FIN EXAM 3

39. Which one of the following statements is correct in relation to independent projects?

A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return.

46. Which of the following characteristics relate to the cash break-even point for a given project? I. The project never pays back. II. The IRR equals the required rate of return .III. The NPV is negative and equal to the initial cash outlay .IV. The operating cash flow is equal to the depreciation expense.

A. I and III only

56. Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows? I. positive net present value II. profitability index greater than zero III. internal rate of return greater than the required rate IV. positive internal rate of return

A. I and III only

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule?

A. Project A only

6. The return earned in an average year over a multi-year period is called the _____ average return.

A. arithmetic

21. Changes in the net working capital requirements:

A. can affect the cash flows of a project every year of the project's life.

27. Which one of the following is an advantage of the average accounting return method of analysis?

A. easy availability of information needed for the computation

53. Which one of the following characteristics best describes a project that has a low degree of operating leverage?

A. high variable costs relative to the fixed costs

36. The top-down approach to computing the operating cash flow:

A. ignores noncash expenses.

1. The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's:

A. incremental cash flows.

17. Net present value:

A. is the best method of analyzing mutually exclusive projects.

52. You are considering a project that you believe is quite risky. To reduce any potentially harmful results from accepting this project, you could:

A. lower the degree of operating leverage.

8. The change in variable costs that occurs when production is increased by one unit is referred to as the:

A. marginal cost.

7. The change in revenue that occurs when one more unit of output is sold is referred to as:

A. marginal revenue.

1. A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?

A. net present value

13. Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?

A. net present value

Which one of the following correctly describes the dividend yield?

A. next year's annual dividend divided by today's stock price

1. Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return?

A. risk premium

25. Applying the discounted payback decision rule to all projects may cause:

A. some positive net present value projects to be rejected.

50. If you excel in analyzing the future outlook of firms, you would prefer the financial markets be ____ form efficient so that you can have an advantage in the marketplace.

A. weak

7. Which one of the following is the depreciation method which allows accelerated write- offs of property under various lifetime classifications?

ACRS

45. Which one of the following statements is correct concerning market efficiency?

D. A firm will generally receive a fair price when it issues new shares of stock.

38. Which of the following statements generally apply to the cash flows of a financing type project I. nonconventional cash flows II. cash outflows exceed cash inflows prior to any time value adjustments III. cash for services rendered is received prior to the cash that is spent providing the services IV. the total of all cash flows must equal zero on an unadjusted basis

D. I, II, and III only

Which of the following are considered weaknesses in the average accounting return method of project analysis? I. exclusion of time value of money considerations II. need of a cutoff rate III. easily obtainable information for computation IV. based on accounting values

D. I, II, and IV only

34. Which of the following are inversely related to variable costs per unit? I. contribution margin per unit II. number of units sold III. operating cash flow per unit IV. net profit per unit

D. I, III, and IV only

39. An increase in which of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used. I. annual salary for the firm's president II. contribution margin per unit III. cost of equipment required by a project IV. variable cost per unit

D. I, III, and IV only

16. Which of the following should be included in the analysis of a new product? I. money already spent for research and development of the new product II. reduction in sales for a current product once the new product is introduced III. increase in accounts receivable needed to finance sales of the new product IV. market value of a machine owned by the firm which will be used to produce the new product

D. II, III, and IV only

9. Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price. She received a total of $0.75 in dividends. Which one of the following statements is correct in relation to this investment?

D. The capital gains yield is positive.

22. A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?

D. The cash flow in year two is valued just as highly as the cash flow in year one.

37. A project with financing type cash flows is typified by a project that has which one of the following characteristics?

D. a cash inflow at time zero

17. Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:

D. accuracy of the projected cash flows.

8. The depreciation tax shield is best defined as the:

D. amount of tax that is saved because of the depreciation expense.

16. Which one of the following increases the net present value of a project?

D. an increase in the aftertax salvage value of the fixed assets

45. Decreasing which one of the following will increase the acceptability of a project?

D. equivalent annual cost

48. Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement?

D. financial break-even

5. The average compound return earned per year over a multi-year period is called the _____ average return

D. geometric

12. Which one of the following will decrease the net present value of a project?

D. increasing the project's initial cost at time zero

12. The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

D. incremental

34. The operating cash flow for a project should exclude which one of the following?

D. interest expense

52. Which two methods of project analysis were the most widely used by CEO's as of 1999?

D. internal rate of return and net present value

9. By definition, which one of the following must equal zero at the accounting break-even point?

D. net income

40. The profitability index is most closely related to which one of the following?

D. net present value

45. Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?

