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Which one of the following statements is NOT true? Managers are indifferent about accepting or rejecting a zero NPV project. Accepting a positive-NPV project increases shareholder wealth. Accepting a negative-NPV project has no impact on shareholder wealth. Accepting a negative-NPV project decreases shareholder wealth.

Accepting a negative-NPV project has no impact on shareholder wealth.

Norman, Inc., is considering two mutually exclusive projects. Project A is a six-year project with a NPV of $3,000 and Project B is a four-year project with an NPV of $2,278. Project A has an equivalent annual cash flow of $730 and Project B has an equivalent annual cash flow of $750. Which project should the firm select? Choose Project B because it has the lower NPV. Choose Project B because it has the higher equivalent annual cash flow. Choose Project A because it has the lower equivalent annual cash flow. Choose Project A because it has the higher NPV.

Choose Project B because it has the higher equivalent annual cash flow.

Windy Burgers is trying to determine when to harvest a herd of cows that it currently owns. If it harvests the herd in year 1, the NPV of the project would increase over an immediate harvest by 25 percent. A year 2 harvest would create an NPV increase of 15 percent over that of year 1 and year 3 would create an NPV increase of 7 percent over that of year 2. If the cost of capital is 12 percent for Windy, then which harvest year would maximize the NPV for the firm? Assume that all NPVs are calculated from the perspective of today. Harvest in year 1. Harvest immediately. Harvest in year 2. Harvest in year 3.

Harvest in year 2.

If Company Xhas the option of leasing some factory space to Company Y or utilizing it for another product line, then how should Company X handle the lost lease payments on the factory space if it chooses the product line? Ignore it. Include it as an opportunity cost. Include half of it as additional revenue for the project. None of the above.

Include it as an opportunity cost.

Which of the following is NOT true about capital budgeting? It involves identifying projects that will add to a firm's value. It allows a firm to reverse the decision of large capital investments at any time. It involves investing large amounts of capital. It allows a firm's management to analyze potential business opportunities and decide on which ones to undertake.

It allows a firm to reverse the decision of large capital investments at any time.

Which of the following statements about IRR is false? Entry field with correct answer The IRR is a discounted cash flow method. The IRR is an expected rate of return. None of these. The IRR is the discount rate that makes the NPV greater than zero

The IRR is the discount rate that makes the NPV greater than zero

Which of the following statements is NOT true? The cash conversion cycle begins when a firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures. The cash conversion cycle ends not with the finished goods being sold to customers and the cash collected on the sales; but when you take into account the time taken by a firm to pay for its purchases. The cash conversion cycle begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales. To measure the cash conversion cycle, we need another measure called the days' payables outstanding.

The cash conversion cycle begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.

Which of the following is a characteristic of independent projects? The cash flows are related. The cash flows are unrelated. Selecting one would automatically eliminate accepting the other. None of these.

The cash flows are unrelated.

When compared to the straight-line depreciation method, MACRS has: a greater proportion of its depreciation early in the life of the asset. a lesser proportion of its depreciation early in the life of the asset. an equal proportion of its depreciation early in the life of the asset. none of the above.

a greater proportion of its depreciation early in the life of the asset.

A construction firm is evaluating two value-adding projects. The first project deals with building access roads to a new terminal at the local airport. The second project is to build a parking garage on a piece of land that the firm owns adjacent to the airport. The firm's decision will be to? accept both projects because they are contingent projects. accept both projects because they are independent projects. pick neither project. pick the one that adds the most value because they are mutually exclusive projects.

accept both projects because they are independent projects.

When a company pays a cash dividend, the cash account on the assets side of the balance sheet _____ and the retained earnings account on the liabilities and stockholders' equity side of the balance sheet are both reduced. is reduced and the retained earnings account on the liabilities and stockholders' equity side of the balance sheet is increased. is increased and the retained earnings account on the liabilities and stockholders' equity side of the balance sheet is reduced. is reduced and the net income account on the liabilities and stockholders' equity side of the balance sheet are reduced.

and the retained earnings account on the liabilities and stockholders' equity side of the balance sheet are both reduced. When a company pays a cash dividend, the cash account on the assets side of the balance sheet and the retained earnings account on the liabilities and stockholders' equity side of the balance sheet are both reduced.

