3C

Question 1

Pole Co. is investing in a machine with a 3-year life. The machine is expected to reduce annual cash operating costs by $30,000 in each of the first two years and by $20,000 in Year 3. Present values of an annuity of $1 at 14% are:

Period 1 0.8772
2 1.6467
3 2.3216
Using a 14% cost of capital, what is the present value of these future savings?

Answer 1

62,900

Present value of Year 1 and 2 savings of $30,000 = Savings x Annuity factor for 2 years
= $30,000 x 1.6467
= $49,401

Present value of Year 3 savings of $20,000 = Savings x Difference between second- and third-year annuity factor
= $20,000 x (2.3216 -1.6467)
= $20,000 x 0.6749
= $13,498

Present value of Years 1-3 savings = Present value of Year 1 and 2 savings + Present value of Year 3 savings

= $49,401 + $13,498
= $62,899, or $62,900 rounded

Question 2

JUST INFORMATIONAL

The net present value method adjusts for the ____

It seeks to determine whether the present value of the estimated net future cash inflows at a desired (or required) rate of return will be greater or less than the cost of the ____

The ____ (or hurdle rate) is the required internal rate of return for projects considered by a company or investor.

Answer 2

time value of money.

True

proposed investment

discount rate

Question 3

Which of the following is not an implication of income tax on capital budgeting? T/F

The reduction in taxes payable due to depreciation is a cash inflow item that must be included in the analysis. Depreciation is NOT a cash flow.

Cash flows in the form of revenue are taxable and must be computed net of tax.

Cash outflows in the form of expenses are deductible in computing taxes payable and must be computed net of tax.

Salvage value at book value resulting in a gain must be computed net of tax.

Gain or loss on the disposition of an existing facility (piece of equipment) is a taxable gain or a deductible loss for computing income tax.

Answer 3

T
T
T
F -salvage value at book value results in no gain (loss) and has no tax consequences.
T

Question 4

Theamatics, Inc., leased 400 acres of vacant land from Farmco, Inc., on January 1. Theamatics hopes to construct a hotel-shopping center complex on the land. The lease agreement states that title to the land will pass to Theamatics at the end of the lease term. The cost of the land to Farmco was $500,000. The fair value of the land and the present value of the lease payments is $625,000. The collectibility of the lease payments is reasonably predictable, and no important uncertainties surround the amount of unreimbursable costs yet to be incurred by Farmco on the lease. What type of lease is this for Farmco?

Operating lease
Finance lease
Direct financing lease
Sales-type lease

Answer 4

Sales type lease

If at the inception of a lease involving land only, Criterion A1 (transfer of ownership) is met and the lease gives rise to dealer’s profit (loss), the lease is classified as a sales-type lease.

Question 5

how do you determine if its a finance lease?

When does the title transfer?
The lease contains a ___ option
Lease term is the major part of the reaming ___ life of the asset.
…….Can you lease an asset near the end of its life?
Underlying asset is ___ and not expected to have an alternative use
Present value of lease payments exceed____

Answer 5

end of lease
purchase option
economic life
No  you can not.
specialized 
Fair value

Question 6

How do you determine if its an operating lease?

Upon agreement/commencement, It is ROU. What is ROU

After the agreement, Lease liability gradually ___

Answer 6

Right of use

decreases

Question 7

How do you detremine if it is a SALES TYPE lease?

1. At commencement, Transfer of ___
2. What is recognized? By whom?

Answer 7

ownership

gain or loss, the lessor

Question 8

How do you determine if it is a DIRECT finance lease?

1. The lessor will collect the lease payments plus __

Answer 8

Residual value

Question 9

Contribution margin calculated as sales revenue less

Answer 9

variable costs

Question 10

An “ordinary annuity” is where payment is due/received at the ___of the period.

An “annuity due” or “annuity in arrears” is where payment is due/received at the ___of the period.

If you see simply “annuity”, assume ___.

Answer 10

end

beginning

ordinary annuity

Question 11

What is the calculation for the interest payment on a bond?

Stated rate of interest × Par value
Stated rate of interest × Market value
Effective rate of interest × Par value
Effective rate of interest × Market value

Answer 11

Stated rate of interest × Par value

The calculation for the interest payment on a bond is the Stated rate of interest × Par value.

This is the calculation used by the corporation to establish the interest to be paid.

Question 12

A ___loan is a legal agreement between a borrower and lender where the borrower promises to make interest and principal payments at specific times to the lender for the use of borrowed funds. It is a form of funded debt (long-term debt).

1. Do they have disadvantages over bonds/equity issuances?
2. How do you get the loans registered w/ the SEC?
3. Disadvantage: Issue costs are high
4. Interest rates are fixed or variable?

Answer 12

term

1. No, they have advantages
2. You DONT register w/ the SEC
3. False -issue costs are low
4. Either or - dont matta

Question 13

A ___is generally a publicly offered form of long-term debt where the borrower agrees to makes payments of interest and principal on specific dates to the bond holder.

Answer 13

bond

Question 14

An____is the legal document that contains the terms of the bond issue.

This document is approved by the ___before the
bond issue is offered to the public.

Common provisions in a bond indenture

1. ___ - right to redeem before maturity
2. ____– retire portion of bond each yr
3. ________- conditions must be met by issuer

Answer 14

indenture

SEC

Call Provision
Sinking Fund
Restrictive Covenant

Question 15

Bond Ratings - determined using a rating system such as Standard & Poor’s, based upon the probability that the issuing corporation will go into ____.

it goes from ___to ___

Answer 15

Default

AAA to D (strong to weak)

Question 16

Advantages of using the net present value method for decision making include the following:

The time value of money is considered (__of returns).
Given a perfect market, correct __will be obtained.
A correct ranking will be obtained for mutually exclusive projects given similar lives and investments.
An __value is obtained.

Disadvantages of using the net present value method for decision making include the following:

The ____rate is difficult to determine.
___related to cash flows have to be made that may or may not be correct.

Answer 16

compounding
decision advice
T
absolute

Negatives:

Discount Rate
Assumptions

Question 17

A limitation of using the discounted payback method to evaluate a project is that it ignores which of the following?

Cash flows after the payback period
Duration of funds being tied up
A project's cost of capital
A project's breakeven point
The method disregards profitability

Answer 17

Cash flows after payback period & The method disregard profitability

Question 18

The ___payback is the length of time required to recover the initial cash investment using a sum of the discounted future cash flows.

Answer 18

discounted

Question 19

An investment in a new product will require an initial outlay of $20,000. The cash inflow from the project will be $4,000 a year for the next six years. The payment will be received at the end of each year. What is the net present value of the investment at 8% using the correct factor from below?

Present value of $1 to be received after 6 periods 0.63017
Present value of an ordinary annuity of $1 per
period for 6 periods 4.62288
Present value of an ordinary annuity due of $1 per period for 6 periods 4.99271
Future value of $1 at the end of 6 periods 1.58687

Answer 19

$(1,508.48)

The present value of an ordinary annuity factor of 4.62288 is used because the payments will be received at the end of each period.

The present value of the future cash returns is the annual cash flow of $4,000 multiplied by the present value of an annuity of $1 a year for six years at 8%, or 4.62288. Thus, the present value of the future cash flows is $18,491.52.

The cost of the machine is $20,000, so the net present value is $18,492 less $20,000, or a negative net present value of $1,508.48.

Question 20

The payback reciprocal can be used to approximate a project’s ____if the cash flow pattern is relatively stable.

Answer 20

internal rate of return

Question 21

The payback reciprocal can be used to approximate a project’s:

net present value.
accounting rate of return if the cash flow pattern is relatively stable.
payback period.
internal rate of return if the cash flow pattern is relatively stable.

Answer 21

internal rate of return if the cash flow pattern is relatively stable.

Question 22

Which of the following statements is true regarding the payback method?

It does not consider the time value of money.

The salvage value of old equipment is ignored in the event of equipment replacement.

It is the time required to recover the investment and earn a profit.

It is a measure of how profitable one investment project is compared to another.

The payback method can be a good screening tool and as a general rule should be used as the primary investment evaluation tool. T/F

Answer 22

It does not consider the time value of money.

False – it should NOT be used

Question 23

PAYBACK METHOD ILLUSTRATION

Problem: Compute the payback period for an investment opportunity that costs $20,000 and provides equal annual cash flows of $4,000 per year for eight years.

      $20,000 Solution: ------- = 5 years 
      $ 4,000

Answer 23

yep

Question 24

What type of covenant requires a corporation to maintain, at all times, some minimum level of working capital?

