Final Exam Notes PDF

Preview

Summary

Final Exam Notes...

Description

1) 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? Stand-alone principle

2) Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances? Selling furniture to appliance customers

3) W&M paid $179,000, in cash, for equipment three years ago and spent $18,000 for equipment upgrades last year. The company no longer uses this equipment and has received a cash offer of $68,000 from a buyer. The current book value of the equipment, including all updates, is $54,500. What value, if any, should the company assign to this equipment should it decide to use the equipment for a new project? $68,000

4) Kelley's Baskets makes handmade baskets and 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? Hiring additional employees to handle the increased workload should the firm accept the wreath project

5) Which one of the following costs was incurred in the past and cannot be recouped? Sunk

6) The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following? Opportunity cost

7) Nelson Mfg. owns a manufacturing facility that is currently sitting idle and is debt-free. The facility is located on a piece of land that originally cost $159,000. The facility itself cost $1,390,000 to build. As of now, the book value of the land and the facility are $159,000 and $458,000, respectively. The firm received a bid of $1,700,000 for the land and facility last week. The firm's management rejected this bid even though they were told that it is a reasonable offer in today's market. If the firm was to consider using this land and facility in a new project, what cost, if any, should it include in the project analysis? $1,700,000

8) GL Plastics 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? Sunk

9) Which one of the following is an example of a sunk cost? $1,200 paid to repair a machine last year

10) Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? Selling fewer hot dogs because hamburgers were added to the menu

11) Which one of the following should not be included in the analysis of a new product? Money already spent for research and development of the new product

12) Which one of the following best describes the concept of erosion? The cash flows of a new project that come at the expense of a firm's existing cash flows

13) Net working capital: can create either an initial cash inflow or outflow

14) Which one of the following is a project cash inflow? Ignore any tax effects. Decrease in inventory

15) A company that utilizes the MACRS system of depreciation but does not use bonus depreciation: will have a greater depreciation tax shield in Year 2 than in Year 1

16) 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? Net income + Depreciation

17) The operating cash flow for a project should exclude which one of the following? Interest expense

18) 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? Equivalent annual cost

19) You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that 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 that has the: lowest equivalent annual cost

20) The operating cash flow of a cost-cutting project: can be positive even though there are no sales

21) All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0? Initial investment in inventory to support the project

22) Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and 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? Equivalent annual cost

23) The equivalent annual cost method is useful in determining: which one of two machines should be purchased when the machines are mutually exclusive, have differing lives, and will be replaced at the end of their lives

24) Assume you are considering two mutually exclusive machines and need to select one for a cost-cutting project. Which one of these sets of characteristics best indicates the use of the equivalent annual cost method of analysis? Differing lives and planned replacement at end of life

25) Pro forma statements for a proposed project should generally do all of the following except: include interest expense

26) 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 he using? Scenario analysis

27) Forecasting risk is defined as the possibility that: incorrect decisions will be made due to erroneous cash flow projections

28) 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

29) The base case values used in scenario analysis are the values considered to be the most: likely to occur

30) Which of the following variables will be forecast at their highest expected level under a bestcase scenario? Salvage value and units sold

31) 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

32) Sensitivity analysis determines the: degree to which the net present value reacts to changes in a single variable

33) 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

34) As the degree of sensitivity of a project to a single variable rises, the: greater is the importance of accurately predicting the value of that variable

35) Simulation analysis is based on assigning a ________ and analyzing the results. wide range of values to multiple variables simultaneously

36) A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why? Sensitivity analysis; to identify the key variable that affects a project's profitability

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

38) Variable costs can be defined as the costs that: vary directly with sales

39) Fixed costs: are constant over the short-run regardless of the quantity of output produced

40) The change in revenue that occurs when one more unit of output is sold is referred to as: marginal revenue

41) The change in variable costs that occurs when production is increased by one unit is referred to as the: marginal cost

42) By definition, which one of the following must equal zero at the accounting break-even point? Net income

43) 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

44) Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output? IRR and net income

45) A project that has a payback period exactly equal to the project's life is operating at: the accounting break-even point

46) Valerie just completed analyzing a project. Her analysis indicates that the project will have a six-year life and require an initial cash outlay of $120,000. Annual sales are estimated at $189,000 and the tax rate is 21 percent. The net present value is negative $120,000. Based on this analysis, the project is expected to operate at the: cash break-even point

47) Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement? Financial break-even

48) 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: financial break-even point

49) Theresa is analyzing a project that currently has a projected NPV of zero. Which one of the following changes that she is considering is most apt to cause that project to produce a positive NPV instead? Consider each change independently. Decrease the labor hours per unit produced

50) Assume both the discount and tax rates are positive values. At the financial break-even point, the: IRR equals the required return

51) Operating leverage is the degree of dependence a firm places on its: fixed costs

52) 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

52) 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. For the firm as a whole, management has limited spending to $10 million for new projects next year even though the firm could afford additional investments. This is an example of: soft rationing

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

54) 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: soft rationing

55) 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: facing hard rationing

56) Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment? Coupon

57) Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called? Face value

58) A discount bond's coupon rate is equal to the annual interest divided by the: face value

