FIN 357: Exam 2
Which six factors determine the yield on a bond? - Interest rate risk - Default risk - Real rate of return - Liquidity - Taxability - Voting rights - Expected future inflation
all but voting rights
From a managerial perspective, highly uncertain projects can be dealt with by keeping the degree of operating leverage _____. - as low as possible - a well-kept secret - fixed - as high as possible
as low as possible
If a given set of cash flows is expressed in _________ terms and discounted at the _________ rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the real rate.
nominal, nominal
When voting for the board of directors, the number of votes a shareholder is entitled to is usually ______ vote per share held.
one
The situation that occurs when a business cannot raise financing for a project under any circumstances is called __________ rationing.
hard
A firm with higher operating leverage will have ______ fixed costs relative to a firm with low operating leverage. - low - insufficient - high - indeterminate
high
The degree to which a firm or project relies on fixed costs is called the _________ leverage.
operating
A stock with dividend priority over common stock is called a ______ stock.
preferred
Net ________ value is a measure of how much value is created or added today by undertaking an investment.
present
The two major forms of long-term debt are _____ issue and privately placed.
public
Interest expenses incurred on debt financing are ______ when computing cash flows from a project. - spread over the life of the project - treated as cash outflows - ignored - treated as cash inflows
ignored
An increase in depreciation expense will ____ cash flows from operations. - increase - decrease - not affect
increase
With cost-cutting proposals, when costs decrease, operating cash flows __________ (decrease/increase).
increase
As a practical matter, it is easier to ____________ (decrease/increase) operating leverage than it is to ____________ (decrease/increase) it.
increase, decrease
_________ cash flows come about as a direct consequence of taking a project under consideration.
incremental
The written agreement between the corporation and the lender detailing the terms of the debt issue is the _____________
indenture
Stock price reporting has increasingly moved from traditional print media to the ______ in recent years.
internet
A situation in which a firm has positive NPV projects but cannot find the necessary financing is called capital __________.
rationing
If a given set of cash flows is expressed in nominal terms and discounted at the nominal rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the ____ rate. - cross - real - nominal - inflation
real
The accelerated cost _________ system is a depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications.
recovery
Erosion will ______ the sales of existing products. - increase - reduce - not affect
reduce
Opportunity costs are classified as ______ costs in project analysis. - irrelevant - relevant - intangible - sunk
relevant
The first step in estimating cash flow is to determine the _________ cash flows. - operating - relevant - specious
relevant
____________ analysis involves estimating the best-case, worst-case, and base-case cash flows and calculating the corresponding NPVs.
scenario
The trading of existing shares occurs in the ______ market.
secondary
The payback period method allows lower management to make (smaller/larger), everyday financial decisions effectively.
smaller
The Omega Division of Alpha Corporation has been allocated $4 million for capital spending but has identified $4.6 million in positive NPV projects. Omega's manager thinks he can convince the company to fund the additional $0.6 million dollars because Omega uses _______ rationing to control overall spending. - food - soft - exceptional - hard
soft
The situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting is called _________ rationing.
soft
Within the context of financial markets, complete the following equation: Bid − Ask = Bid-Ask ________
spread
Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a: - managed board - voting rights board - proxy board - staggered board
staggered board
In a ________ board, only a fraction of the directorships are up for election at any one time.
staggered or classified
The ________-alone principle is the assumption that evaluation of a project may be based on the project's incremental cash flows.
stand
According to the _________ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm." - stand-with - walk-alone - stand-alone - stand-and-deliver
stand-alone
The goal of many successful organizations is a(n) ______ rate of growth in dividends. - negative - erratic - zero - steady
steady
With _____ voting, the directors are elected one at a time and the only way to guarantee a seat is to own 50 percent plus one share.
straight
Investment firms that are active participants in stocks assigned to them are called ________ liquidity providers
supplemental
Using the top-down approach, OCF is calculated by subtracting costs and _______ from sales.
tax
Which approach to estimating the operating cash flows uses the following equation? OCF = (Sales − Costs) × (1 − Tax rate) + Depreciation × Tax rate
tax-shield approach
The computation of equivalent annual costs is useful when comparing projects with unequal _____. - annual cash flows - initial investments - lives - salvage values
lives
With nonconventional cash flows, there is a possibility that more than one discount rate will make the NPV of an investment zero. This is called the _________ rates of return problem.
