FINANCE hw ch. 8,9 12
which one of the following terms is mostly commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?
erosion
Net present value involves discounting an investment's:
future cash flows
Dismal Outlook is unable to obtain financing for any new projects under any circumstances. This company is faced with:
hard rationing
If a project with conventional cash flows has a profitability index of 1.0, the project will:
have an internal rate of return that equals the required return.
Scenario Analysis:
helps determine the reasonable range of expectations for a project's anticipated outcome.
Sensitivity Analysis:
helps identify the variable within a project that presents the greatest forecasting risk.
which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital?
increase the market value of the firm's common stock
A firm that uses its weighted average cost of capital as the required return for all of its investments will:
increase the risk level of the firm over time.
in an efficient market, the cost of equity for a highly risk firm:
increases in direct relation to the stock's systematic risk
any changes to a firm's project future cash flows that are caused by adding a new project are referred to as:
incremental cash flows
which one of the following is most clearly related to the net present value profile?
internal rate of return
Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently?
internal rate of return and net present value
the cost of preferred stock:
is equal to the stock's dividend yield.
the opportunities that a manager has to modify a project once the project has started are called:
managerial options
contingency planning focuses on the:
managerial options implicit in a project
which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flow that are interrupted by one or more positive cash flows?
modified internal rate of return
the possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:
multiple rates of return
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation?
net present value
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a verity of investment opportunities?
net present value
which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?
net present value
Ed owns a store that caters primarily to men. Each of the answer options represents an item related to a planned store expansion. Each of these items should be included in the expansion analysis with the exception of the cost:
of the blueprints that have been drawn of the expansion area.
which one of the following terms refers to the best option that was foregone when a particular investment is selected?
opportunity cost
which one of the following methods of analysis ignores the time value of money?
payback
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests?
profitability index
Which one of the following indicates that a project should be rejected? Assume that cash flows are normal, i.e., that initial cash flow is negative.
profitability index less than 1.0
pro forma financial statements is a financial statement that:
projects future years' operating results
Farmer's supply is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate to evaluate this proposed expansion. Which one of the following terms describes this evaluation approach?
pure play approach
scenario analysis is best described as the determination of the:
reasonable range of project outcomes
the payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:
recoup it's initial cost
the net working capital invested in a project is generally:
recouped at the end of the project
which one of the following is most apt to cause a wise manager to increase a project's cost of capital? assume the firm is levered.
she learns the project is riskier than previously believed.
which of the following principles refers to the assumption that a project will be evaluated based on its incremental ash flows?
stand-alone principle
Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, Weston can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost?
sunk
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n):
sunk cost
The analysis of a new project should exclude:
sunk costs
The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:
tax shield
Which statement is true?
the cost preferred stock is unaffected by the issuer's tax rate
which one of the following is the primary determinant of an investment's cost of capital?
the investment level of risk
Kelly's uses the firm's WACC as the required return for some of its projects. For other projects, the firms uses a rate of equal to WACC plus one percent, while another set of projects is assigned rates equal to WACC minus some amount. Which one of the following factors should be the key factor the firm uses to determine the amount of the adjustment it will make when assigning a discount beats to a specific project?
the perceived risk level of project
which one of the following statements concerning capital structure weights is correct?
the repurchase of preferred stock will increase the weight of debt
Which one of the following is an indicator that an investment is acceptable? Assume the cash flows are conventional.
Internal rate of return that exceeds the required return
Kurt, who is a divisional manager, continually brags that his division's required return for its projects is 1 percent lower than the return required for any other division of the firm. Which one of the following most likely contributes the most to the lower rate requirement for Kurt's division?
Kurt's division is less risky than the other divisions.
Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years.
Money spent last month repairing a damaged front fender
Boone Brothers remodels homes and replaces windows. Ace Builders constructs new homes. If Boone Brothers considers expanding into new home construction, it should evaluate the expansion project using which one of the following as the required return for the project?