Answer 24

Affirmative Covenant

Question 25

A firm that often factors its accounts receivable has an agreement with its finance company that requires the firm to maintain a 6% reserve and charges 1% commission on the amount of receivables. The net proceeds would be further reduced by an annual interest charge of 10%. Assuming a 360-day year, what amount of cash (rounded to the nearest dollar) will the firm receive from the finance company at the time a $100,000 account that is due in 90 days is turned over to the finance company? Note: Interest is last

Answer 25

90,675 Face amount of A/R factored = $100,000 LESS: 6% reserve = .06 x $100,000 = $6,000 1% commission = .01 x $100,000 = $1,000 7,000 Net amount available $ 93,000 LESS: 10% interest = .10 x $93,000 x (90 / 360) =2,325 Cash proceeds $ 90,675

Question 26

A firm that often factors its accounts receivable has an agreement with its finance company that requires the firm to maintain a 6% reserve and charges 1% commission on the amount of receivables. The net proceeds would be further reduced by an annual interest charge of 10%. Assuming a 360-day year, what amount of cash (rounded to the nearest dollar) will the firm receive from the finance company at the time a $100,000 account that is due in 90 days is turned over to the finance company? Note: Interest is last

Answer 26

90,675 Face amount of A/R factored = $100,000 LESS: 6% reserve = .06 x $100,000 = $6,000 1% commission = .01 x $100,000 = $1,000 7,000 Net amount available $ 93,000 LESS: 10% interest = .10 x $93,000 x (90 / 360) =2,325 Cash proceeds $ 90,675

Question 27

Accounts payable and accruals provide instant financing at no cost for a firm T/F __is an appealing source of financing since it is free; however, the length of this credit is only for a very limited time. __loans are not backed by any collateral and come in a variety of forms. A variation on the line of credit is the ___that is generally used by large corporations. This is an agreement by a bank to extend credit to a company over a specified period of time A ___is an international financing tool that guarantees payment to an international supplier upon the safe arrival of the goods by issuing a loan to the purchaser. ___is an unsecured promissory note that is issued by large banks and big corporations to meet short-term cash needs.

Answer 27

True Trade credit Unsecured revolving credit agreement letter of credit Commercial paper

Question 28

Harvey Co. is evaluating a capital investment proposal for a new machine. The investment proposal shows the following information: Initial cost $500,000 Life 10 Years Annual net cash inflows $200,000 Salvage value $100,000 If acquired, the machine will be depreciated using the straight-line method. The payback period for this investment is:

Answer 28

2.5 years The payback method does not take into account the life of the equipment, its salvage value, or how it will be depreciated. 200,000 * 2.5 = $500,000

Question 29

A company is investing in a machine costing $365,000. The following table shows selected financial data for the company for the next five years: ``` Year Annual Cash Flows Annual Net Income 1 $50,000 $45,000 2 125,000 120,000 3 150,000 145,000 4 50,000 45,000 5 30,000 25,000 What is the payback period on this machine? ```

Answer 29

Fuck net income, we just pay attention to Annual cash flow 365,000 - 50000 - 125000 - 150000 = $40,000 $50k is leftover in year 4 so you know its 3 years and some change. 40,000/50,000 = .80. The answer is 3.80 years

Question 30

A company invests $100,000 in property. The company has a contract to sell it for $120,000 in one year. The bank has a guaranteed interest rate of 10%. Information on present and future value factors is as follows: Present value of $1 at 10% at the end of one period: 0.90909 Future value of $1 at 10% at the end of one period: 1.10000 What is the net present value of the company's investment in the property?

Answer 30

9,091 The present value (PV) of the net cash inflows is calculated and compared to the initial investment. An investment proposal is desirable if its NPV is positive. The PV factor for a single sum for one period at 10% is .90909. PV = $120,000 × .90909 (rounded) = $109,091 Cash outflow (cost) = (100,000) Net present value = $ 9,091

Question 31

Which of the following statements is correct when a corporation is earning excess profits? Participating preferred stock acts more like equity than cumulative preferred stock. Cumulative preferred stock acts more like equity than participating preferred stock. Cumulative preferred stock does not act more or less like equity than participating preferred stock. No statement can be made comparing cumulative preferred and participating preferred stocks to equity.

Answer 31

Participating preferred stock acts more like equity than cumulative preferred stock Participating preferred stock acts more like equity than cumulative preferred stock when a corporation is earning excess profits because the stock does not receive a fixed percentage like debt. When excess profits are earned, the participating preferred stock receives additional dividends.

Question 32

Information on four investment proposals is as follows: Proposal Investment Required Net Present Value A $ 8,000 $3,200 B $12,000 $3,600 C $10,000 $2,500 D $ 4,000 $2,000 Rank the proposals in terms of preference:

Answer 32

DABC Using the project profitability index to rank the proposals: ``` NPV Investment A: $3,200 / $ 8,000 = 0.4 B: $3,600 / $12,000 = 0.3 C: $2,500 / $10,000 = 0.25 D: $2,000 / $ 4,000 = 0.5 ``` The order of preference then should be D, A, B, C. Note: Project Profitability Index = NPV of Project ÷ Investment Required. The project with the highest project profitability index would be the most desirable.

Question 33

When the risks of the individual components of a project's cash flows are different, an acceptable procedure to evaluate these cash flows is to: compute the net present value of each cash flow using the firm's cost of capital. compare the internal rate of return from each cash flow to its risk. utilize the accounting rate of return. discount each cash flow using a discount rate that reflects the degree of risk.

Answer 33

Discount Each Cash flow using a discount rate that reflects the degree of risk

Question 34

An investment advisor is working with a client to be sure that he understands the client's needs and preferences as he develops recommendations for the client's portfolio. As he speaks with the client, he ascertains that the client is willing to accept a reasonable level of risk in her portfolio. He further determines that the client expects to be fairly compensated for the level of risk that is assumed by a commensurate increase in value to her portfolio. The investment advisor believes that his client is: a risk taker. desirous of having her portfolio on the security market line. risk adverse. looking for a passively managed portfolio.

Answer 34

Risk Adverse The definition of a risk-adverse investor is one who is willing to take risk but believes that they will be reasonably compensated for the level of risk being taken. The security market line is a theoretical construct that provides a graphic representation of the expected return of a particular security as a function of beta, i.e., nondiversifiable risk

Question 35

MEASURING PORTFOLIO PERFORMANCE 1. If the return reflects the ___ 2. how ___compare w/ those achieved by peers 3. Whether success was due to ___

Answer 35

risk taken returns skill or luck

Question 36

Returns must be adjusted for risk before they can be compared meaningfully. In today's world, methods of risk adjustment are generally based on _

Answer 36

mean-variance criteria

Question 37

Yipann Corporation is reviewing an investment proposal; the data for each year are presented as follows. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is equal to its net book value, and there will be no salvage value at the end of the investment's life. See question: 400266

Answer 37

k

Question 38

Internal rate of return (time-adjusted rate of return)—unequal annual cash flows Illustration: An investment opportunity costs $10,000 and returns $5,000, $4,000, and $3,000, respectively, the first three years. What is the internal rate of return (IRR)? (1) First attempt: Using an interest rate of 10%, the net present value is $105, computed as follows: ``` Cash flows: $5,000 x .9091(given) $ 4,545.50 4,000 x .8264 3,305.60 3,000 x .7513 2,253.90 ----------- Present value cash inflows $10,105.00 ----------- Cash investment (10,000.00) ----------- Net present value $ 105.00 =========== ``` Second attempt: Using an interest rate of 11%, the net present value is ($55.50), computed as follows: ``` Cash flows: $5,000 x .9009 $ 4,504.50 4,000 x .8116 3,246.40 3,000 x .7312 2,193.60 ----------- Present value cash inflows $ 9,944.50 ----------- Cash investment (10,000.00) ----------- Net present value $ 55.50 ```

Answer 38

k

Question 39

A project has an initial investment of $100,000 and a project profitability index of 1.15. The firm's cost of capital is 12%. The net present value of the project is:

Answer 39

15k Projec profitability index = Present value of future inflows / Initial investment 1.15 = Present value of future inflows / $100,000 $100,000 x 1.15 = Present value of future inflows $115,000 = Present value of future inflows Net present value: Net present value = Present value of future inflows - Initial investment = $115,000 - $100,000 = $15,000

Question 40

Projec profitability index = Present value of future inflows / Initial investme Net present value = Present value of future inflows - Initial investment

Answer 40

YEPPPP

Question 41

400258 study this Note: For discount rates .. ALWAYS USE PV of $!... not the ORDINARY ANNUITY

Answer 41

k

Question 42

he use of an accelerated method instead of the straight-line method of depreciation in computing the net present value of a project has the effect of: raising the hurdle rate necessary to justify the project. lowering the net present value of the project. increasing the present value of the depreciation tax shield. increasing the cash outflows at the initial point of the project.

Answer 42

increasing the present value of the depreciation tax shield. An accelerated method of depreciation will cause larger amounts of depreciation to be deducted sooner than straight-line. Although the same amount of tax will be shielded in nominal dollars, the present value of the tax savings (or shield) is greater under accelerated depreciation because less tax is paid out earlier in the project's life.

Question 43

A project's net present value, ignoring income tax considerations, is normally affected by the: proceeds from the sale of the asset to be replaced. carrying amount of the asset to be replaced by the project. amount of annual depreciation on the asset to be replaced. amount of annual depreciation on fixed assets used directly on the project.

Answer 43

proceeds from the sale of the asset to be replaced. xpected proceeds from the sale of the asset to be replaced are a future cash inflow, which will affect the proposed project's net present value. This is saying the present value is affected by future value.

Question 44

Of the following decisions, capital budgeting techniques would least likely be used in evaluating the: acquisition of new aircraft by a cargo company. design and implementation of a major advertising program. trade for a star quarterback by a football team. adoption of a new method of allocating non-traceable costs to product lines.

Answer 44

adoption of a new method of allocating non-traceable costs to product lines.