multiple
By ignoring time value, the payback period rule may incorrectly accept projects with a (positive/negative) NPV.
negative
The difference between a firm's current assets and its current liabilities is known as the ________.
net working capital
The Fisher effect decomposes the nominal rate into: - the real rate and the yield to maturity - the inflation rate and the yield to maturity - the inflation rate and the real rate
- the inflation rate and the real rate
Capital rationing exists when a company has identified positive NPV projects but can't find _____. - positive IRRs - the necessary financing - negative cash flows - irreducible equations
- the necessary financing
For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed. - True - False
False
True or false: Cumulative voting means board members are elected one at a time, with each shareholder casting his or her allotted votes for each seat on the board.
False
True or false: The MIRR function eliminates multiple IRRs and should replace NPV.
False
True or false: The real rate of return will generally be higher than the nominal rate of return.
False
Using the payback period rule will bias toward accepting which type of investment? - short-term investment - long-term investment
Short-term investment
When a corporation or government wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities that are generically called ___________
bonds
OCF is calculated as net income plus depreciation using the ________ approach.
bottom-up
A person who brings buyers and sellers together is called a(n) ______. - investor - lawyer - dealer - broker
broker
The federal government can raise money from financial markets to finance its deficits by ___. - issuing stocks - issuing bonds - requesting foreign aid - raising taxes
- issuing bonds
Which one of the following is the most important source of risk from owning bonds? - Market interest rate fluctuations - Loss of a bond certificate - Coupon interest rate fluctuations - Mergers
- Market interest rate fluctuations
If a project has multiple internal rates of return, which of the following methods should be used? - IRR - NPV - MIRR
- NPV - MIRR
In terms of time to maturity, U.S. Treasury notes and bonds have initial maturities ranging from ___ years. 5 to 25 5 to 20 2 to 30 10 to 30
2 to 30
Broadband, Inc. has estimated preliminary cash flows for a project and found that the NPV for those cash flows is $400,000. The company now plans to perform a scenario analysis on the cash flow and NPV estimates. It will use an NPV of _____ as the base case. $360,000 $400,000 $440,000 $220,000
$400,000
A bond pays annual interest payments of $50, has a par value of $1,000, and a market price of $1,200. How is the coupon rate computed? $50/$1,200 $50/($1,200 - 1,000) $50/$1,000 $50/[($1,000 + 1,200)/2]
$50/$1,200
Which of the following represents the accounting profit break-even point? - Total taxes/Contribution margin - Fixed costs/Contribution margin - Depreciation/Contribution margin - (Fixed costs + Depreciation)/Contribution margin
- (Fixed costs + Depreciation)/Contribution margin
The rules for depreciating assets for tax purposes are based upon provisions in the ___. - 1986 Sarbanes-Oxley Act - 1986 Tax Reform Act - 1986 IRS Act - 1986 SEC Act
- 1986 Tax Reform Act
What is a sunk cost? - A cost incurred in the past that is irrelevant to the capital investment decision process. - A significant cost that will be incurred at the end of a project's life. - A cost that created a significant business loss.
- A cost incurred in the past that is irrelevant to the capital investment decision process.
Select: Which of these are required to calculate the current value of a bond? - Applicable market rate - Time remaining to maturity - Par value - Coupon rate - Price at the time of bond issue
- Applicable market rate - Time remaining to maturity - Par value - Coupon rate
Select all that apply NASDAQ has which of these features? - Computer network of securities dealers - Multiple market maker system - Single DMM system - Physical trading floor
- Computer network of securities dealers - Multiple market maker system
What is a bond's current yield? - Current yield = Annual coupon/Par value - Current yield = Current price/Face value - Current yield = Annual coupon/Face value - Current yield = Annual coupon payment/Current price
- Current yield = Annual coupon payment/Current price
What are three important features of Treasury notes and bonds? - Default-free - Highly liquid - Taxable - Tax-free
- Default-free - Highly liquid - Taxable
Select all that apply Which of the following are expected cash flows to investors in stocks? - Interest - Dividends - Fees - Capital gains
- Dividends - Capital gains
Which one of the following is true about dividend growth patterns? - Dividends never grow. - Dividends always grow at a differential rate. - Dividends may grow at a constant rate. - Dividends always grow at a constant rate.