Ace Builders' cost of capital
Bruce Moneybags owns several restaurants and hotels near a local interstate. One restaurant, Beef and More, originally cost $1.8 million, is currently fully paid for but needs modernized. He is trying to decide whether to accept an offer and sell Beef and More as is for the offer price of $1.1 million or renovate the restaurant himself. The projected renovation cost is $1.3 million. The restaurant would need to be shut down completely during the renovation which would cause an aftertax net loss of $90,000 in today's dollars. The estimated present value of the cash inflows from the renovated restaurant are $3.2 million. When analyzing the renovation project, what cost, if any, should be included for the current restaurant?
$1.1 million
An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true?
The net present value is equal to zero.
the internal rate of return is the:
Discount rate that results in a zero net present value for the project
which one of the following is the primary advantage of payback analysis?
ease of use
Flo is considering three mutually exclusive options for the additional space she plans to add to her specialty women's store. The cost of the expansion will be $148,000. She can use this additional space to add children's clothing, an exclusive gifts department, or a home décor section. She estimates the present value of the cash inflows from these projects are $121,000 for children's clothing, $178,000 for exclusive gifts, and $145,000 for decorator items. Which option(s), if any, should she accept?
Exclusive gifts only
You want to use the pure play approach to assign a cost of capital to a proposed investment. Which one of the following characteristics should you most concentrate on as you search for an appropriate pure play firm?
Firm operations
The cost of capital for a project depends primarily on which one of the following?
How the project uses its funds
which one of the following statements is correct?
If the internal rate of return equals the required return, the net present value will equal zero.
which one of the following will decrease the aftertax cost of debt for a firm?
Increase in tax rates
which one of the following will increase the cost of equity, all else held constant?
Increase in the dividend growth rate
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?
Mutually Exclusive
Which one of the following indicates that a project is expected to create value for its owners?
Positive net present value
which one of the following indicates that an independent project is definitely acceptable?
Profitability index greater than 1.0
Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project's net present value. What type of analysis is being conducted?
Sensitivity analysis
A firm has a return on equity of 12.4 percent according to the dividend growth model and a return of 18.7 percent according to the capital asset pricing model. The market rate of return is 13.5 percent. What rate should the firm use as the cost of equity when computing the firm's weighted average cost of capital (WACC)?
The arithmetic average of 12.4 percent and 18.7 percent
The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land?
The current market value of the land
Which one of the following statements is correct? (Payback)
The payback period ignores the time value of money.
which one of the following will occur when the internal rate of return equals the required return?
The profitability index will equal 1.0
which one of the following is used as the pretax cost of debt?
Weighted average yield to maturity on the firm's outstanding debt
Which one of the following statements is correct? Assume cash flows are conventional.
When the internal rate of return is greater than the required return, the net present value is positive.
Old Town Industries has three divisions. Division X has been in existence the longest and has the most stable sales. Division Y has been in existence for five years and is slightly less risky than the overall firm. Division Z is the research and development side of the business. Given this, the firm should probably:
assign the highest cost of capital to Division Z because it is most likely the riskiest of the three divisions.
the average net income of a project divided by the projects average book value is referred to as the projects:
average accounting return
which one of the following methods of analysis ignores cash flows?
average accounting return
Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best describes the firm's situation?
capital rationing
Lester lent money to The Corner Store by purchasing bonds issued by the store. The rate of return that he and the other lenders require is referred to as the:
cost of debt
Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC?
cost of equity
the weighted average cost of capital is defined as the weighted average of a firm's:
cost of equity, cost of preferred, and it's after tax cost of debt
CrossTown Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project?
current market value of the building
an increase in a levered firm's tax rate will:
decrease the firm's cost of capital
the net present value
decreases as the required rate of return increases
the net present value profile illustrates how the net present value of an investment is affected by which one of the following?
discount rate
The shoe box is considering adding new line of winter footwear to its product lineup. When analyzing the viability of this addition, the company should include all of the following in its analysis with the exception of:
the research and development costs to produce the current winter footwear samples.
The modified internal rate of return is specifically designed to address the problems associated with:
unconventional cash flows
which one of the following represents the minimum rate of return a firm must earn on its assets if it is to maintain the correct value if it's securities?
weighted average cost of capital
All else constant, an increase in a firm's cost of debt:
will result in an increase in the firm's cost of capital.
If an investment is producing a return that is equal to the required return, the investment's net present value will be:
zero