Question 45

CAPITAL BUDGETING TECHNIQUES (1) ___method (2) _____payback (3) ____rate of return (4) ___present value (5) ____rate of return (6) ____index (7) CVP analysis/margin of safety

Answer 45

``` Payback Discounted Accounting Net Internal Profitability True ```

Question 46

Approaches for Detremining FV 1. The ___approach to determining fair value is based upon what it would cost to replace the subject item with an asset of like function and capacity. 2. The ___approach to determining fair value uses market comparison of identical or comparable assets or liabilities 3. The __)approach to determining fair value uses the company's ability to create earnings or cash inflows and the risk involved in the specific investment. When measuring fair value over multiple periods, methods should be used consistently Tf

Answer 46

cost market income True

Question 47

Tam Co. is negotiating for the purchase of equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment's estimated useful life is 10 years, with no residual value, and would be depreciated by the straight-line method. Tam's predetermined minimum desired rate of return is 12%. Present value of an annuity of 1 at 12% for 10 periods is 5.65. Present value of 1 due in 10 periods at 12% is .322. In estimating the internal rate of return, the factors in the table of present values of an annuity should be taken from the columns closest to:

Answer 47

5 The payback period serves as a fair approximation of the annuity factor value from the table of present values of an annuity. Using the data given: Payback = Investment / Annual saving = $100,000 / $20,000 = 5.00 Thus, internal rate of return can be obtained as a percentage rate from an annuity table for 10 periods nearest the annuity factor of 5.00.

Question 48

FAIR VALUE HIERARCHY ____ is when determining fair value, and include such items as prices of assets or liabilities that can be either directly or indirectly observed but do not include the Level 1 quoted market prices. ____- Observable and highest/most desirable to determine FV ____ inputs are unobservable and considered to be the lowest and least desirable level when determining fair value

Answer 48

Level 2 Level 1 Level 3

Question 49

A disadvantage of the net present value method of capital expenditure evaluation is that it: is calculated using sensitivity analysis. computes the true interest rate. does not provide the true rate of return on investment. is difficult to adapt for risk.

Answer 49

Doesnt provide true rate of return on investment

Question 50

Which of the following inputs would be most beneficial to consider when management is developing the capital budget? Supply/demand for the company's products Current product sales prices and costs Wage trends Profit center equipment requests

Answer 50

Capital budgeting involves management making decisions about spending money on long-term assets. In order to make these decisions, management must first know what each profit center's equipment needs are. Supply and demand for the company's products, current sales prices and costs, and wage trends would be helpful in order to determine future cash flows as they relate to implementing various capital projects, but these are not the best answers

Question 51

The discounted payback period is the length of time required for discounted cash flows to recover the cost of the investment. The year two cash inflow for project D which is consistent with a discounted payback period of two years can be calculated as follows: Investment cost =

Answer 51

Present value of years of cash inflows

Question 52

400274 do this question

Answer 52

mmmmk

Question 53

A project should be accepted if the present value of cash flows from the project is: equal to the initial investment. less than the initial investment. greater than the initial investment. equal to zero.

Answer 53

Greater than investment

Question 54

What is an internal rate of return? A net present value An accounting rate of return A payback period expected from an investment A time-adjusted rate of return from an investment

Answer 54

A time-adjusted rate of return from an investment

Question 55

When evaluating capital budgeting analysis techniques, the payback period emphasizes: liquidity. profitability. cost of capital. net income.

Answer 55

Liquidity Payback period is the length of time in years required to recover the cash invested in a project. Payback is computed as net investment divided by average expected annual cash inflow. Payback focuses on rapid recovery of cash investment (i.e., liquidity).

Question 56

400260 good luck

Answer 56

lol

Question 57

Which of the following statements is correct regarding financial decision making? Opportunity cost is recorded as a normal business expense. The accounting rate of return considers the time value of money. A strength of the payback method is that it is based on profitability. Capital budgeting is based on predictions of an uncertain future.

Answer 57

Capital budgeting is based on predictions of an uncertain future.

Question 58

Tam Co. is negotiating for the purchase of equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment's estimated useful life is 10 years, with no residual value, and would be depreciated by the straight-line method. Tam's predetermined minimum desired rate of return is 12%. Present value of an annuity of 1 at 12% for 10 periods is 5.65. Present value of 1 due in 10 periods at 12% is .322. What is the accrual accounting rate of return based on initial investment?

Answer 58

10% Annual accrual accounting "income" = Annual saving - Depreciation = $20,000 - ($100,000 / 10 years) = $20,000 - $10,000 = $10,000 Accrual accounting rate of return = Accounting "income" / Investment = $10,000 / $100,000 = 10%

Question 59

Accounting Rate of return = (Net cash inflow - depreciation) / investment Or accounting income/ investment

Answer 59

yep ype yep

Question 60

For capital budgeting purposes, management would select a high hurdle rate of return for certain projects because management: believes too many proposals are being rejected. believes bank loans are riskier than capital investments. believes capital investment proposals involve average risk. wants to factor risk into its consideration of projects.

Answer 60

wants to factor risk into its consideration of projects.

Question 61

Allo Foundation, a tax-exempt organization, invested $200,000 in a 5-year project at the beginning of 2006. Allo estimates that the annual cash savings from this project will amount to $65,000. The $200,000 of assets will be depreciated over their 5-year life on the straight-line basis. On investments of this type, Allo's desired rate of return is 12%. Information on present value factors is as follows: AT 12% AT 14% AT 16% ------ ------ ------ PV of 1 for 5 periods 0.5674 0.5194 0.4761 PVof an annuity of 1 for 5 periods 3.6048 3.4331 3.2743 Allo's internal rate of return on this project is:

Answer 61

Internal rate of return is the interest rate which will result in a net present value (PV) of zero. Therefore: PV of Cash Savings = PV of Investment Outlay $65,000 x PV factor = $200,000 x 1.0 $65,000(PV factor) = $200,000 Then dividing by $65,000: PV factor = $200,000 / $65,000 = 3.08 Referring to the present value factors in the question, the percentage rates for present value of an annuity indicates that a present value factor of 3.08 would relate to an interest rate of more than 16%.

Question 62

If a project has differing required rates of return over its life, i.e., 8% in the first three years and 12% in the second three years, the analyst should: choose the highest rate to compare to the firm's cost of capital. choose the lowest rate to compare to the firm's cost of capital. compute the project's net present value using both rates for the appropriate years and accept the project if the net present value is at least zero. use the average of the multiple rates to compare to the firm's cost of capita

Answer 62

compute the project's net present value using both rates for the appropriate years and accept the project if the net present value is at least zero. With differing rates of return in different years, the best way to make a comparison is to calculate the net present value using both rates for the appropriate years and accept those projects with a net present value (NPV) of zero or greater. Net present value is appropriate because it allows discounting different years using the respective required rates of return for those years.

Question 63

The profitability index is a variation on which of the following capital budgeting models? Internal rate of return Economic value added Net present value Discounted payback

Answer 63

NPV

Question 64

A small vacuum cleaner repair shop is located in a once-quiet, out-of-the way neighborhood. Recently, however, a large entertainment complex that will be used for concerts, basketball games, and other major events was just opened a block from this small business. When determining the fair value of this property, the fair value should be based upon: the use of the property as a small vacuum cleaner repair shop. the use of the property as a small restaurant serving a variety of light meals, exotic desserts, and alcohol. the use of the property as a small restaurant serving a variety of light meals, exotic desserts, and alcohol only if the current owner plans to sell the property. the average of the property value based upon its current use and the highest and best use.

Answer 64

the use of the property as a small restaurant serving a variety of light meals, exotic desserts, and alcohol. he fair value measurement assumes that the business (or item) being valued will be put to the highest and best use that is physically possible, legally permissible, and financially feasible. The result will be the maximization of value. It is important to realize that the highest and best use may not be the current use; therefore, the highest and best use is determined from the viewpoint of the purchaser and not the seller. In this scenario, the use of the facility as a vacuum cleaner repair shop is clearly not the highest and best use of the property. Due to the need to have small restaurants and bars in the vicinity of a large entertainment complex, the highest and best use of the property would likely be an establishment such as a small restaurant serving light fare for the before-the-event crowd and desserts for the after-the-event group

Question 65

Which of the following changes would result in the highest present value? A $100 decrease in taxes each year for four years A $100 decrease in the cash outflow each year for three years A $100 increase in disposal value at the end of four years A $100 increase in cash inflow each year for three years

Answer 65

Two general rules can be developed related to present value calculations: Increases in cash inflows (decreases in cash outflows) will result in higher present values, all else being equal. The earlier the cash inflows (the later the cash outflows) the higher the present value, all else being equal.

Question 66

Given a 10% discount rate with cash inflows of $3,000 at the end of each year for five years and an initial investment of $11,000, what is the net present value?