- Dividends may grow at a constant rate.
Which of the following represents the valuation of stock using a zero-growth model? - Dividends/Discount rate - Discount rate/Dividends - Dividends × Discount rate - (Dividends)^discount rate
- Dividends/Discount rate
Which of the following is not a difference between debt and equity? - A corporation's interest payments on debt are tax deductible, but the dividends it pays to equity holders are not - Equity is publicly traded while debt is not - Unlike dividend omissions to equity holders, unpaid debt obligations can lead to bankruptcy - Equity represents ownership interest while debt does not
- Equity is publicly traded while debt is not
Select all that apply Which of the following are features of common stock? - It generally has voting rights. - It receives dividends every quarter. - It has no special preference in receiving dividends. - It has no special preference in bankruptcy. - It receives interest semi-annually.
- It generally has voting rights. - It has no special preference in receiving dividends. - It has no special preference in bankruptcy.
While making capital budgeting decisions, which of the following sentence is true regarding the initial investment of net working capital? - It is not at all considered while making capital budgeting decisions. - It is treated as sunk cost which will not recovered. - It is treated as cash outflow at the end of the project's life. - It is expected to be recovered by the end of the project's life.
- It is expected to be recovered by the end of the project's life.
What are some reasons why the bond market is so big? - Many corporations have multiple bond issues outstanding. - Various state and local governments also participate in the bond market. - Corporations are required to raise more money from bonds than from stocks. - Federal government borrowing activity in the bond market is enormous.
- Many corporations have multiple bond issues outstanding. - Various state and local governments also participate in the bond market. - Federal government borrowing activity in the bond market is enormous.
A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. What will the stock's price be? 1.81 12.29 20.00
20.00 C / r
Select all that apply Which of the following are reasons why NPV is considered a superior capital budgeting technique? - NPV considers all the cash flows. - NPV properly discounts earnings. - NPV results in only one rate of return. - NPV considers time value of money.
- NPV considers all the cash flows. - NPV considers time value of money.
Which of the following occurs in the primary market? - Issuers repurchase shares - Newly-issued stocks are initially sold - Outstanding shares are resold - Shareholders gift shares to charities
- Newly-issued stocks are initially sold
WinWin Corporation has five board members, and each shareholder gets one vote per share. The company uses a straight board voting procedure. How does this arrangement affect minority shareholders? - Each minority shareholder would have one preferred board member. - Minority shareholders don't vote in such an arrangement. - Corporations always have one board member designated to protect the interests of minority shareholders. - No minority shareholder would have enough votes to win any seat on the board.
- No minority shareholder would have enough votes to win any seat on the board.
This capital budgeting method allows lower management to make smaller, everyday financial decisions effectively. - Average accounting return - Internal rate of return - Payback method - Net present value
- Payback method
Which of the following variables are required to calculate the value of a bond? - Remaining life of bond - Issue price of the bond - Coupon rate - Market yield
- Remaining life of bond - Coupon rate - Market yield
Which of the following is an example of a sunk cost? - Purchase of inventory - Renovation of existing building to accommodate the new project - Research and development expense incurred in the past - Acquisition of new equipment to manufacture the product
- Research and development expense incurred in the past
Which of the following is an example of a sunk cost? - Bonus to top management - Test marketing expenses - Cost of new equipment - Salvage value of equipment
- Test marketing expenses
Which of the following entities declares a dividend? - The board of directors - The management of the company - Existing shareholders - The CFO
- The board of directors
Why does a bond's value fluctuate over time? - A bond's value does not fluctuate over time - The coupon rate and par value are fixed, while market interest rates change - The coupon rate varies, while market interest rates are fixed - A bond's par value changes over time
- The coupon rate and par value are fixed, while market interest rates change
Select all that apply When evaluating cost-cutting proposals, how are operating cash flows affected? - The decrease in costs decreases operating income. - The decrease in costs increases operating income. - There is an additional depreciation deduction. - Wages are always reduced in cost-cutting endeavors.