The "working capital trade-off" is the term referring to the: balancing of fixed costs against variable costs. balancing of shortage costs against carrying costs. balancing of long-term costs against short-term costs. balancing of receivables cost with inventory costs.

balancing of shortage costs against carrying costs. To determine the optimal management strategy for current assets, a firm's financial manager must balance shortage costs against carrying costs. This is the working capital trade-off.

Whenever a project has a negative impact on an existing project's cash flows, then that effect should: be ignored if the project is evaluated using the correct cost of capital. be included as a negative revenue amount on the new project's cash flow analysis. be included if the impact is limited to noncash expenditures. be ignored.

be included as a negative revenue amount on the new project's cash flow analysis.

The farm credit system better understands the needs of businesses like The Farmer's Cow than commercial banks. provides less financing opportunities to dairy farmers than to other types of agriculture. does not have sufficient capital to meet the needs of organizations such as The Farmer's Cow. declined to be involved with The Farmer's Cow because it was new to the business of marketing and selling milk.

better understands the needs of businesses like The Farmer's Cow than commercial banks.

If you are discounting a project's cash flows using the nominal cost of capital, then that means that you have taken the _______ into account: real rate of return. expected rate of inflation. both of the above. none of the above.

both of the above.

Depreciation expense _____. decreases taxable income and increases taxes increases taxable income and increases taxes decreases taxable income and decreases taxes increases taxable income and decreases taxes

decreases taxable income and decreases taxes Depreciation expense decreases taxable income and decreases taxes.

Cash flows over a project's life should include _____. depreciation expense interest paid dividends paid sunk costs

depreciation expense Cash flows over a project's life should include depreciation and amortization expenses.

When deciding to select one project or another where the projects have different useful lives, then you could utilize: a repeated investment analysis to decide which project is better for the firm. an equivalent annual annuity analysis to decide which project is better for the firm. either of the above. none of the above.

either of the above

When choosing between two mutually exclusive investments with different lives, we should choose the one with the _____. lower equivalent annual cost shorter payback period larger traditional NPV higher traditional IRR

lower equivalent annual cost Equivalent annual cost should be used to choose between projects that are mutually exclusive and have different life-spans.

Over the life of a project, a firm using the MACRS method rather than the straight-line method will have _____. stable total taxes the same total taxes higher total taxes lower total taxes

the same total taxes Over the life of a project, a firm using the MACRS method rather than the straight-line method will have the same total taxes but the tax savings will be realized sooner, increasing the present value of the tax savings.

Which of the following statements is true when managing working capital accounts? Maintain minimal raw material inventories without causing manufacturing delays. Use as little labor as possible to manufacture the product while producing a quality product. Delay paying accounts payable as long as possible without suffering any penalties. All of the above are true.

All of the above are true.

Which of the following statements is true? Financial shortage costs arise mainly from illiquidity—shortage of cash or a lack of marketable securities to sell for cash. Operating shortage costs result from lost production and sales. Operating shortage costs can be substantial, especially if the product markets are competitive. All of the above.

All of the above.

General Mills just is undertaking an analysis on a new cereal. The firm realizes that if they come out with a new product it would affect sales of existing products? What is the best course of action for General Mills in this analysis? Account for the reduction of sales from existing cereals in the projection of cash flows on the new product. Treat the reduction of sales from existing cereals as a sunk cost. Include the allocated costs of the new cereal in the sales of the pre-existing products. Ignore the fact that sales of other products will be affected.

Account for the reduction of sales from existing cereals in the projection of cash flows on the new product.

Which of the following statements is true? The calculation of free cash flow does not include the impact of income taxes. The idea that we can evaluate the cash flows from a project independently of the cash flows for the firm is known as the incremental principle. Depreciation expense should not be included in the calculation of incremental net operating profits after-tax. Accounting earnings are an unreliable measure of the costs and benefits of a project.

Accounting earnings are an unreliable measure of the costs and benefits of a project.

Which of the following statements regarding stock splits is true? When a company announces stock splits, the share price of the company will increase. Companies split their stock so as to bring its price down to an appropriate trading range. When a company announces stock splits, the share price of the company will decrease. Stock splits sometimes represent yet another way of returning value to stockholders.

Companies split their stock so as to bring its price down to an appropriate trading range. Companies split their stock so as to bring its price down to an appropriate trading range. Since stock splits do not change the value of firms, it will have no impact on the share price. Companies split their stock so as to bring its price down to an appropriate trading range.