Answer 66

370 The present value of the payment in the first year is $3,000 ÷ 1.1, or $2,727. The present value of the payment in the second year is $3,000 ÷ (1.1 × 1.1), or $2,479. The present value of the payment in the third year is $3,000 ÷ (1.1 × 1.1 × 1.1), or $2,254. The present value of the payment in the fourth year is $3,000 ÷ (1.1 × 1.1 × 1.1 × 1.1), or $2,049. The present value of the payment in the fifth year is $3,000 ÷ (1.1 × 1.1 × 1.1 × 1.1 × 1.1), or $1,863. The sum of the present value of the five future payments is $11,372. The cost of the investment is $11,000, so the net present value is $11,372 - $11,000, or $372, rounded to $370.

Question 67

The Look Company is considering an investment that would require an initial investment of $120,000. The investment would provide cash inflows of $20,000 per year for 10 years, starting one year from today. Look is trying to compute the internal rate of return for this investment. On the line for 10 periods on the present value of an annuity factor table, the factor is 6.145 for 10%. If the hurdle rate for acceptable projects is 10%, will the project be accepted?

Answer 67

Yes interest rates get higher, the factors for the same number of periods become smaller. This is because, as the interest rates become higher, the time value of the money becomes higher. This makes the present value of the money lower. In this case, the factor of internal rate of return is 6: $120,000 ÷ $20,000 = 6 If the hurdle rate of return is 10%, with a factor of 6.145, then the actual rate of return will be greater than 10%, and the project will be accepted.

Question 68

An accountant has been retained by a company as an investment advisor for its employees. Research of historical rates of return yields the following information: Type of Investment Mean Return Standard Deviation ---------------------------------- ----------- ------------------ Common stocks 12% 20% Long-term corporate bonds 6% 8% Intermediate-term gov bonds 5% 5% U.S. Treasury bills 4% 3% Which of the following investments has the greatest reward/risk ratio if a return's standard deviation is an accurate assessment of investment risk?

Answer 68

US T BILL The reward/risk ratio is the rate of return divided by a measure of risk (the standard deviation in this question). Computing this reward-to-risk ratio for U.S. Treasury bills gives 4%/3%, or 1.33, which exceeds the ratio for the other investment alternatives: Common stocks: 12%/20%, or 0.60 Long-term corporate bonds: 6%/8%, or 0.75 Intermediate-term government bonds: 5%/5%, or 1.00

Question 69

A company can finance an equipment purchase through a loan. Alternatively, it often can obtain the same equipment through a lease arrangement. A factor that would not be considered when comparing the lease financing with the loan financing is: whether the lessor has a higher cost of capital than the lessee. whether the lessor and lessee have different tax reduction opportunities. the residual value of the property. the capacity of the equipment.

Answer 69

the capacity of the equipment. The financing of the equipment by either lease or loan will not affect the physical output, or capacity, that the equipment has the ability to generate. The equipment will utilize the same capacity regardless of the means by which it is financed.

Question 70

Market beliefs related to efficient markets take three forms. Which of the following is not a market belief? Weak-form efficient markets Semi-strong efficient markets Strong-form efficient markets Active-form efficient markets

Answer 70

active form

Question 71

What are the three forms of efficient markets _____efficiency suggests that information about past prices would not be of use in predicting future performance ____efficient markets suggest that all publicly available information is incorporated in market prices ____ efficient markets suggest that all available information is incorporated in current market prices.

Answer 71

weak Semi Strong Strong

Question 72

Which of the following factors is not characteristic of the efficient markets hypothesis? Financial managers can benefit from timing the sales and purchases of securities. Investors are knowledgeable. Capital market prices reflect underlying value. Accounting changes do not influence the stock price.

Answer 72

Financial managers can benefit from timing the sales and purchases of securities.

Question 73

___is an investment theory that states it is impossible to "beat the market" because existing share prices always incorporate and reflect all relevant information; stocks always trade at their underlying fair value, making it impossible for knowledgeable investors to either purchase undervalued stocks or sell stocks for inflated prices.

Answer 73

Efficient Markets Hypothesis

Question 74

When estimating cash flow for use in capital budgeting, depreciation is: included as a cash or other cost. excluded for all purposes in the computation. utilized to estimate the salvage value of an investment. utilized in determining the tax costs or benefit.

Answer 74

utilized in determining the tax costs or benefit. The only effect depreciation expense has on cash flows is the determination of income tax.

Question 75

Yarrow Co. is considering the purchase of a new machine that costs $450,000. The new machine will generate net cash flow of $150,000 per year and net income of $100,000 per year for 5 years. Yarrow's desired rate of return is 6%. The present value factor for a 5-year annuity of $1, discounted at 6%, is 4.212. The present value factor of $1, at compound interest of 6% due in 5 years, is 0.7473. What is the new machine's net present value?

Answer 75

$181,800 The net present value is the excess of the discounted present value of future cash returns above the investment cost. The present value of the future cash returns is the annual cash flow of $150,000 multiplied by the present value of an annuity of $1 a year for five years at 6%, which is 4.212. Thus, the present value of the future cash flows is $631,800 ($150,000 × 4.212). The cost of the machine is $450,000, so the net present value is: $631,800 - $450,000 = $181,800.

Question 76

A company issued common stock and preferred stock. Projected growth rate of the common stock is 5%. The current quarterly dividend on preferred stock is $1.60. The current market price of the preferred stock is $80 and the current market price of the common stock is $95. What is the expected rate of return on the preferred stock?

Answer 76

8% To determine the expected rate of return on preferred stock, annualize the quarterly dividend, and then divide the expected dividend per share by the price per share; multiply by 100 to get the percentage rate of return: ($1.60 × 4) ÷ $80 = 8%

Question 77

What does beta measure in the capital asset pricing model? The volatility of a stock relative to its competitors The volatility of a stock relative to the market The additional return required over the risk-free rate Unsystematic risk

Answer 77

The volatility of a stock relative to the market

Question 78

The use of a rule of thumb can: show that the valuator is knowledgeable about the subject company's ___. support a valuation arrived at using another method with __ support a valuation arrived at using another method with different results along with arguments as to why the subject company is not “___” within the industry.

Answer 78

industry similar results. average

Question 79

Regal Industries is replacing a grinder purchased five years ago for $15,000 with a new one costing $25,000 cash. The original grinder is being depreciated on a straight-line basis over 15 years to a zero salvage value; Regal will sell this old equipment to a third party for $6,000 cash. The new equipment will be depreciated on a straight-line basis over 10 years to a zero salvage value. Assuming a 40% marginal tax rate, Regal's net cash outlay at the time of purchase if the old grinder is sold and the new one purchased is:

Answer 79

17,400 Cash paid for new grinder $25,000 Less: Proceeds from sale of old grinder $6,000 Net of cash tax "saving" resulting from loss on sale (1)(40% x $4,000) 1,600 7,600 ------ ------- Net cash outlay $17,400 =======

Question 80

DUE DILLIGENCE Important to use due diligence and verify assumptions regarding 1. Existence of )___& their value 2. Projections of Future ___Streams 3. Existence of ___

Answer 80

Physical assets Benefit Risk

Question 81

DUE DILIGENCE - EXISTENCE OF ASSETS 1. Physical __should be performed 2. Inquiries should be made about __ 3. Inquire to determine asset are suitabled for ___

Answer 81

Inspections Liens intended use

Question 82

DUE DILIGENCE - BENEFIT STREAMS 1. Predictions of revenue should be examined for __ 2. Future of product lines should be examined for future __ 3. Past and future budgets should be examined for __

Answer 82

reasonableness profitability reasonableness

Question 83

DUE DILIGENCE - EXISTENCE OF RISK All businesses operate in an environment filled with risk. When valuing a business or business segment, it is important to identify various risks that could have negative impacts on the subject of the valuation such as general market risk, labor efficiency, attrition, availability risk, supplier risk, and competitive risk. The higher the risk level, the lower the value of the subject of the valuation.

Answer 83

True

Question 84

It was time for an investment advisor to meet with one of her major clients for the annual review of his portfolio. She knew that the investor would be very interested in the performance of his portfolio in the turbulent and volatile market that had existed for the past 12 months. She reviewed the client's file and saw that he had indicated that he expected his portfolio would provide him with a risk-adjusted return that provided a high portfolio return per unit of risk. She picked up the phone and called one of the firm's analysts and asked him to complete an analysis of the ________ for the portfolio.

Answer 84

treynor index The Treynor index is based on the premise that there are two components of risk: Risk produced by fluctuations in the market Risk produced by fluctuations of the individual stock

Question 85

The Treynor index is based on the premise that there are two components of risk: Risk produced by fluctuations in the __ Risk produced by fluctuations of the ___ The ___measure of portfolio risk measures the absolute value of performance of a portfolio on a risk-adjusted basis. The ___measure of portfolio risk provides information similar to that of the Treynor index, except that the risk measure is the standard deviation of the portfolio rather than beta.

Answer 85

market individual stock Jensen Sharpe

Question 86

Which of the following covenants obliges the borrower to repay the bonds if a large quantity of common stock is held by a single investor and the bond rating is downgraded? Poison put clause Cross-default clause Affirmative covenant Negative pledge clause

Answer 86

poison put clause A poison put clause is a covenant that obliges the borrower to repay the bonds if a large quantity of common stock is held by a single investor and the bond rating is downgraded. This type of bond covenant is used as a defensive strategy to prevent hostile takeovers.

