Chapter 10 finance

If a firm doubled its level of fixed costs but maintained its operating leverage, then one explanation may be that:

Sales revenue also doubled and the proportion of variable costs did not change.

Which one of the following techniques may be more appropriate to analyze projects with interrelated variables?

Scenario analysis

The capital budget should be consistent with the firm's:

Strategic plans.

A project that breaks even in accounting terms will surely have a negative NPV.

TRUE

If a large proportion of a firm's costs is fixed, a shortfall in sales will have a magnified effect on the firm's profits.

TRUE

Operating leverage increases with fixed cost.

TRUE

The option to abandon a project becomes more valuable as the possible outcomes become more varied.

TRUE

The option to abandon a project inexpensively has particular value when:

The equipment has a ready second-hand value.

What happens to a firm with high operating leverage when the overall level of sales is very high?

The firm is likely to enjoy high profits.

Decision trees:

Recognize that managers may need to react to unexpected future events.

Sensitivity analysis evaluates projects by:

Recording profitability changes while changing one variable at a time.

Which company is likely to have high operating leverage?

A company with high fixed costs.

What level of management is responsible for originating capital budgeting proposals?

All levels of management

Managers that accept projects that only break even on an accounting basis are helping their shareholders.

FALSE

The level of sales that produces a zero project NPV is referred to as the accounting break-even point.

FALSE

While sensitivity analysis is forward-looking, scenario analysis attempts to reconstruct and analyze the past.

FALSE

Soft capital rationing may be beneficial to a firm if it:

Weeds out proposals with NPVs that have been overstated.