- The decrease in costs increases operating income. - There is an additional depreciation deduction.
(select all that apply) What are the advantages of the payback period method for management? - The payback period adjusts for the discount rate. - The payback period method is ideal for short projects. - The payback period method is easy to use. - It allows lower level managers to make small decisions effectively.
- The payback period method is ideal for short projects. - The payback period method is easy to use. - It allows lower level managers to make small decisions effectively.
What does the clean price for a bond represent? - The original issue price plus interest accrued since the last coupon date. - The quoted price, which excludes interest accrued since the last coupon date. - The quoted price plus interest accrued since the last coupon date. - The original issue price
- The quoted price, which excludes interest accrued since the last coupon date.
Select all that apply Which of the following are reasons why it is more difficult to value common stock than it is to value bonds? - All bond and stock cash flows are guaranteed to be paid. - The rate of return required by the market is not easily observed. - Common stock cash flows are not known in advance - The life of a common stock is essentially forever.
- The rate of return required by the market is not easily observed. - Common stock cash flows are not known in advance - The life of a common stock is essentially forever.
Which of the following are usually included in a bond's indenture? - The total amount of bonds issued - The names of the bondholders - The bond's rating - The repayment arrangements
- The total amount of bonds issued - The repayment arrangements
Which of the following are true about variable costs? - Total variable costs increase as the total number of units produced increases. - The variable cost per unit increases as the number of units produced increases. - The variable cost per unit may remain constant as the number of units produced increases.
- The variable cost per unit may remain constant as the number of units produced increases.
The present value of all cash flows (after the initial investment) is divided by the ______ to calculate the profitability index. - initial investment - internal rate of return - net present value - discount rate
- initial investment
Select all that apply What is a corporate bond's yield to maturity (YTM)? - YTM is the yield that will be earned if the bond is sold immediately in the market. - YTM is the expected return for an investor who buys the bond today and holds it to maturity. - YTM is another term for the bond's coupon rate. - YTM is the prevailing market interest rate for bonds with similar features.
- YTM is the expected return for an investor who buys the bond today and holds it to maturity. - YTM is the prevailing market interest rate for bonds with similar features.
The basic NPV investment rule is: - accept a project if the NPV is greater than zero. - accept a project if the NPV is less than zero. - accept a project if the discount rate is above zero. - reject a project if its NPV is less than zero. - if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference
- accept a project if the NPV is greater than zero. - reject a project if its NPV is less than zero. - if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference
Financial break-even is the sales level that results in _____. - a positive IRR - a positive NPV - an NPV of zero - an IRR that is less than the NPV
- an NPV of zero
Select all that apply When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in _____. - asking what-if questions - scenario analysis - rocket science - fruitless endeavors
- asking what-if questions - scenario analysis
To be considered good, projected cash flows should _____ actual cash flows. - exactly match - be in opposition to - be close to
- be close to
Opportunity costs are ____. - benefits lost due to taking on a particular project - the costs incurred by a firm to preserve its market share - benefits gained as a result of accepting a particular project - the costs of pursuing a specific project
- benefits lost due to taking on a particular project
A firm will start generating positive accounting profits _____. - beyond the break-even sales point - at the break-even sales point - at the point at which revenues exceed total fixed costs - below the break-even sales point
- beyond the break-even sales point
Secondary markets in sukuk are extremely illiquid because most sukuk are: - legally suspect - riskier than other bond issues - bought and held to maturity - subject to religious interpretation
- bought and held to maturity
Select all that apply Investment in net working capital arises when ___. - equipment is purchased using long term debt - cash is kept for unexpected expenditures - inventory is purchased - credit sales are made
- cash is kept for unexpected expenditures - inventory is purchased - credit sales are made
Select all that apply Three special case patterns of dividend growth include _____. - constant growth = discounted growth - nonconstant growth - negative growth - fast growth - zero growth
- constant growth - nonconstant growth - zero growth
Select all that apply Which of the following are fixed costs? - net working capital - inventory costs - cost of equipment - rent on a production facility
- cost of equipment - rent on a production facility
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ____. - broker - speculator - retailer - dealer
- dealer
The assumption of constant growth infers that _________. - dividends change at a constant rate - stock prices remain constant - the real interest rate remains constant
- dividends change at a constant rate
Select all that apply The possibility that errors in projected cash flows will lead to incorrect decisions is known as _____. - guess and bless - managerial incompetence - estimation risk - forecasting risk