Question 87

In capital budgeting, the excess present value index (profitability index) is best used to: evaluate mutually exclusive investments of different sizes. adjust for inflation in the net present value computation. compare various projects with the same initial investment amount. adjust for risk in capital budgeting decisions.

Answer 87

evaluate mutually exclusive investments of different sizes. ANS - evaluate mutually exclusive investments of different sizes. The excess present value index, or profitability index, is computed as the present value of future net cash inflows divided by the discounted initial investment. The result is an index number rather than a dollar amount. This allows for the evaluation of mutually exclusive projects with different (not the same) investment amounts. The profitability index is often used to compare two or more mutually exclusive projects.

Question 88

Present value of cash flows not including the initial investment ------------------------------------ = ????? Initial investment

Answer 88

Profitability Index

Question 89

If you were to see the formula (Portfolio return - Risk-free rate) ÷ Standard deviation, you would be dealing with:

Answer 89

Sharpe Measure

Question 90

Which following is not one of the four basic assumptions when using the income approach to valuation? Prediction of the future benefit stream The number of periods in the projection The terminal value at the beginning of the projection The discount capitalization rate

Answer 90

The terminal value at the beginning of the projection The terminal value should be calculated at the end of the projection, not at the beginning. Using the income approach to valuation, one needs to evaluate the future benefit stream, the number of periods in the project, and the discount capitalization rate.

Question 91

There are two types of valuation engagements described by the Statement on Standards for Valuation Services (SSVS 1), issued by the AICPA, that went into effect in 2008. Valid comparisons of these two types of engagements include which of the following? In a valuation engagement, the valuator is free to use any valuation approach of method deemed to be professional appropriate. In a calculation engagement, the valuator and the client agree upon the specific valuation methods or approaches to be used. The results of a valuation engagement can be either a single number or expressed as a range. The result of a calculation engagement can only be expressed as a single number. A valuation engagement is used when a full business is being valued. A calculation engagement is used when a minority interest is being valued. In a valuation engagement, the valuator will use a going concern as the premise of value. In a calculation engagement, the valuator will use liquidation as the premise of value.

Answer 91

In a valuation engagement, the valuator is free to use any valuation approach of method deemed to be professional appropriate. In a calculation engagement, the valuator and the client agree upon the specific valuation methods or approaches to be used.

Question 92

In a ____engagement, the valuation analyst is free to employ the use of any valuation approach or method that is professionally deemed appropriate under the circumstances. The results are expressed in terms of a conclusion of value and can either be a single number or a range. The premise of value can be either a going concern or liquidation. In a ____engagement, the valuation analyst and the client agree upon the valuation methods and approaches to be used; therefore, the analyst is not free to use any approach or method available. The results are expressed in terms of a calculated valued and can be either a single number or a range. The premise of value can be either a going concern or liquid

Answer 92

valuation calculation

Question 93

Which of the following methods should be used if capital rationing needs to be considered when comparing capital projects? Profitability index Net present value Return on investment Internal rate of return

Answer 93

Profitability index

Question 94

For the next two years, a lease is estimated to have an operating net cash inflow of $7,500 per annum, before adjusting for $5,000 per annum tax basis lease amortization and a 40% tax rate. The present value of an ordinary annuity of $1 per year at 10% for two years is 1.7355. What is the lease's after-tax present value using a 10% discount factor?

Answer 94

$11,281 Net annual cash inflows = Cash inflow - income taxes = $7,500 - (.40 x ($7,500 - $5,000)) = $7,500 - (.40 x ($2,500)) = $7,500 - $1,000 = $6,500 Present value of cash inflow = Net annual cash inflow x PV factor = $6,500 x 1.7355 = $11,280.75, or 11,281 rounded

Question 95

The Alda Company plans to issue bonds with a maturity value of $1,000,000 and a stated rate of interest of 10%. What could be said about the issuance if the effective rate of interest (also known as the yield to maturity) is 9%? The bond is issued at a discount. The bond is issued at par. The bond is issued at a premium. The stated rate is changed to 9%.

Answer 95

Issued at a premium If the Alda Company issues bonds with a maturity value of $1,000,000, a stated rate of interest of 10%, and an effective rate of interest (also known as the yield to maturity) of 9%, then the bonds are not issued at a discount. Bonds are issued at par when both rates are equal and at a premium when the stated rate of interest is more than the effective rate.

Question 96

Bonds are issued at par when both rates ___and at a premium when the __rate of interest is more than the ___rate. Discount is is when ___is more than __

Answer 96

are equal stated , effective Effective, stated

Question 97

The net present value (NPV) of a project has been calculated to be $215,000. Which one of the following changes in assumptions would decrease the NPV? Decrease the estimated effective income tax rate. Decrease the initial investment amount. Increase the estimated salvage value. Increase the discount rate.

Answer 97

Increase in discount rate

Question 98

In the definition of fair value as presented in FASB ASC 820, the principal market is considered to be a market where: the holder of the asset or liability could find the greatest volume of asset sales or liability transfers of items similar to the one being valued. the holder of an asset could maximize the price received in an asset sale or minimize the transfer costs in the conveyance of a liability. the buyer and seller are not related parties and both have usual and customary knowledge of the items being transferred. all transfer costs rest solely with either the buyer or the seller.

Answer 98

the holder of the asset or liability could find the greatest volume of asset sales or liability transfers of items similar to the one being valued. . The principal market is considered to be one where the holder of the asset or liability being valued could find the greatest volume of similar transfers. The most advantageous market is one where the holder of an asset could maximize the price received in an asset sale or minimize the transfer costs in the conveyance of a liability.

Question 99

The discount rate used when preparing a business valuation when employing an income approach is critical. Which of the following statements about discount rates is true? The higher the risk, the higher the discount rate, and the lower the present value of the subject company. The discount rate or cost of capital is a predetermined amount as dictated in Revenue Ruling 68-609. The capital asset pricing model (CAPM) is the best and most frequently used method to develop a discount rate for a business valuation. Discount rates and capitalization rates often employed when using an income approach for a business valuation are interchangeable.

Answer 99

The higher the risk, the higher the discount rate, and the lower the present value of the subject company. The higher the perceived risk involved in a particular investment, the greater the return that an investor would demand on that investment; therefore, the higher the discount rate used, the lower the present value.

Question 100

A secured bond issue is one that: has coupons attached for payment of interest. the entire issue is due at one time. provides bondholders with a pledge against certain assets. requires that each owner be registered for security purposes.

Answer 100

provides bondholders with a pledge against certain assets. A secured bond issue is a group of bonds that has extra protection for the bondholders through the pledging of certain company assets as security that the bond issue will be paid.

Question 101

Everything else being equal, a noncallable bond will be priced in comparison to a callable bond so that the noncallable bond will provide: a higher yield. a lower yield. the same yield. a yield 1% less.

Answer 101

Lower yield Callable bonds reduce issuer risk by allowing the bonds to be called in if interest rates decline. The holder of callable bonds, however, is exposed to greater risk (i.e., loss of relatively high interest in a declining interest rate period). In contrast, a noncallable bond is less risky for a bondholder, so it should sell at a lower yield.

Question 102

Neu Co. is considering the purchase of an investment that has a positive net present value based on Neu's 12% hurdle rate. The internal rate of return would be: 0. 12%. greater than 12%. less than 12%.

Answer 102

greater than 12% Consider the relationship: Present value of cash inflows $XXX Less present value of cash outflows XX Net present value $ XX ==== If the internal rate of return is equal to the hurdle rate, no “excess return” will occur so net present value will be zero. A positive net present value indicates that the internal rate of return exceeds the hurdle rate. Thus, for the proposed Neu Co. project the internal rate of return (IRR) is greater than 12%. Note: The hurdle rate is simply the cost of capital or cost of borrowing for Neu Co.

Question 103

Since the calculation of fair value assumes that the value determination is for a particular asset, liability, or equity ownership, the following items must be taken into consideration: (1) Age and condition of the valuation object (2) Attributes for the valuation object (3) Ability of the valuation object to stand alone or the need to function as part of a unit (4) Location of the valuation object (5) Restriction placed on the use or sale of the valuation object

Answer 103

YEPPPPPPPPPPPPP

Question 104

The capital budgeting model that is generally considered the best model for long-range decision making is the: payback model. accounting rate of return model. unadjusted rate of return model. discounted cash flow model.

Answer 104

discounted cash flow model.

Question 105