D. net present value

4. The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?

D. opportunity cost

51. Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions?

D. payback

10. The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

D. profitability index

47. The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

D. required rate of return

29. Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?

D. sensitivity

4. An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis.

D. simulation

56. Uptown Promotions has three divisions. As part of the planning process, the CFO requested that each division submit its capital budgeting proposals for next year. These proposals represent positive net present value projects that fall within the long-range plans of the firm. The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million, respectively. For the firm as a whole, the management of Uptown Promotions has limited spending to $10 million for new projects next year. This is an example of:

D. soft rationing.

52. The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient.

D. strong

47. Inside information has the least value when financial markets are:

D. strong form efficient.

43. A project has a payback period that exactly equals the project's life. The project is operating at:

D. the accounting break-even point.

20. Which one of the following will be used in the computation of the best-case analysis of a proposed project?

D. the lowest variable cost per unit that can reasonably be expected

30. Simulation analysis is based on assigning a _____ and analyzing the results.

D. wide range of values to multiple variables simultaneously

23. When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as:

D. worst case scenario analysis.

13. Which one of the following is an example of a sunk cost?

B. $1,200 paid to repair a machine last year

28. Morris Motors just purchased some MACRS 5-year property at a cost of $216,000. Which one of the following will correctly give you the book value of this equipment at the end of year 2?

B. $216,000 × (1 - 0.20 - 0.32)

38. Which one of the following statements is correct concerning bid prices?

B. A firm can submit a bid that is higher than the computed bid price and still break even.

26. Which one of the following statements is correct?

B. A project can create a positive operating cash flow without affecting sales.

12. Which one of the following statements related to capital gains is correct?

B. An increase in an unrealized capital gain will increase the capital gains yield.

A project has a discounted payback period that is equal to the required payback period. Given this, which of the following statements must be true? I. The project must also be acceptable under the payback rule .II. The project must have a profitability index that is equal to or greater than 1.0. III. The project must have a zero net present value. IV. The project's internal rate of return must equal the required return.

B. I and II only

41. When using the equivalent annual cost as a basis for deciding which equipment should be purchased, the equipment under consideration must fit which two of the following criteria? I. differing productive lives II. differing manufacturers III. required replacement at end of economic life IV. differing initial cost

B. I and III

20. All of the following are related to a proposed project. Which of these should be included in the cash flow at time zero? I. purchase of $1,400 of parts inventory needed to support the project II. loan of $125,000 used to finance the project III. depreciation tax shield of $1,100 IV. $6,500 of equipment needed to commence the project

B. I and IV only

43. When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

B. accepted because the profitability index is greater than 1.

6. Fixed costs:

B. are constant over the short-run regardless of the quantity of output produced.

33. Which one of the following statements concerning variable costs is correct?

E. Variable costs per unit are inversely related to the contribution margin per unit.

41. Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following?

B. assumes the firm has sufficient funds to undertake both projects

15. Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

B. cash inflow in the final year of the project

13. Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold?

B. degree of operating leverage

25. Sensitivity analysis determines the:

B. degree to which the net present value reacts to changes in a single variable.

2. Scenario analysis is defined as the:

B. determination of changes in NPV estimates when what-if questions are posed.

2. Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows?

B. discounted cash flow valuation

Topic: Simulation analysis 32. Ted is analyzing a project using simulation. His focus is limited to the short-term. To ease the simulation process, he is combining expenses into various categories. Which one of the following should he include in the fixed cost category?

B. equipment insurance

12. Operating leverage is the degree of dependence a firm places on its:

B. fixed costs.

36. Graphing the crossover point helps explain:

B. how decisions concerning mutually exclusive projects are derived.

34. To convince investors to accept greater volatility, you must:

B. increase the risk premium.

53. Individuals who continually monitor the financial markets seeking mispriced securities:

B. make the markets increasingly more efficient.

41. Estimates of the rate of return on a security based on a historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short- term.