Which of the following rates should be used to calculate a project's net present value? Coupon interest rate on bonds Required rate of return on equity Treasury bill rate Cost of capital

Cost of capital The cost of capital is the rate of return that a capital project must earn to be accepted by management and is the appropriate one to be used in the calculation of a project.

Which of the following is true of stock repurchases? Individual stockholders can decide whether they want to participate in stock repurchases. Stockholders are taxed on the total amount they received from stock repurchases. When a company uses cash to repurchase stock, the cash account on the assets side of the balance sheet is increased, while the treasury stock account on the liabilities and stockholders' equity side of the balance sheet is reduced. Stock repurchases are taxed as the same way as dividends are.

Individual stockholders can decide whether they want to participate in stock repurchases. Stock repurchases are taxed differently than dividends. Individual stockholders can decide whether they want to participate in stock repurchases. Individual stockholders can decide whether they want to participate in stock repurchases. When a stockholder sells shares back to the company, the stockholder is taxed only on the profit from the sale. Individual stockholders can decide whether they want to participate in stock repurchases. When a company uses cash to repurchase stock, the cash account on the assets side of the balance sheet is reduced, while the treasury stock account on the liabilities and stockholders' equity side of the balance sheet is increased. Individual stockholders can decide whether they want to participate in stock repurchases.

Which one of the following is an advantage of the NPV method of analyzing capital projects? It is consistent with the goal of achieving higher net income. It is easy to understand even without an accounting or finance background. It uses cash flows from financial statements and hence it is more reliable. It uses a discounted cash flow technique to adjust for the time value of money.

It uses a discounted cash flow technique to adjust for the time value of money. It is not easy to understand the NPV method without a thorough knowledge of the time value of money concept. NPV method uses a discounted cash flow technique to adjust for the time value of money. It uses a discounted cash flow technique to adjust for the time value of money. NPV method does not use cash flows from financial statements; instead it uses estimated cash flows. NPV method uses a discounted cash flow technique to adjust for the time value of money. NPV method focuses on value maximization and not on achieving higher net income. It uses a discounted cash flow technique to adjust for the time value of money.

Your firm is evaluating the merits of several different machines. Machine A has a useful life of 5-years, generates an NPV of $53,250, an IRR of 13.6% and an equivalent annual cost of $10,316. Machine B has a useful life of 3-years, an NPV of $61,051, an IRR of 12.5%, and an equivalent annual cost of $9,724. Machine C has a useful life of 4-years, generates an NPV of $55,225, an IRR of 15.2% and an equivalent annual cost of $7,535 Machine D has a useful life of 7-years, generates an NPV of $64,020, an IRR of 11.4% and an equivalent annual cost of $8,885. Which machine should be purchased and why? Machine B, because it has the shortest useful life. Machine C, because it has the highest IRR. Machine D, because it has the highest NPV. Machine A, because it has the most positive EAC.

Machine A, because it has the most positive EAC.

Which of the following is a key conclusion from the Lintner study (1956)? Managers prefer dividend payment programs to share repurchase programs. Firms tend to have short-term target payout ratios. Dividend changes follow shifts in short-term sustainable earnings. Managers are reluctant to make dividend changes that might have to be reversed.

Managers are reluctant to make dividend changes that might have to be reversed. As per the Lintner study (1956), firms tend to have long-term target payout ratios. As per the Lintner study (1956), dividend changes follow shifts in long-term sustainable earnings. As per the Lintner study (1956), managers are reluctant to make dividend changes that might have to be reversed.

Which of the following capital budgeting techniques, is the most appropriate one for evaluating projects? Accounting rate of return Internal rate of return Net present value Payback period

Net present value Accounting rate of return is the rate of return on a capital project based on average net income divided by average book value over the project's life. It ignores the time value of money. Net present value method is the most appropriate one for evaluating projects because it values a project based on the cash flows adjusted to the time value of money. Internal rate of return method can give multiple IRRs, if the cash flows are nonconventional. Net present value method is the most appropriate one for evaluating projects because it values a project based on the cash flows adjusted to the time value of money. Net present value method is the most appropriate one for evaluating projects because it values a project based on the cash flows adjusted to the time value of money. Payback method ignores time value of money and does not account all the cash flows of a project. Net present value method is the most appropriate one for evaluating projects because it values a project based on the cash flows adjusted to the time value of money.

When estimating the incremental after-tax free cash flows for a project, we include which one of the following costs? Opportunity costs Costs that impact another product that the firm does not produce. Sunk costs Investment costs

Opportunity costs When estimating the incremental after-tax free cash flows for a project, we should include the opportunity costs.