The statistical term ___describes the numerical average of a probability distribution ____analysis uses sales price and cost numbers that are assumed to be known in the short run. ____is used to plan and control the resources consumed in completing large and complex projects. PERT does use a probabilistic approach in identifying a “critical path,” but it is not applicable in situations other than those involving critical path identification. The ___approach is a graphical method for separating fixed and variable costs. Historical cost data is used as input in this process.

Answer 105

expected value Cost-volume-profit (CVP) Program evaluation and review technique (PERT) scattergraph

Question 106

Which tool would most likely be used to determine the best course of action under conditions of uncertainty? Cost-volume-profit analysis Expected value (EV) Program evaluation and review technique (PERT) Scattergraph method

Answer 106

expected value Sales x Probability = Expected Value $200,000 x .60 = $120,000 $160,000 x .40 = 64,000 Total expected value for sales = $184,000 Expected value can be used to determine the best estimate or course of action under uncertainty.

Question 107

The market approach is one of the three basic methodologies available to the valuator. When determining whether this approach can be employed in a particular engagement (whether guideline companies are available), the valuator must keep all of the following in mind except: the normalized statements of the subject of the valuation need to use similar GAAP choices, such as LIFO and FIFO, as the guideline companies. one company does not make a comparable. the guideline companies will need to be identical to the subject of the valuation. a guideline company needs to produce (supply) similar products, serve similar markets, and be within a similar size range as the subject company.

Answer 107

the guideline companies will need to be identical to the subject of the valuation.

Question 108

Assumptions using market approaches for valuation 1. Similar operations 2. Similar Markets 3. Similar Geographics diversification 4. Similar size of org 5. Similar Products 6. Similar Financial/Operational Leverage 7. has similar liquidity, solvency(asset/debt management), growth, and profitability as the subject company. One company does NOT make it comparable T/F To be comparable, they need to be identical T/F

Answer 108

YEP True False -no they dont.

Question 109

An individual received an inheritance from a grandparent's estate. The money can be invested and the individual can either (a) receive a $20,000 lump-sum amount at the end of 10 years or (b) receive $1,400 at the end of each year for the next 10 years. The individual wants a rate of return of 12% and uses the following information: Present value of $1 = 0.322 Present value of annuity of $1 = 5.650 What is the preferred investment option and what is its net present value?

Answer 109

Option B - $7,910 The preferred investment option is (b) with a net present value of $7,910. The present value of the $20,000 lump sum in 10 years is $6,440 ($20,000 × 0.322). The present value of the $1,400 10-year annuity is $7,910 ($1,400 × 5.650). Option (b) of $7,910 is the best option.

Question 110

Whatney Co. is considering the acquisition of a new, more efficient press. The cost of the press is $360,000, and the press has an estimated 6-year life with zero salvage value. Whatney uses straight-line depreciation for both financial reporting and income tax reporting purposes and has a 40% corporate income tax rate. In evaluating equipment acquisitions of this type, Whatney uses a goal of a 4-year payback period. To meet Whatney's desired payback period, the press must produce a minimum annual before-tax, operating cash savings of:

Answer 110

$110,000 In this problem, operating cash savings would be total cash savings less nonoperating cash savings (e.g., cash savings from lower taxes). Annual depreciation on a $360,000 asset with an estimated 6-year life with zero salvage value using straight-line depreciation is $60,000. The tax savings generated by this depreciation is $60,000 times 40%, or $24,000. Now calculate after-tax operating cash savings: $90,000 - $24,000 = $66,000. However, the problem asks for before-tax operating cash savings, calculated as follows: $66,000 ÷ (1 - Tax rate of 0.40) = $66,000 ÷ 0.60 = $110,000

Question 111

In determining cash flows from a proposed investment, the amount of the investment's depreciation tax savings (shield) in a given year is equal to: the depreciation. the depreciation times (one minus the tax rate). the depreciation times the tax rate. the depreciation times (one plus the tax rate).

Answer 111

Depreciation times the tax rate Many items in capital budgeting have related tax effects. Items that do not affect cash flows such as depreciation must be taken into consideration when income taxes are relevant or the present value of the cash flows related to taxes is relevant. Noncash items are adjusted for the tax impact by multiplying by the tax rate; cash items (such as revenues) are adjusted by multiplying by (1 − tax rate).

Question 112

Which of the following events would decrease the internal rate of return of a proposed asset purchase? Decrease tax credits on the asset Decrease related working capital requirements Shorten the payback period Use accelerated instead of straight-line depreciation

Answer 112

Decrease Tax Credits on Asset Two general rules can be developed related to the internal rate of return (IRR) of a proposed asset purchase: Increases in cash inflows (decreases in cash outflows) will result in a higher internal rate of return. The earlier the cash inflows (the later the cash outflows) the higher the internal rate of return, all else being equal. Taxes in general will lower the IRR of a proposed asset purchase, as will decreases in the tax credits available when an asset is purchased.

Question 113

A measure of project risk is provided by the capital budgeting technique of: net present value. internal rate of return. accounting rate of return. payback.

Answer 113

payback The payback capital budgeting technique indicates how soon a project will recover its cost. The sooner the cost is recovered, the less risky the project—returns are less knowable the further in the future they a

Question 114

Project A and B each require an investment of $11,000. Project A returns annual cash inflows of $4,000 for three years. Project B returns annual cash inflows of $3,500 for four years. Project A is superior to Project B both in payback and profitability. Project A is superior to Project B in payback but not profitability. Project B is superior to Project A in payback but not profitability. Project B is superior to Project A both in payback and profitability.

Answer 114

Project A is superior to Project B in payback but not profitability. Project A has a payback of $11,000 ÷ $4,000 = 2.8. (Project A has a faster payback.) Project B has a payback of $11,000 ÷ $3,500 = 3.1. Project A has profitability of (3 × $4,000) - $11,000 = $1,000. Project B has profitability of (4 × $3,500) - $11,000 = $3,000. (Project B has better profitability.)

Question 115

During a meeting with the CEO of the Marble Company, Connie CPA learned that the son of the CEO had worked at the company during one summer doing odd jobs. The year in question was included in the past financial records being used as a basis for the business valuation for which Connie had been engaged. The payroll records revealed that the son had received $40,000 (including taxes and other benefits) for this summer work. Connie should make a normalization adjust for:

Answer 115

a discretionary item for $35,000 since the going market rate for the work performed by the son would have been $5,000

Question 116

Business valuators often have to make adjustments during the normalization process. There are four basic categories of normalization adjustments: 1. _____adjustment = Removal of nonoperating item included in the historical finacnial statements 2. _____Adjustments -- removal of unusual unexpected items not likely to recur again 3. ____adjustment -- adjustments to historical F/S to match GAAP choices 4. _____adjustments - adjustments to the historical F/S to include/remove items not considred part of normal operations. Excessive wages paid to family members are considered to be discretionary items.

Answer 116

Non operating Non recurring Comparability Discretionary

Question 117

company that annually reviews its investment opportunities and selects appropriate capital expenditures for the coming year is presented with two projects, called Project A and Project B. Best estimates indicate that the investment outlay for Project A is $30,000 and for Project B is $1 million. The projects are considered to be equally risky. Project A is expected to generate cash inflows of $40,000 at the end of each year for two years. Project B is expected to generate cash inflows of $700,000 at the end of the first year and $500,000 at the end of the second year. The company has a cost of capital of 8%. What is the net present value (NPV) of each project when the cost of capital is zero?

Answer 117

A: $50k B: $200k When the cost of capital is zero, the NPV is simply the sum of a project's undiscounted cash flows: NPV = Cash inflows - Initial outlay NPV for A = $ 40,000 + $ 40,000 - $ 30,000 = $50,000 NPV for B = $700,000 + $500,000 - $1,000,000 = $200,000 The amounts, $30,000 and $1,000,000, are the initial investment outlays and do not incorporate the cash inflows from the projects. The amounts, $80,000 and $1,200,000, are the sums of cash inflows without deducting the initial investment outlays.

Question 118

A corporation is considering purchasing a machine that costs $100,000 and has a $20,000 salvage value. The machine will provide net annual cash inflows of $25,000 per year and has a 6-year life. The corporation uses a discount rate of 10%. The discount factor for the present value of a single sum 6 years in the future is 0.564. The discount factor for the present value of an annuity for 6 years is 4.355. What is the net present value of the machine?

Answer 118

$20,155 The present value of the future cash returns is the annual cash flow of $25,000 multiplied by the present value of an annuity of $1 a year for six years at 10%, which is 4.355. Thus, the present value of the future cash flows is $108,875 ($25,000 × 4.355). The salvage value of $20,000 will be received in cash in six years, so its present value is $20,000 multiplied by the present value of a single payment of $1 in six years at 10%, or 0.564, giving a present value of the salvage value of $11,280. Summing the present value of the annual payments ($108,875) and the present value of the salvage value ($11,280) gives a total present value of future cash flows of $120,155. The cost of the machine is $100,000, so the net present value is $120,155 less $100,000, or $20,155.

Question 119

Preferred stock and long-term bonds are similar from the standpoint of the issuing firm because: both forms of financing have long maturities. both forms of financing have voting powers. interest and dividend payments are fixed. interest and dividend payments are tax-deductible expenses for the issuer.

Answer 119

interest and dividend payments are fixed. nterest payments are fixed on long-term bonds while dividend payments are fixed on preferred stock, cumulative preferred stock in particular.

Question 120

