative and equal to the initial investment.

E) The net present value of the project is negative and equal to the initial investment.

Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its five-year life. The firm has a 34% tax rate, uses straight-line depreciation over an asset's life, and has a positive net income. Given this, which one of the following statements is correct? A) The new machine will have a zero rate of return. B) The new machine creates erosion effects. C) As a project, the new machine has a net present value equal to minus one times the machine's purchase price. D) The new machine will create a cash outflow when the firm disposes of it at the end of its life. E) The new machine will generate positive operating cash flows.

E) The new machine will generate positive operating cash flows.

The average of a firm's cost of equity and after tax cost of debt that is weighted based on the firm's capital structure is called the: A) Reward to risk ratio. B) Weighted capital gains rate. C) Subjective cost of capital. D) Structured cost of capital. E) Weighted average cost of capital.

E) Weighted average cost of capital.

T/F If a firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits, the price that should be charged is the average cost.

False, change average to marginal

T/F As the discount rate increases, present value of investment cash flows increases

False, change increases to decreases

T/F A firm should select the capital structure that limits the value of the firm by having equal debt with the value of equity

False, change limits to maximizes

which is relation between percentage change in OCF and quantity sold?

degree of operating leverage

T/F As uncertainty about expected cash flows increases, the value of an asset increases

false, change increases to decreases

T/F An investment project with an infinite life (i.e., it is expected to last forever) will have an infinite value

false, change infinite to "that can be estimated as a perpetuity

Operating leverage is the degree of dependence a firm places on its

fixed costs

determination of changes in NPV estimates when what-if questions are posed

scenario analysis

analysis of the change in a project NPV when changing a single variable

sensitivity analysis

T/F An increase in depreciation will increase cash flow from assets but decrease net income

true

T/F As expected growth rate increases in the dividend growth model, the price of a stock increases.

true

T/F As the life of an asset or project is lengthened, the value of that asset increases

true

a decrease in _________ increases accounting break even quantity? Use straight line depreciation. Ignore tax

unit price