FIN 3310
61. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.
13. Considered alone, which of the following would increase a company's current ratio?
An increase in accounts receivable.
85. Which of the following statements is CORRECT?
An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well diversified portfolio of stocks.
94. You have the following data on three stocks: Stock Standard Deviation Beta A 20% 0.59 B 10% 0.61 C 12% 1.29 If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.
B, A.
3. Which of the following items is NOT included in current assets?
Bonds.
9. Which of the following items cannot be found on a firm's balance sheet under current liabilities?
Cost of goods sold.
41. Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by:
Default risk differences.
8. HD Corp. and LD Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, HD uses more debt than LD. Which of the following statements is CORRECT?
HD would have the lower net income as shown on the income statement.
67. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR.
63. Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L's IRR is 12%. The two projects have the same NPV when the WACC is 7%. Which of the following statements is CORRECT?
If the WACC is 10%, both projects will have positive NPVs.
77. Rowell Company spent $3 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new product. Rowell owns the building free and clear¾there is no mortgage on it. Which of the following statements is CORRECT?
If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it.
64. McCall Manufacturing has a WACC of 10%. The firm is considering two normal, equally risky, mutually exclusive, but not repeatable projects. The two projects have the same investment costs, but Project A has an IRR of 15%, while Project B has an IRR of 20%. Assuming the projects' NPV profiles cross in the upper right quadrant, which of the following statements is CORRECT?
If the crossover rate is 8%, Project B will have the higher NPV.
50. The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?
If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.
43. A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?
If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.
14. A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?
Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
79. Which of the following statements is true of operating breakeven analysis?
It involves determining the point at which revenue from sales equals operating costs.
44. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
Market interest rates decline sharply.
58. Which of the following statements is CORRECT?
One drawback of the regular payback is that this method does not take account of cash flows beyond the payback period.
74. Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects?
Project B, which has below-average risk and an IRR = 8.5%.
10. Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?
Reduce the days' sales outstanding (DSO) without affecting sales or operating costs.
7. Below is the common equity section (in millions) of Teweles Technology's last two year-end balance sheets: 2009 2008 Common stock $2,000 $1,000 Retained earnings 2,000 2,340 Total common equity $4,000 $3,340 Teweles has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?
Teweles issued common stock in 2009.
55. Which of the following statements is CORRECT?
The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.
12. Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company's total assets or operating income. Which of the following effects would occur as a result of this action?
The company's current ratio increased.
59. Project X's IRR is 19% and Project Y's IRR is 17%. The projects have the same risk and the same lives, and each has constant cash flows during each year of their lives. If the WACC is 10%, Project Y has a higher NPV than X. Given this information, which of the following statements is CORRECT?
The crossover rate must be greater than 10%.
23. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?
The discount rate increases.
46. Which of the following statements is CORRECT, assuming stocks are in equilibrium?
The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.
84. Which of the following is true of the degree of operating leverage (DOL)?
The higher the DOL, the closer the firm is to its operating breakeven point.
57. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
69. A company is considering a new project. The CFO plans to calculate the project's NPV by estimating the relevant cash flows for each year of the project's life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the company's overall WACC. Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows?
The investment in working capital required to operate the project, even if that investment will be recovered at the end of the project's life.
49. Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT? Expected dividend, D1 $3.00 Current Price, P0 $50 Expected constant growth rate 6.0%
The stock's expected dividend yield and growth rate are equal.
52. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A B Required return 10% 12% Market price $25 $40 Expected growth 7% 9%
These two stocks must have the same dividend yield.
62. You are on the staff of Camden Inc. The CFO believes project acceptance should be based on the NPV, but Steve Camden, the president, insists that no project should be accepted unless its IRR exceeds the project's risk-adjusted WACC. Now you must make a recommendation on a project that has a cost of $15,000 and two cash flows: $110,000 at the end of Year 1 and -$100,000 at the end of Year 2. The president and the CFO both agree that the appropriate WACC for this project is 10%. At 10%, the NPV is $2,355.37, but you find two IRRs, one at 6.33% and one at 527%, and a MIRR of 11.32%. Which of the following statements best describes your optimal recommendation, i.e., the analysis and recommendation that is best for the company and least likely to get you in trouble with either the CFO or the president?
You should recommend that the project be accepted because (1) its NPV is positive and (2) although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the WACC. You should explain this to the president and tell him that the firm's value will increase if the project is accepted.
81. Everything else equal, a firm can reduce its operating breakeven point by:
increasing the contribution margin.
80. By definition, a firm's operating breakeven point represents the level of production and sales at which:
net operating income equals zero.
83. Which of the following statements is CORRECT? As a firm increases the operating leverage used to produce a given quantity of output, this will
normally lead to a reduction in its fixed assets turnover ratio.
25. What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?
paid/perpetuity
26. What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?
paid/perpetuity