``` PREF STOCK Similarities to debt: 1. Fixed divdiend & Fixed interest 2. Priority over common stockholders 3. No voting Rights ``` Similarities to Equity 1. Increases equity 2. Original investment doesn't need to be paid back 3. No maturity date 4. Pref div are not deductible expense 5. Pref div isn't required to be paid 6. Liability to stockholders is limited to investment Participating preferred stock allows for a limited participation in dividend increases based on a stated formula. T/F Dividends on preferred stock can be cumulative or noncumulative. T/F

Answer 120

True to all

Question 121

What happens to bond prices, in general, when interest rates decline? Increase No change Decrease Some increase and some decrease

Answer 121

increase

Question 122

Which of the following decision-making models equates the initial investment with the present value of the future cash inflows? Accounting rate of return Payback period Internal rate of return Cost-benefit ratio

Answer 122

IRR The internal rate of return (IRR) can be referred to as the yield (return) expected over the life of a project. It is computed by equating the initial investment with the present value of the cash flows over the life of the project. IRR is the discount rate that results in the net present value of all cash flows to be zero.

Question 123

Joan CPA has been engaged to do some estate planning for a client. As part of that estate planning, Joan is expected to do a valuation of the client's small business. In the process of performing this engagement, Joan will be determining the ________ of the small business. price worth value cost

Answer 123

Value Value is based upon the amount that would be received in exchange for an asset or settlement of a liability between willing parties in an arm's-length transaction where both parties had acted with knowledge, with prudence, and without compulsion.

Question 124

Value Worth Price ___is the actual observed exchange price that is used in the marketplace. ____relates to the advantages of ownership based upon the perceived benefits at a particular point in time and for a particular use. ___is based upon the amount that would be received in exchange for an asset or settlement of a liability between willing parties in an arm's-length transaction where both parties had acted with knowledge, with prudence, and without compulsion. The more assumptions made or the greater the ___ Valuation is based upon events yet to occur and is therefore dependent upon various assumptions made during the valuation process. T/F

Answer 124

Price Worth Value uncertainty True

Question 125

A rule of thumb used in the business valuation process is based upon such things as a multiple or a percentage of revenues, earning, book value, or other measured unit (beds, tables, etc.). Such calculations are easy to perform, and there are resources available providing rule-of-thumb information. By using a rule of thumb, a practitioner can: develop a defendable valuation estimate that would be easy to defend in a litigated situation. provide support for a valuation estimate arrived at using another method with similar results. develop a valuation estimate that would be acceptable to use alone per the Statement on Standards for Valuation Services 1 (SSVS 1). demonstrate consistency when performing business valuations in conformance with SSVS 1.

Answer 125

provide support for a valuation estimate arrived at using another method with similar results.

Question 126

provide support for a valuation estimate arrived at using another method with similar results. The discounted payback rate takes into account cash flows for all periods. The internal rate of return rule is to accept the investment if the opportunity cost of capital is greater than the internal rate of return. The net present value model says to accept investment opportunities when their rates of return are less than the company's incremental borrowing rate. The payback rule ignores all cash flows after the end of the payback period.

Answer 126

The payback rule ignores all cash flows after the end of the payback period. Weaknesses of the payback method include the following: All cash flows occurring after the payback period are ignored. The time value of money is not considered.

Question 127

A company purchases an item for $43,000. The salvage value of the item is $3,000. The cost of capital is 8%. Pertinent information related to this purchase is as follows: Net Cash Flow Present Value Factor at 8% ------------- -------------------------- Year 1 $10,000 0.926 Year 2 15,000 0.857 Year 3 20,000 0.794 Year 4 27,000 0.735 What is the discounted payback period in years?

Answer 127

3.25 Net Cash Flow PV Factor at 8% Present Value ------------- --------------- ------------- Year 1 $10,000 0.926 $ 9,260 Year 2 15,000 0.857 12,855 Year 3 20,000 0.794 15,880 Year 4 27,000 0.735 19,845 The discounted payback can then be calculated: 43000-9260-12855-15880 = 5000/19845 = 3.25 The discounted payback method uses the present value of the projected cash flows in determining the payback period; thus, the payback period is longer than one calculated using the more traditional payback method.

Question 128

Under which one of the following conditions is the internal rate of return method less reliable than the net present value technique? When the net present value of the project is equal to zero When income taxes are considered in the analysis When both benefits and costs are included, but each is separately discounted to the present When there are net cash inflows of sizable amounts early in the project

Answer 128

When there are net cash inflows of sizable amounts early in the project The real issue here is the reinvestment assumption applied to “recovered funds.” Net present value (NPV) assumes reinvestment at the cost of capital whereas internal rate of return (IRR) assumes reinvestment at the IRR. NPV makes the more realistic assumption about the rate of return that can be earned on cash flows from the project.

Question 129

Which of the following methods is best suited for evaluating the performance of a firm’s capital in any given year? Internal rate of return Net present value Economic value added Payback

Answer 129

Economic Value Added

Question 130

Which of the following is an accurate comparison of fair value and fair market value? Fair market value defines the buyer as hypothetical, whereas fair value defines a specific buyer. Fair market value uses the principal market, whereas fair value uses the most advantageous market. Fair market value uses the premise that the seller and not necessarily the buyer is willing to enter into the transaction, whereas fair value uses the premise that both the buyer and seller are willing parties. Fair market value defines the seller as hypothetical, whereas fair value assumes a specific seller.

Answer 130

Fair market value defines the seller as hypothetical, whereas fair value assumes a specific seller. e differences between fair market value and fair value are quite substantial: Fair market value implies a willing buyer and seller, whereas the buyer and seller under fair value are not necessarily willing. Fair market value defines the seller as hypothetical, whereas there is a specific seller when using fair value. Fair market value takes advantage of an unrestricted market, whereas fair value uses the principal or most advantageous market.

Question 131

e differences between fair market value and fair value are quite substantial: Fair market value implies a willing buyer and seller, whereas the buyer and seller under fair value are not necessarily willing. Fair market value defines the seller as hypothetical, whereas there is a specific seller when using fair value. Fair market value takes advantage of an unrestricted market, whereas fair value uses the principal or most advantageous market.

Answer 131

YEP

Question 132

400866 do this question

Answer 132

lol

Question 133

IRS Revenue Ruling 68-608 provides guidance as to the form of the financial statement when used in a valuation process. This guidance can be summarized as which of the following? The past earnings used in the valuation process should fairly reflect the probable future earnings. The past earnings used in the valuation process are required to conform to GAAP. The past earnings used in the valuation process should include all past transactions since they were a part of the subject company's business history. The past earnings used in the valuation process should mirror the income and expense items as claimed on the income tax returns filed by the subject company.

Answer 133

The past earnings used in the valuation process should fairly reflect the probable future earnings.

Question 134

Kore Industries is analyzing a capital investment proposal for new equipment to produce a product over the next eight years. The analyst is attempting to determine the appropriate “end-of-life” cash flows for the analysis. At the end of eight years, the equipment must be removed from the plant and will have a net book value of zero, a tax basis of $75,000, a cost to remove of $40,000, and scrap salvage value of $10,000. Kore's effective tax rate is 40%. What is the appropriate “end-of-life” cash flow related to these items that should be used in the analysis?

Answer 134

12,000 Outflow: Cost to remove ($ 40,000) Inflow: Salvage value $ 10,000 Inflow: Tax savings from net loss $ 42,000 * ---------- Net cash inflow $ 12,000 * The tax savings is calculated on a net loss of $105,000. The loss is a result of the $65,000 tax loss on the asset disposal ($75,000 tax basis offset by $10,000 scrap value) and the $40,000 cost to remove the asset.

Question 135

Advantages and disadvantages of the use of short-term credit and long-term credit are as follows: Funds can be obtained quickly. Retirement will probably contain a prepayment penalty. Financing with this credit usually results in lower interest costs. Interest rates tend to vary quickly. Interest rates tend to be more stable. There are some spontaneous sources of funds. Some of this debt is “interest free.” This type of debt is more risky. The advantages and disadvantages of the use of short-term credit should be grouped as follows:

Answer 135

Advantages of short-term credit: Funds can be obtained quickly. Financing with this credit usually results in lower interest costs. There are some spontaneous sources of funds such as trade credit. Some of this debt is “interest free,” such as wages payable. Disadvantages of short-term credit: Interest rates tend to vary quickly. This type of debt is more risky. Advantages of long-term credit: Interest rates tend to be more stable. Disadvantages of long-term credit: Retirement will probably contain a prepayment penalty

Question 136

Letters of credit are often used to facilitate international trade. The basic purpose of the letter of credit is to reduce risk to the: bank. exporter. final customer. importer.

Answer 136

exporter The basic transaction involves a sale of goods by a foreign exporter to a domestic importer. The letter of credit issued by a bank essentially substitutes the bank's credit, for that of the importer. Thus, the risk of uncollectibility to the exporter is virtually eliminated.

Question 137

Which of the following statements does not describe the discounted payback method? The investment alternative with the shortest payback period is considered the most desirable. The chief limitation is that the method emphasizes liquidity and disregards profitability. The method is simple to compute and easy to understand and explain. Discounted payback is the length of time required to recover the initial cash investment using a sum of the future revenue streams.

Answer 137

Discounted payback is the length of time required to recover the initial cash investment using a sum of the future revenue streams. The discounted payback period is the length of time required to recover the initial cash investment using a sum of the discounted future cash flows (not undiscounted future revenue streams).

Question 138

The discount rate is determined in advance for which of the following capital budgeting techniques? Payback Accounting rate of return Net present value Internal rate of return

Answer 138

NPV In order to find the present value of future cash flows, one must assume an interest rate (the minimum return rate or hurdle rate of return). Therefore, one must determine an interest rate in advance for the net present value model.

Question 139

Which of the following rates is most commonly compared to the internal rate of return to evaluate whether to make an investment? Short-term rate on U.S. Treasury bonds Prime rate of interest Weighted average cost of capital Long-term rate on U.S. Treasury bonds

Answer 139

WACC When the IRR (internal rate of return) approach is used to evaluate an investment, generally projects with an IRR exceeding the cost of financing are chosen. The cost of financing (hurdle or discount rate) is often determined through the use of the weighted average cost of capital of debt and equity financing.