Which of the following should not be included in a schedule of cash flows from operations when evaluating a capital project? Fixed costs. Depreciation and amortization. Variable costs. Sunk costs.

Sunk costs.

Which one of the following statements about the discounted payback method is false? The discount payback method is a risk indicator. The discounted payback method represents the number of years it takes a project to recover its initial investment. The discounted payback method calls for a project to be accepted if the payback period is greater than a target period. The expected cash flows from a project are discounted at the cost of capital.

The discounted payback method calls for a project to be accepted if the payback period is greater than a target period.

Which of the following is NOT true about the flexible current asset investment strategy? The strategy promotes a liberal trade credit policy for customers. The strategy's downside is the high inventory carrying cost. The strategy calls for management to invest large amounts in cash, short-term investments, and inventory. The strategy is perceived be a high-risk and high-return course of action for management to follow.

The strategy is perceived be a high-risk and high-return course of action for management to follow.

Cash flows used for analyzing capital budgeting proposals differ from those included in the accounting statement of cash flows in which of the following ways? They are forward looking, while accounting cash flows are historical. They include financial activity-related cash flows while accounting statement- related cash flows do not. They measure cash flows associated with total projects, while accounting cash flows are for the firm as a whole. They are designed to estimate total cash flows while the accounting statement of cash flows is intended to reconcile changes in the income statement.

They are forward looking, while accounting cash flows are historical. Cash flows used for analyzing capital budgeting proposals differ from those included in the accounting statement of cash flows because they are forward looking, while accounting cash flows are historical.

Which of the following is true of stock repurchases? When a company repurchases its own shares; it increases the number of shares of stock held by investors. They represent a pro-rata distribution of value to the shareholders. Stock repurchases affect net income. They are taxed differently than dividends.

They are taxed differently than dividends. Dividends, not stock repurchases, represent a pro-rata distribution of value to the shareholders. Stock repurchases are taxed differently than dividends. When a company repurchases its own shares, it removes them from circulation. This reduces the number of shares of stock held by investors. Stock repurchases are taxed differently than dividends. Stock repurchases are taxed differently than dividends. Stock repurchases have no effect on net income. Stock repurchases are taxed differently than dividends.

In early 2003, the U.S. government cut the tax rate on dividends to a flat 15 percent instead of treating dividend payments as other income. All else being equal, how would we expect the number of companies paying dividends to change? We would expect the number of dividend- paying companies to amalgamate. We would expect the number of dividend-paying companies to stay relatively constant. We would expect the number of dividend-paying companies to liquidate. We would expect the number of dividend-paying companies to increase.

We would expect the number of dividend-paying companies to increase. Until 2003, dividends were taxed as ordinary income, and depending on the stockholder's income, as much as 39.6 percent of the dividend would be paid to the federal government in taxes. Hence, it can be expected that the number of dividend-paying companies to increase.

Dividends represent _____ an indication that the firms have run out of positive NPV projects in which to invest a return of capital to the owners a company's interest obligations to the creditors an announcement by a company that it has good projects in the pipeline

an announcement by a company that it has good projects in the pipeline When a firm plans not to pay dividends despite having enough cash, it indicates that the firm has good projects in the pipeline which will increase its value. Dividends alone will not represent the return of capital. Dividends along with capital appreciation represent the return of capital. Dividend payments indicate that the firm is not able to find suitable projects which will increase the value of the firm. Investors will also prefer companies investing in higher NPV projects which will increase the value of the firm to dividend payments, which are taxed. Interest payments represent a company's interest obligations to the creditors.

Two projects are considered to be mutually exclusive if selecting one would automatically eliminate accepting the other. none of these. both selecting one would automatically eliminate accepting the other and the projects perform the same function. the projects perform the same function.

both selecting one would automatically eliminate accepting the other and the projects perform the same function.

The cash conversion cycle indicates the amount of time over which cash is tied up in inventory and accounts receivable. It also indicates that an increase in the delay of payment for payables owed: increases the cash conversion period, increasing the value of the firm. increases the cash conversion period, decreasing the value of the firm. decreases the cash conversion period, decreasing the value of the firm. decreases the cash conversion period, increasing the value of the firm.

decreases the cash conversion period, increasing the value of the firm. The cash conversion cycle indicates the amount of time over which cash is tied up in inventory and accounts receivable. It also indicates that an increase in the delay of payment for payables owed decreases the cash conversion period, increasing the value of the firm.