B. overestimate; underestimate

3. The length of time a firm must wait to recoup the money it has invested in a project is called the:

B. payback period.

26. The excess return is computed as the:

B. return on a risky security minus the risk-free rate.

19. Which one of the following will increase a bid price?

E. an increase in the required rate of return

2. The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

B. stand-alone principle

30. The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following?

B. tax due on the salvage value of that asset

35. The bottom-up approach to computing the operating cash flow applies only when:

B. the interest expense is equal to zero.

46. Efficient financial markets fluctuate continuously because:

B. the markets are continually reacting to new information.

14. If a project has a net present value equal to zero, then:

B. the project earns a return exactly equal to the discount rate.

24. The operating cash flow of a cost cutting project:

E. can be positive even though there are no sales.

14. 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:

E. capital rationing.

44. Valerie just completed analyzing a project. Her analysis indicates that the project will have a 6-year life and require an initial cash outlay of $320,000. Annual sales are estimated at $589,000 and the tax rate is 34 percent. The net present value is a negative $320,000. Based on this analysis, the project is expected to operate at the:

E. cash break-even point.

47. When the operating cash flow of a project is equal to zero, the project is operating at the:

E. cash break-even point.

31. The net book value of equipment will:

E. decrease slower under straight-line depreciation than under MACRS.

37. Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow?

E. depreciation expense

4. The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the:

E. discounted payback period.

7. Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines that market?

E. efficient capital market

9. The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?

E. equivalent annual cost

11. Which one of the following is defined as the sales level that corresponds to a zero NPV?

E. financial break-even

50. You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the:

E. financial break-even point.

16. PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing:

E. hard rationing.

8. There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

E. have multiple rates of return.

30. The internal rate of return:

E. is easy to understand.

21. The base case values used in scenario analysis are the ones considered the most:

E. likely to occur.

17. You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine which has the:

E. lowest equivalent annual cost.

35. Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale?

E. marginal cost

36. The president of Global Wholesalers would like to offer special sale prices to the firm's best customers under the following terms: 1. The prices will apply only to units purchased in excess of the quantity normally purchased by a customer.2. The units purchased must be paid for in cash at the time of sale.3. The total quantity sold under these terms cannot exceed the excess capacity of the firm. 4. The net profit of the firm should not be affected. 5. The prices will be in effect for one week only. Given these conditions, the special sale price should be set equal to the:

E. marginal cost of all variable inputs.

18. Which one of the following is a project acceptance indicator given an independent project with investing type cash flows?

E. modified internal rate of return that exceeds the required return

10. By definition, which one of the following must equal zero at the cash break-even point?

E. operating cash flow

42. Which one of the following methods of analysis provides the best information on the cost- benefit aspects of a project?

E. profitability index

42. The primary purpose of Blume's formula is to:

E. project future rates of return.

18. 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 Steve using?

E. scenario analysis

31. Which one of the following types of analysis is the most complex to conduct?

E. simulation

20. Which one of the following categories of securities has had the most volatile returns over the period 1926-2010?

E. small-company stocks

57. Brubaker & Goss has received requests for capital investment funds for next year from each of its five divisions. All requests represent positive net present value projects. All projects are independent. Senior management has decided to allocate the available funds based on the profitability index of each project since the company has insufficient funds to fulfill all of the requests. Management is following a practice known as:

E. soft rationing.

14. G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

E. sunk

19. Why is payback often used as the sole method of analyzing a proposed small project?

C. It is the only method where the benefits of the analysis outweigh the costs of that analysis.

7. You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?

C. NPV profile

32. Three years ago, Knox Glass purchased a machine for a 3-year project. The machine is being depreciated straight-line to zero over a 5-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate)

C. Sale price + (Book value - Sale price) × T

23. Which one of the following statements concerning U.S. Treasury bills is correct for the period 1926- 2010?

C. The annual rate of return was always positive.

45. A project has a projected IRR of negative 100 percent. Which one of the following statements must also be true concerning this project?

C. The net present value of the project is negative and equal to the initial investment.

43. The bid price always assumes which one of the following?

C. The net present value of the project is zero.

46. Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its 5-year life. The firm has a 34 percent tax rate, uses straight-line depreciation over an asset's life, and has a positive net income. Given this, which one of the following statements is correct?

C. The new machine will generate positive operating cash flows, at least in the first few years of its life.

54. Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project?

C. The payback decision rule could override the accept decision indicated by the net present value.

49. Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

C. The payback decision rule could override the net present value decision rule should cash availability be limited

5. A project's average net income divided by its average book value is referred to as the project's average:

C. accounting return.

35. You are comparing two mutually exclusive projects. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should:

C. always accept project A if the required return exceeds the crossover rate.

44. Which one of the following would make a project unacceptable?

C. an equivalent annual cost that exceeds that of an alternative project

46. Mutually exclusive projects are best defined as competing projects which:

C. both require the total use of the same limited resource.

31. Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return?

C. condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows

22. Which one of the following is a project cash inflow? Ignore any tax effects.

C. decrease in accounts receivable

11. Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately. If the dividend yield remains at its pre- announcement level, then you know the stock price:

C. decreased proportionately with the dividend decrease.

41. Given the following, which feature identifies the most desirable level of output for a project?

C. discounted payback period equal to the project's life

39. Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision?