59) A bond's principal is repaid on the ________ date. maturity

60) The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the: yield to maturity

61) A $1,000 par value corporate bond that pays $60 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $996.20? The current yield exceeds the coupon rate

62) Which one of these equations applies to a bond that currently has a market price that exceeds par value? Yield to maturity < Coupon rate

63) All else constant, a bond will sell at ________ when the coupon rate is ________ the yield to maturity. a discount; less than

64) DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the: market price of the bond will decrease

65) Which one of the following applies to a premium bond? Coupon rate > Current yield > Yield to maturity

66) Which one of the following relationships applies to a par value bond? Coupon rate = Current yield = Yield to maturity

67) Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct? A) The bonds will become discount bonds if the market rate of interest declines. B) The bonds will pay 10 interest payments of $60 each. C) The bonds will sell at a premium if the market rate is 5.5 percent. D) The bonds will initially sell for $1,030 each. E) The final payment will be in the amount of $1,060. 68) A newly issued bond has a coupon rate of 7 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: A) 3.5 percent. B) greater than 3.5 percent but less than 7 percent. C) 7 percent. D) greater than 7 percent. E) less than 3.5 percent. 14 69) The price sensitivity of a bond increases in response to a change in the market rate of interest as the: A) coupon rate increases. B) time to maturity decreases.

C) coupon rate decreases and the time to maturity increases. D) time to maturity and coupon rate both decrease. E) coupon rate and time to maturity both increase. 70) Which one of the following bonds is the least sensitive to interest rate risk? A) 3-year; 4 percent coupon B) 3-year; 6 percent coupon C) 5-year; 6 percent coupon D) 7-year; 6 percent coupon E) 7-year; 4 percent coupon 71) You own a bond that pays an annual coupon of 6 percent that matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent? A) The current yield to maturity is greater than 6 percent. B) The current yield is 6 percent. C) The next interest payment will be $30. D) The bond is currently valued at one-half of its issue price. E) You will realize a capital gain on the bond if you sell it today. 72) Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? A) Real rate risk B) Interest rate risk C) Default risk D) Liquidity risk E) Taxability risk 73) A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today? A) The face value of the bond today is greater than it was when the bond was issued. B) The bond is worth less today than when it was issued. C) The yield to maturity is less than the coupon rate.

D) The coupon rate is less than the current yield. E) The yield to maturity equals the current yield. 74) Which one of these statements is correct? A) Most long-term bond issues are referred to as unfunded debt. B) Bonds often provide tax benefits to issuers. C) The risk of a company financially failing decreases when the company issues bonds. D) All bonds are treated equally in a bankruptcy proceeding. E) A debenture is a senior secured debt. 15 75) Last year, Lexington Homes issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt? A) Semiannual coupon B) Discount bond C) Note D) Trust deed E) Collateralized 76) An example of a negative covenant that might be found in a bond indenture is a statement that the company: A) shall maintain a current ratio of 1.1 or higher. B) cannot lease any major assets without bondholder approval. C) must maintain the loan collateral in good working order. D) shall provide audited financial statements in a timely manner. E) shall maintain a cash surplus of $100,000 at all times. 77) Protective covenants: A) apply to short–term debt issues but not to long–term debt issues. B) only apply to privately issued bonds. C) are a feature found only in government–issued bond indentures. D) only apply to bonds that have a deferred call provision.

E) are primarily designed to protect bondholders. 78) Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued? A) Current yield B) Written record of all the current bond holders C) List of collateral used as bond security D) Current market price E) Price at which a bondholder can resell a bond to another bondholder 79) A note is generally defined as: A) a secured bond with an initial maturity of 10 years or more. B) a secured bond that initially matures in less than 10 years. C) any bond secured by a blanket mortgage. D) an unsecured bond with an initial maturity of 10 years or less. E) any bond maturing in 10 years or more. 80) A sinking fund is managed by a trustee for which one of the following purposes? A) Paying bond interest payments B) Early bond redemption C) Converting bonds into equity securities D) Paying preferred dividends E) Reducing bond coupon rates 16 81) The Fisher effect primarily emphasizes the effects of ________ on an investor's rate of return. A) default B) market movements C) interest rate changes D) inflation E) the time to maturity 82) Real rates are defined as nominal rates that have been adjusted for which of the following?

A) Inflation B) Default risk C) Accrued interest D) Interest rate risk E) Both inflation and interest rate risk 83) A Treasury yield curve plots Treasury interest rates relative to: A) market rates. B) comparable corporate bond rates. C) the risk-free rate. D) inflation rates. E) time to maturity. 84) Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity? A) Default risk B) Taxability C) Liquidity D) Inflation E) Interest rate risk 85) Which bond would you generally expect to have the highest yield? A) Risk-free Treasury bond B) Nontaxable, highly liquid bond C) Long-term, high-quality, tax-free bond D) Short-term, inflation-adjusted bond E) Long-term, taxable junk bond 86) What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? A) Maximal-growth model B) Constant-growth model C) Cap...