A weakness of the accounting rate of return technique is, it: does not consider book value. considers the time value of money. does not distinguish between revenue and cash flows. requires complex calculations.

does not distinguish between revenue and cash flows. The accounting rate of return technique ignores the time value of money. It does not distinguish between revenue and cash flows. The accounting rate of return technique considers the book value. It does not distinguish between revenue and cash flows. The accounting rate of return technique does not distinguish between revenue and cash flows. It is easy to calculate the accounting rate of return. ARR does not distinguish between revenue and cash flows.

With a(n) _____ management announces the price that will be paid for the shares and the maximum number of shares that will be repurchased. fixed-price tender offer open market repurchase targeted stock repurchase dutch-auction tender offer

fixed-price tender offer With a fixed-price tender offer, management announces the price that will be paid for the shares and the maximum number of shares that will be repurchased.. With a Dutch auction tender offer, the firm announces the number of shares that it would like to repurchase and asks the stockholders how many shares they would sell at a series of prices. With a fixed-price tender offer, management announces the price that will be paid for the shares and the maximum number of shares that will be repurchased. With a fixed-price tender offer, management announces the price that will be paid for the shares and the maximum number of shares that will be repurchased. Targeted stock repurchases are typically used to buy blocks of shares from large stockholders. With a fixed-price tender offer, management announces the price that will be paid for the shares and the maximum number of shares that will be repurchased.

The proper time to harvest an asset is when the percentage NPV increase of harvesting a project at a future point in time is at the last date where the increase is: greater than the cost of capital. less than the cost of capital. 10 percent greater than the cost of capital. none of the above.

greater than the cost of capital.

A firm that maintains a large amount of inventory: has an increased risk of losing sales from being out of stock. practices just-in-time inventory management. has increased costs from storage. has a lower level of liquidity than a firm with less amount of inventory.

has increased costs from storage. Large inventories are expensive to finance, can require warehouses that are expensive to build and maintain, must be protected against breakage and theft, and run a greater risk of obsolescence.

The NPV and IRR methods will always agree when you are evaluating _____ projects and the project's cash flows are _____. mutually exclusive; conventional independent; unconventional independent; conventional mutually exclusive; unconventional

independent; conventional When cash flows are unconventional there will be multiple IRRs. The NPV and IRR methods will always agree when you are evaluating independent projects and the project's cash flows are conventional. The NPV and IRR methods will always agree when you are evaluating independent projects and the project's cash flows are conventional. When cash flows are unconventional there will be multiple IRRs. The NPV and IRR methods will always agree when you are evaluating independent projects and the project's cash flows are conventional.

When doing capital budgeting, we must discount _____. nominal cash flows with the required cost of capital nominal cash flows with the real cost of capital real cash flows with the opportunity cost of capital real cash flows with the real cost of capital

real cash flows with the real cost of capital When doing capital budgeting, we must discount real cash flows with the real cost of capital.

In order to calculate free cash flow by starting with incremental cash flow from operations, we should subtract the incremental capital expenditures and add the incremental additions to working capital. add the incremental capital expenditures and the incremental additions to working capital. subtract the incremental capital expenditures and the incremental additions to working capital. none of the above.

subtract the incremental capital expenditures and the incremental additions to working capital.

The internal rate of return is the discount rate that makes the NPV greater than zero. both the discount rate that makes the NPV greater than zero and the discount rate that makes the NPV less than zero. the discount rate that makes the NPV equal to zero. the discount rate that makes the NPV less than zero.

the discount rate that makes the NPV equal to zero

The incremental cash flow from operations equals _____. the incremental earnings before interest and taxes, depreciation and amortization (EBITDA) the incremental net operating profits after-tax plus depreciation and amortization (NOPAT + DA) the incremental net income plus depreciation the incremental after-tax revenues less depreciation and amortization

the incremental net operating profits after-tax plus depreciation and amortization (NOPAT + DA) The incremental cash flow from operations equals the incremental net operating profits after-tax (NOPAT) plus depreciation and amortization (DA).

A candy manufacturer following a maturity matching strategy would generally finance inventory build-up prior to Halloween by: issuing common stock. issuing long-term debt. selling equipment. using accounts payable.

using accounts payable. Maturity matching strategy is a financing strategy that matches the maturities of liabilities and assets. In this case, the company will finance inventory build-up prior to Halloween by using accounts payable.


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