C. equivalent annual cost

58. The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is:

C. facing hard rationing.

27. As the degree of sensitivity of a project to a single variable rises, the:

C. greater the importance of accurately predicting the value of that variable.

10. Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

C. hiring additional employees to handle the increased workload should the firm accept the wreath project

19. Scenario analysis is best suited to accomplishing which one of the following when analyzing a project?

C. identifying the potential range of reasonable outcomes

1. Forecasting risk is defined as the possibility that:

C. incorrect decisions will be made due to erroneous cash flow projections.

48. According to theory, studying historical stock price movements to identify mispriced stocks:

C. is ineffective even when the market is only weak form efficient.

40. Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project:

C. is operating at a higher level than if it were operating at its cash break-even level.

15. As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return.

C. less than

14. The real rate of return on a stock is approximately equal to the nominal rate of return:

C. minus the inflation rate.

9. If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

C. mutually exclusive.

4. Which one of the following is defined by its mean and its standard deviation?

C. normal distribution

53. Which two methods of project analysis are the most biased towards short-term projects?A. net present value and internal rate of return

C. payback and discounted payback

48. Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis. Both projects have 3- year lives.

C. project B and reject project A based on their net present values.

37. The contribution margin per unit is equal to the:

C. sales price per unit minus the variable cost per unit.

15. Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

C. selling fewer hot dogs because hamburgers were added to the menu

51. You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient.

C. semistrong

3. An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis.

C. sensitivity

18. Which one of the following categories of securities had the highest average return for the period 1926-2010?

C. small company stocks

16. Small-company stocks, as the term is used in the textbook, are best defined as the:

C. smallest twenty percent of the firms listed on the NYSE.

15. The procedure of allocating a fixed amount of funds for capital spending to each business unit is called:

C. soft rationing.

3. Which one of the following costs was incurred in the past and cannot be recouped?

C. sunk

32. The internal rate of return is:

C. tedious to compute without the use of either a financial calculator or a computer.

5. Which one of the following best describes the concept of erosion?

C. the cash flows of a new project that come at the expense of a firm's existing cash flows

5. Variable costs can be defined as the costs that:

C. vary directly with sales.

44. Which one of the following is most indicative of a totally efficient stock market?

C. zero net present values for all stock investments

22. Which of the following variables will be at their highest expected level under a worst case scenario? I. fixed cost II. sales price III. variable cost IV. sales quantity

I and III only

25. Pro forma statements for a proposed project should: I. be compiled on a stand-alone basis .II. include all the incremental cash flows related to the project. III. generally exclude interest expense. IV. include all project-related fixed asset acquisitions and disposals.

I, II, III, and IV

42. The equivalent annual cost considers which of the following? I. required rate of return II. operating costs III. need for replacement IV. economic life

I, II, III, and IV

51. Theresa is analyzing a project that currently has a projected NPV of zero. Which of the following changes that she is considering will help that project produce a positive NPV instead? Consider each change independently. I. increase the quantity sold II. decrease the fixed leasing cost for equipment III. decrease the labor hours needed to produce one unit IV. increase the sales price

I, II, III, and IV

32. Which one of the following statements is correct?

The greater the volatility of returns of returns, the greater the risk premium

26. 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.

21. Which one of the following statements correctly applies to the period 1926-2010?

U.S. Treasury bills had a positive average real rate of return.

17. Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2010?

U.S. Treasury bills provided a positive rate of return each and every year during the period.

54. Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?

subcontracting portions of the project rather than purchasing new equipment to do all the work in-house

18. The bid price is:

the minimum price you should charge if you want to earn a target return on investment.

28. Sensitivity analysis is based on:

varying a single variable and measuring the resulting change in the NPV of a project.

3. Standard deviation is a measure of which one of the following?

volatility

44. Which one of the following is the best example of two mutually exclusive projects?

waiting until a machine finishes molding Product A before being able to mold Product B

40. The equivalent annual cost method is useful in determining:

which one of two machines should be purchased when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

27. A company that utilizes the MACRS system of depreciation:

will have a greater tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life.

23. Net working capital:

can create either a cash inflow or a cash outflow at time zero of a project.

6. The internal rate of return is defined as the:

discount rate which causes the net present value of a project to equal zero.

6. Which one of the following best describes pro forma financial statements?

financial statements showing projected values for future time periods

A. The greater the volatility of returns, the greater the risk premium. I. relatively low risk II. relatively low rate of return III. relatively high standard deviation IV. relatively large risk premium

III and IV only

26. Which one of the following correctly applies to the average accounting rate of return?

It can be compared to the return on assets ratio.

33. Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero?

NI + D

8. Which one of the following statements best defines the efficient market hypothesis?w

All securities in an efficient market are zero net present value investments.

19. Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010?

E. U.S. Treasury bills

55. The degree of operating leverage is equal to:

C. 1 + FC/OCF.

22. Which one of the following time periods is associated with high rates of inflation?

C. 1978-1981

13. Which of the following statements is correct in relation to a stock investment? I. The capital gains yield can be positive, negative, or zero .II. The dividend yield can be positive, negative, or zero. III. The total return can be positive, negative, or zero. IV. Neither the dividend yield nor the total return can be negative.

C. I and III only

11. Danielle's is a furniture store that is considering adding appliances to its offerings. Which of the following should be considered incremental cash flows of this project? I. utilizing the credit offered by a supplier to purchase the appliance inventory II. benefiting from increased furniture sales to appliance customers III. borrowing money from a bank to fund the appliance project IV. purchasing parts for inventory to handle any appliance repairs that might be necessary

C. I, II, and IV only

50. In actual practice, managers frequently use the: I. average accounting return method because the information is so readily available. II. internal rate of return because the results are easy to communicate and understand. III. discounted payback because of its simplicity. IV. net present value because it is considered by many to be the best method of analysis.

C. I, II, and IV only

55. You are considering a project with conventional cash flows and the following characteristics: Which of the following statements is correct given this information? I. The discount rate used in computing the net present value was less than 11.63 percent. II. The discounted payback period must be more than 2.98 years. III. The discount rate used in the computation of the profitability ratio was 11.63 percent. IV. This project should be accepted as the internal rate of return exceeds the required return.

C. I, II, and IV only

Which of the following are advantages of the payback method of project analysis? I. works well for research and development projects II. liquidity bias III. ease of use IV. arbitrary cutoff point

C. II and III only (liquidity bias and ease of use)

42. At the accounting break-even point, the:

C. IRR is zero.

29. Keyser Petroleum just purchased some equipment at a cost of $67,000. What is the proper methodology for computing the depreciation expense for year 2 if the equipment is classified as 5-year property for MACRS?

E. $67,000 × 0.32

33. Which of the following statements related to the internal rate of return (IRR) are correct? I. The IRR method of analysis can be adapted to handle non-conventional cash flows .II. The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate. III. The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV. Both the timing and the amount of a project's cash flows affect the value of the

E. I, II, III, and IV

49. Which of the following statements related to market efficiency tend to be supported by current evidence? I. Markets tend to respond quickly to new information. II. It is difficult for investors to earn abnormal returns. III. Short-run prices are difficult to predict accurately based on public information. IV. Markets are most likely weak form efficient.

E. I, II, and III only

49. Which of the following statements are identified with financial break-even point? I. The present value of the cash inflows exactly offsets the initial cash outflow. II. The payback period is equal to the life of the project .III. The NPV is zero. IV. The discounted payback period equals the life of the project.

E. I, III, and IV only

43. Which two of the following are the most likely reasons why a stock price might not react at all on the day that new information related to the stock issuer is released? I. insiders knew the information prior to the announcement II. investors need time to digest the information prior to reacting III. the information has no bearing on the value of the firm IV. the information was anticipated

E. III and IV only

24. Which one of the following statements related to payback and discounted payback is correct?

E. Payback is used more frequently even though discounted payback is a better method.

11. A project has a net present value of zero. Which one of the following best describes this project?

E. The project's cash inflows equal its cash outflows in current dollar terms.

35. If the variability of the returns on large-company stocks were to increase over the long- term, you would expect which of the following to occur as a result?

II and III only

38. Which of the following values will be equal to zero when a firm is producing the accounting break-even level of output? I. operating cash flow II. internal rate of return III. net income IV. payback period

II and III only

24. 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.

29. Which one of the following statements related to the internal rate of return (IRR) is correct?

The IRR is equal to the required return when the net present value is equal to zero.

2. Which one of the following best defines the variance of an investment's annual returns over a number of years?

The average squared difference between the actual returns and the arithmetic average return.

34. Douglass Interiors is considering two mutually exclusive projects and have determined that the crossover rate for these projects is 11.7 percent. Project A has an internal rate of return (IRR) of 15.3 percent and Project B has an IRR of 16.5 percent. Given this information, which one of the following statements is correct?

You cannot determine which project should be accepted given the information provided.