Financial Management & Policy - Ch 11

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 -I only -III only -II and III only -I, III, and IV only

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

**I, III, and IV only -I and III only -I and IV only -II and III only -I, II, and IV only

Bell Weather Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as:

**capital rationing -financial rejection -marginal rationing -project rejection -soft rationing

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

**financial break-even -accounting break-even -marginal break-even -cash break-even -leveraged break-even

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

**fixed costs -variable costs -sales -operating cash flows -depreciation tax shield

The key means of defending against forecasting risk is to:

**identify sources of value within a project -rely primarily on the NPV method of analysis -increase the discount rate assigned to the project -shorten the life of a project -ignore any potential salvage value that might be realized

Forecasting risk is defined as the possibility that:

**incorrect decisions will be made due to erroneous cash flow projects -some proposed projects will be rejected -some proposed projects will be temporarily delayed -some projects will be mutually exclusive -tax rate could change over the life of a project

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?

**marginal cost -average variable cost -average total cost -average total revenue -marginal revenue

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:

**marginal cost of all variable inputs -average variable cost of materials only -average cost of all variable inputs -sensitivity value of the variable costs -marginal cost of materials only

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

**operating cash flow -net income -contribution margin -NPV -IRR

A decrease in which one of the following will increase the account break-even quantity? Assume straight-line depreciation is used and ignore taxes

**sales price per unit -management salaries -variable labor costs per unit -initial fixed asset purchases -fixed costs

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?

**scenario analysis -simulation testing -sensitivity analysis -break-even analysis -rationing analysis

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:

**soft rationing -scenario analysis -sensitivity analysis -an operating leverage application -hard rationing

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

**the lowest variable cost per unit that can reasonably be expected -minimal numbers of units that are expected to produced and sold -the lowest expected salvage value that can be obtained for a project's fixed assets -the most anticipated sales price per unit -the highest level of fixed costs that is actually anticipated

Variable costs can be defined as the costs that:

**vary directly with sales -remain constant for all time periods -remain constant in the short run -are classified as noncash expenses -are inversely related to the number of units sold

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:

**worst-case scenario analysis -best-case sensitivity analysis -worst-case sensitivity analysis -best-case scenario analysis -base-case scenario analysis