- estimation risk - forecasting risk
Sunk costs are costs that ____. - have already occurred and are not affected by accepting or rejecting a project - will not contribute to profits in the long run even if a project is accepted - cannot be measured - relate to other projects of the firm
- have already occurred and are not affected by accepting or rejecting a project
For all practical purposes, it is easier to _____. - increase operating leverage than to decrease it - decrease operating leverage than to increase it - break even than it is to lose money
- increase operating leverage than to decrease it
If the term structure of interest rates is upward sloping, then ____. - long-term rates equal short-term rates - long-term rates are higher than short-term rates - short-term rates are higher than long-term rates - there is no relationship between short-term and long-term interest rates
- long-term rates are higher than short-term rates
A zero coupon bond is a bond that ____. - is sold at a premium - has no market value - produces no taxable income - makes no interest payments
- makes no interest payments
The IRR rule can lead to bad decisions when cash flows are _____ or projects are mutually exclusive. - conventional - not conventional - certain
- not conventional
Evans Corporation estimated that the cash flows last year from a particular project would be $40,000, but the actual cash flow turned out to be $37,500. Evans Corporation should _____. - give up estimating cash flows - expect cash flow estimates to exactly right every time - not expect cash flow estimates to be exactly right every time
- not expect cash flow estimates to be exactly right every time
When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows: - one vote per proxy - one vote for every 100 shares held - one vote per shareholder - one vote per share held
- one vote per share held
The ____________ method differs from NPV because it evaluates a project by determining the time needed to recoup the initial investment. - internal rate of return - payback - accounting rate of return
- payback
The amount of time needed for the cash flows from an investment to pay for its initial cost is the _____ period. - discounted payback - payback - NPV - internal return
- payback
Select all that apply Once cash flows have been estimated, which of the following investment criteria can be applied to them? - payback period - NPV - YTM - IRR - the constant growth dividend discount model
- payback period - NPV - IRR
Select all that apply Preferred stock has preference over common stock in the _____. - portfolios of individual investors - number of votes given - payment of dividends - distribution of corporate assets
- payment of dividends - distribution of corporate assets
In capital budgeting, the net ______ determines the value of a project to the company. - sales - present value - income - future value
- present value
Select all that apply The IRR rule can lead to bad decisions when _____ or _____. - payback period is less than two years. - NPV is positive - projects are mutually exclusive - cash flows are not conventional
- projects are mutually exclusive - cash flows are not conventional
West Corporation estimated cash flows for a project, evaluated those cash flows using NPV, and determined that the project was acceptable. Unfortunately West Corporation lost money on the project. This may have been avoided had they assessed the ______ of the cash flow estimates. - principality - reliability - additivity - fungibility
- reliability
In a simulation, the average NPV and the spread of NPVs around the average are determined by _____. - an educated guess - repeated random drawings - actual events - multiple forecasts
- repeated random drawings
Corporate managers care about the break-even point because it indicates the level to which _____ can fall before a project will start losing money. - taxes - sales - depreciation - cost of goods sold
- sales
In simulation analysis, a combination of _____ analysis and _____ analysis is used. - scenario; sensitivity - worst-case; accelerated - best-case; accelerated
- scenario; sensitivity
When using _______________ all of the variables except one are frozen in order to determine how sensitive the NPV estimate is to changes in that particular variable. - break-even analysis - sensitivity analysis - simulation
- sensitivity analysis
When the term structure of interest rates is downward sloping, ____. - short-term rates are higher than long-term rates - short-term rates equal long-term rates - there is no relationship between short-term and long-term rates - short-term rates are lower than long-term rates
- short-term rates are higher than long-term rates
A calculated NPV of $15,000 means that the project is expected to create a positive value for the firm and _____. - it will never cost the firm more than calculated in the cash flow analysis - should be accepted if there is no capital rationing constraint - the firm should only accepted if the project has a high payback period
- should be accepted if there is no capital rationing constraint
The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date. - suggests rejecting - suggests accepting
- suggests accepting
Select all that apply Operating cash flow is a function of _____. - initial investment in equipment - salvage value of equipment - taxes - depreciation - earnings before interest and taxes
- taxes - depreciation - earnings before interest and taxes
When a project breaks even on an accounting basis, the cash flow for that period will equal _____. - net working capital for that period - the depreciation allowance for that period - net income for that period - revenues for that period
- the depreciation allowance for that period
When the stock being valued does not pay dividends, - the dividend growth model can still be used. - the dividend growth model can not be used.
