FIN 442 Exam 3
Which one of the following will be used in the computation of the best-case analysis of a proposed project?
The lowest variable cost per unit that can reasonably be expected
Assume you graph a project's net present value given various sales quantities. Which one of the following is correct regarding the resulting function?
The slope of the function measures the sensitivity of the net present value to a change in sales quantity.
Equivalent annual cost method is useful in determining:
Which one of two machines should be purchased when the machines are mutually exclusive, have different lives, and will be replaced at the end of their lives.
Which one of the following statements is correct concerning bid prices?
a firm can submit a bid that is higher than the computed bid price an still break even
Which one of the following will increase a bid price?
an increase in the required rate of return
The capital structure weights used in computing a company's weighted average cost of capital:
are based on the market value of the firms debt and equity securities
A company like Royal Carribean Cruise would be
cyclical
A company like Tiffany's that sells Jewerly would be
cyclical
A homebuilder like D.R. Horton construction would be
cyclical
If a firm's fixed operating costs decrease, the firm's operating breakeven point will
decrease
If a firm's fixed operating costs decreases, the firm's operating breakeven point will
decrease
Which one of these will increase a company's aftertax cost of debt?
decrease in the firm's tax rate
A cereal and food manufacturer like Kellogs would be
defensive
Sensitivity analysis determines the:
degree to which the net present value reacts to changes in a single variable.
Scenario analysis is defined as the:
determination of changes in NPV estimates when what-if questions are posed.
A company's overall cost of equity is:
directly related to the risk level of the firm
A firm that is more capital intensive has less business risk
false
The higher a company's DTL is, all else equal, the less uncertain the returns on its stock will be.
false
Package delivery firms like UPS and FedEx would be examples of firms with a ______ degree of operating leverage (DOL), and manufacturing firms like Boeing or Ford Motor Company would be examples of firms with a ______ degree of operating leverage (DOL).
high ; high
Forecasting risk is defined as the possibility that:
incorrect decisions will be made due to erroneous cash flow projections.
Generally, _______ in leverage result in ________ return and ________ risk.
increases ; increase ; increase
The base case values used in scenario analysis are the values considered to be the most:
likely to occur
Price x quantity is equal to
total revenue
Breakeven point occurs where ___________ is equal to ____________.
total revenue ; total cost
A firm does not typically have a lot of choice in the amount of operating leverage necessary to produce its service but, it does have control over how much financial leverage it utilizes.
true
All else equal, the higher the fixed costs, the higher the breakeven point will be.
true
All else equal, the more capital intensive a firm is, the more its EBIT or Operating Income will change for a given change in sales.
true
The higher the degree of total leverage a company has, the more its profits will change given a small change in sales.
true
Variable costs can be defined as the costs that:
vary directly with sales
Incorporating flotation costs into the analysis of a project will:
will have no effect on the present value of the project
If a company's total revenues is equal to its total costs, the company's profits will be
zero
By definition, which one of the following must equal zero at the accounting break-even point?
net income
The cost of preferred stock is computed the same as the:
return on a perpetuity
Steve 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
An analysis of the change in a project's NPV when a single variable is changed is called ______ analysis.
sensitivity
Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?
sensitivity
Which one of the following types of analysis is the most complex to conduct?
simulation
Bell weather goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as:
Capital rationing
The degree of financial leverage (DFL) that a firm has, the more its net income or EPS will change for a given change in ________.
EBIT
As the degree of sensitivity of a project to a single variable rises, the:
Greater is the importance of accurately predicting the value of that variable.
Which one of the following characteristics best describes a project that has a low degree of operating leverage?
High variable costs relative to the fixed costs
Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?
Lowering the projected selling price per unit
Which one of the following statements concerning scenario analysis is correct?
Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions.
A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why?
Sensitivity analysis ; to guarantee that each project will be profitable