- the dividend growth model can still be used.
A firm will start generating profits when ___. - the total number of units sold exceeds the accounting break-even point - total variable costs exceed total fixed costs - total revenue exceeds the total fixed costs - total revenue exceeds the initial investment required to generate that revenue
- the total number of units sold exceeds the accounting break-even point
The basic approach to evaluating cash flow and NPV estimates involves asking _____. - random questions about the cash flow assumptions - for assistance from the federal government - what-if questions
- what-if questions
An accounting break-even point of 1,000 units means that ______. - when the firm sells 1,000 units, profits will be equal to zero - the maximum capacity of the plant is 1,000 units - when the firm generates total revenue of $1,000, profits will be equal to zero - the total fixed costs are equal to $1,000
- when the firm sells 1,000 units, profits will be equal to zero
An accounting break-even point of 2,000 means the firm ____. - will start generating profits if it sells more than 2,000 units - will start generating losses if it sells more than 2,000 units - has total costs (including depreciation) of $2,000 - will start generating profits if its total revenue reaches $2,000
- will start generating profits if it sells more than 2,000 units
Most of the time, a floating-rate bond's coupon adjusts ____. - with a lag to some base rate - dramatically - on a continual basis - with a lead to some base rate
- with a lag to some base rate
Select all that apply The U.S. government borrows money by issuing: - Treasury bills - Treasury pass-through certificates - Treasury notes - Treasury bonds
-Treasury bills - Treasury notes - Treasury bonds
Select all that apply A benchmark PE ratio can be determined using: - the PEs of similar companies - the constant-growth model - Bank of Canada estimates - a company's own historical PEs
-the PEs of similar companies - a company's own historical PEs
Broadband, Inc. has estimated preliminary cash flows for a project and found that the NPV for those cash flows is $1,000,000. The company now plans to perform a scenario analysis on the cash flow and NPV estimates. It will use an NPV of $_____ as the base case. 2,000,000 500,000 1,100,000 1,000,000
1,000,000
Select all that apply When McDonald's decides to build a new restaurant at a particular location, which of the following competitors might also be tempted to locate new facilities in the same area? - Abercrombie and Fitch - Burger King - Barnes and Noble - Wendy's
Burger King and Wendy's
The _____ is the percentage change in operating cash flow relative to the percentage change in quantity sold. - GAAP - LOL - DOC - DOL
DOL
Which of the following equations correctly relates OCF to sales volume? OCF = (P − v)/(Q − FC) OCF = (P − v) × Q − FC OCF = (P − v) × Q + FC OCF = (P + v) × Q − FC
OCF = (P − v) × Q − FC
Which one of the following is the equation for estimating operating cash flows using the tax shield approach? OCF = (Sales - Costs) × Tax rate + Depreciation × (1 - Tax rate) OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation × Tax rate OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation OCF = (Sales - Costs) + Deprecation × Tax rate
OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation × Tax rate
What is the equation for estimating operating cash flows using the top-down approach? - OCF = Net Income + Depreciation - OCF = Sales - Costs - OCF = (Sales - Costs) X (1-T) + Depreciation X T - OCF = Sales - Costs - Taxes
OCF = Sales - Costs - Taxes
Suppose Price per Unit is $6, variable cost per unit is $2, fixed costs are $400 and the depreciation allowance per year is $500. The relationship between operating cash flow (OCF) and sales volume (Q) can be expressed as: OCF = −400 + 4*Q OCF = 400 − 4*Q OCF = 4/Q + 500 OCF = 400*Q − 4
OCF = −400 + 4*Q
Which of the following statements is true in the context of comparing accounting profit and present value break-even point? - Both techniques are equally good. - Accounting profit is superior because the financial statements report profits and not present value. - Present value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect. - The superiority of a particular technique will vary from firm to firm depending on the unique circumstances of the firm.
Present value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect.
What is the purpose of accounting profit break-even analysis? - To determine the level of sales at which profits generate the minimum rate of return expected by shareholders. - To determine the level of sales at which variable costs are fully recovered. - To determine the maximum number of units that can be produced in a plant. - To determine the level of sales at which profits are equal to zero.
To determine the level of sales at which profits are equal to zero.
True or false: Equity represents an ownership interest.
True
True or false: IRR approach may lead to incorrect decisions in comparison of two mutually exclusive projects.
True
True or false: Some projects, such as mines, have cash outflows followed by cash inflows, which are then followed by cash outflows, giving the project multiple rates of return.
True
True or false: The major difference between Western financial practices and Islamic law is that Islamic law does not permit charging or paying interest.
True
True or false: The price you actually pay to purchase a bond will generally exceed the clean price.
True
True or false: Ultimately, we are more interested in cash flow than accounting income.
True
True or false: When a business does hard rationing, the firm's DCF analysis breaks down.
True
A project should be __________ if its NPV is greater than zero.
accepted
Cash flows should always be considered on a(n) ___________ basis. - zero-tax - before-tax - aftertax
aftertax
_________ budgeting is the decision-making process for accepting and rejecting projects.
capital
Which is more important to a project analysis? Accounting income or cash flow
cash flow
A bond with exotic features is often called a _____ bond.
cat
The _________ yield is the bond's annual coupon divided by its price.
current
When interest rates in the market rise, we can expect the price of bonds to ____.
decrease
A firm's bond rating sheds light on its _________ risk. - nominal - interest rate - total - default
default
An NYSE member who acts as a dealer in particular stocks is called a _______ market maker.
designated
Incremental cash flows come about as a(n) ________ consequence of taking a project under consideration. - sporadic - indirect - direct
direct
A _________ is a payment by a corporation to shareholders, made in either cash or stock.
dividend
Common stock has no special preference either in receiving _________ or in bankruptcy.
dividends
When developing cash flows for capital budgeting, it is _____ to overlook important items. - easy - difficult - rare - impossible
easy
The cash flows of a new project that come at the expense of a firm's existing projects is called ________
erosion
The ___________ break-even is the sales level that results in a zero NPV.
financial
The ________ step is to determine whether cash flows are relevant.
first
With ________-rate bonds, the coupon payments are
floating
An NYSE member who executes customer buy and sell orders is called a ______ broker.
floor
The possibility that errors in projected cash flows will lead to incorrect decisions is called _____________, or estimation risk.
forecasting/forecast
The profitability index is calculated by dividing the PV of the _________ cash flows by the initial investment. - positive - future - previous
future
Corporate managers care about the break-even point because it indicates the level _____. - of sales at which the firm can enjoy maximum tax benefits - of sales at which depreciation expense will be fully written off - of sales they will need to make to enjoy leadership in the industry - to which sales can fall before a project will start losing money
to which sales can fall before a project will start losing money
True or false: Interest earned on Treasury notes and bonds is taxable
true
True or false: When developing cash flows for capital budgeting, it is easy to overlook important items.
true
In a competitive market, positive NPV projects are: - unlimited - uncommon - easy to find
uncommon
The ________ cost is equal to the quantity of output times the cost per unit of output.
variable
The ________ curse says that the lowest bidder is the one who underbid the most.
winner's
Korporate Classics Corporation (KCC) won a bid to supply widgets to Pacer Corporation but lost money on the deal because they underbid the project. KCC fell victim to the _____. - winner's curse - winner's blessing - Hamilton's blessing - loser's curse
winner's curse
When analyzing a proposed investment, we _______ (will/won't) include interest paid or any other financing costs.
won't
When a firm finances new investments, it may set up accounts payable with suppliers, but the balance that the firm must supply is called the investment in net _________ capital.
working
Capital Corp is considering a project whose internal rate of return is 14%. If Capital's required return is 14%, the project's NPV is: - negative - positive - zero
zero