Question 140

has a duration that corresponds to the useful life of the asset and payments that amortize the cost of the asset while providing the lessor an interest return. What lease is this describing

Answer 140

financial

Question 141

A multiperiod project has a positive net present value. Which of the following statements is correct regarding its required rate of return? Less than the company's weighted average cost of capital Less than the project's internal rate of return Greater than the company's weighted average cost of capital Greater than the project's internal rate of return

Answer 141

Less than the project's internal rate of return This is a trick fucking question. If you have a pos NPV that means your IRR is greater than 0. So the required rate of return is less than the IRR. Bullshit

Question 142

Which one of the following provide a spontaneous source of financing for a firm? Accounts payable Mortgage bonds Accounts receivable Debentures

Answer 142

AP Because trade credit arises automatically from purchase transactions, it provides a spontaneous source of financing for the firm. Trade credit is represented on the balance sheet of the borrowing firm as Accounts Payable

Question 143

A stock priced at $50 per share is expected to pay $5 in dividends and trade for $60 per share in one year. What is the expected return on this stock?

Answer 143

30% Expected total return is the full return of an investment over a given time period. It would include all capital gains and any dividends or interest paid if that information had been provided. To determine the expected return, divide the ending price plus dividends by the opening price, and then subtract 1: [($60 + $5) ÷ $50] – 1 = 0.30.

Question 144

Which of the following is a limitation of the profitability index? It uses free cash flows. It ignores the time value of money. It is inconsistent with the goal of shareholder wealth maximization. It requires detailed long-term forecasts of the project's cash flows.

Answer 144

It requires detailed long-term forecasts of the project's cash flows. The profitability index is the present value of the cash flows after the initial investment divided by the amount of that investment. Since it is based on the present value of future cash flows, it does require detailed forecasts of the related cash flows. Using free cash flows is incorrect because free cash flows are net operating cash flows minus capital expenditures of a specific year. That is not related to the profitability index, which considers net present value of future cash flows. Ignoring the time value of money is incorrect because the profitability index does consider the time value of money since it uses the present value of future cash flows. Inconsistency with the goal of shareholder wealth maximization is incorrect because the goal of using the profitability index is shareholder wealth maximization

Question 145

A company purchased property that it expects to sell for $14,000 next year. The net present value of the investment is $1,000. The company is guaranteed an interest rate of 12% by the bank. What amount did the company pay for the property?11.5k

Answer 145

11.5k The present value of $14,000 in one year discounted at 12% is 14,000 ÷ 1.12, or $12,500. The net present value of $1,000 is the difference between this $12,500 present value and the cost of the investment; therefore, the cost of the investment must be $11,500.

Question 146

Lin Co. is buying machinery it expects will increase average annual operating income by $40,000. The initial increase in the required investment is $60,000, and the average increase in required investment is $30,000. To compute the accrual accounting rate of return, what amount should be used as the numerator in the ratio?

Answer 146

Accounting rate of return = Increase in income ÷ Required investment Increase in income (numerator) = $40,000

Question 147

Salem Co. is considering a project that yields annual net cash inflows of $420,000 for years 1 through 5, and a net cash inflow of $100,000 in year 6. The project will require an initial investment of $1,800,000. Salem’s cost of capital is 10%. Present value information is presented below: Present value of $1 for 5 years at 10% is 0.62. Present value of $1 for 6 years at 10% is 0.56. Present value of an annuity of $1 for 5 years at 10% is 3.79. What was Salem’s expected net present value for this project?

Answer 147

Net present value is a measure of the projected return on investment that accounts for the time value of money. It is the difference between the present value of future cash inflows from an investment and the costs related to the investment, including the investment's initial cost. Using a 10% interest rate, the present value of an annuity of $420,000 a year for five years is $420,000 × 3.79, or $1,591,800. The present value of a single payment of $100,000 in six years is $100,000 × 0.56, or $56,000. These sum to a present value of future cash inflows of $1,647,800. The net present value is this sum ($1,647,800) less the original investment of $1,800,000. The difference is a negative net present value of $152,200

Question 148

Which one of the following statements concerning cash flow determination for capital budgeting purposes is incorrect? Tax depreciation must be considered since it affects cash payments for taxes. Book depreciation is relevant since it affects net income. Sunk costs are not incremental flows and should not be included. Net working capital changes should be included in cash flow forecasts.

Answer 148

Depreciation itself is not a cash outflow. Depreciation is relevant for capital budgeting purposes only because it affects the income upon which taxes must be assessed. Taxes are a cash outflow. Therefore, only tax depreciation is relevant. Book depreciation is not relevant despite its effect on net income.

Question 149

400273

Answer 149

k

Question 150

Portfolio management determines which assets to include in a given portfolio. Which of the following is not a characteristic of portfolio management? Choosing individual stocks Choosing a mixture of stocks Deciding the degree of risk for the investor Choosing a mix of different assets

Answer 150

Deciding the degree of risk for the investor Only the investor should decide the degree of risk with which they are comfortable. A portfolio manager should never make that choice on behalf of the investor.

Question 151

All of the following are the rates used in net present value analysis except for the: cost of capital. hurdle rate. accounting rate of return. required rate of return.

Answer 151

Acct rate of return

Question 152

When evaluating projects, the discounted breakeven period is best described as: Annual fixed costs ÷ Monthly contribution margin. Project investment ÷ Annual net cash inflows. the point where cumulative cash inflows on a project equal total cash outflows. the point where discounted cumulative cash inflows on a project equal discounted total cash outflows.

Answer 152

the point where discounted cumulative cash inflows on a project equal discounted total cash outflows. Stated very simply, the discounted breakeven period is the time required to recover the cash invested in a project. However, since almost all investment projects span several years, it is necessary to discount both cash inflows and outflows. When this is done, breakeven time becomes “the point where discounted cumulative cash inflows on a project equal discounted total cash outflows.”

Question 153

An entity is examining potential investments and notes that 1-year maturity yields are higher than those for 10-year maturities. Which of the following explanations for this occurrence is best? The short-term investments have higher liquidity and therefore carry a higher rate of interest. The short-term investments carry a more immediate default risk premium, resulting in higher rates of return. The long-term instruments provide a longer stream of investment income and therefore carry a lower rate of return. Investors are expecting reduced inflation in the future as reflected in the lower long-term returns.

Answer 153

Investors are expecting reduced inflation in the future as reflected in the lower long-term returns. Inflation drives interest rates up, so if investors are expecting reduced inflation in the future, interest rates and returns would also be lower.

Question 154

Short-term interest rates are: generally lower than long-term rates. generally higher than long-term rates. lower than long-term rates during periods of high inflation only. not significantly related to long-term rates.

Answer 154

Generally Lower ates than long-term rates

Question 155

A company has the following financial information: Proportion of After-Tax Source of Capital Capital Structure Cost of Capital ----------------- ----------------- --------------- Long-term debt 60% 7.1% Preferred stock 20% 10.5% Common stock 20% 14.2% To maximize shareholder wealth, the company should accept projects with returns greater than what percent?

Answer 155

9.2% Projects that earn more than the cost of capital will increase wealth for the shareholder; therefore, the weighted average cost of capital given the company's particular capital structure must be determined. Ex: 60% * 7.1% = 4.3% Capital Item Weight Cost Weighting Factor --------------- ------ ----- ---------------- Debt 60% 7.1% 4.3% Preferred Stock 20% 10.5% 2.1% Common Stock 20% 14.2% 2.8% ---- ---- 100% WACC 9.2%

Question 156

The market approach to determining the fair value of a small company is based upon the theory that: an organization with newer assets will be worth more than one with older and possibly obsolete assets. an investor will require that an investment will not only cover the cost of the initial investment but also provide a return necessary to compensate for the riskiness of that investment. companies within the industry that have similar performance records and structure will have similar value. the economic substitution principle provides a basis to develop a value that takes into consideration the functional obsolescence and physical deterioration of the assets employed in the company.

Answer 156

companies within the industry that have similar performance records and structure will have similar value.

Question 157

Poor capital budgeting decisions can often be difficult to reverse. Questions such as the following are addressed: (1) Should ____be replaced by more expensive but more efficient models? (2) Should a ___or market be added? (3) Should existing ___be extinguished or refinanced? (4) How can a constrained ___best be used?

Answer 157

Machinery New Product Existed Debt Resource

Question 158

Everything else being equal, the internal rate of return (IRR) of an investment project will be lower if: the investment cost is lower. cash inflows are received later in the life of the project. cash inflows are larger. the project has a shorter payback period.

Answer 158

cash inflows are received later in the life of the project. Later cash inflows have a lower present value than earlier cash inflows, since the present value of a dollar is higher the sooner it is received. Projects with later cash flows will have lower net present values, for any given discount rate, than will projects with earlier cash flows, everything else being equal. Hence, projects with later cash flows will have a lower internal rate of return (IRR).

Question 159

The calculation of depreciation is used in the determination of the net present value of an investment for which of the following reasons? The decline in the value of the investment should be reflected in the determination of net present value. Depreciation adjusts the book value of the investment. Depreciation represents cash outflow that must be added back to net income. Depreciation increases cash flow by reducing income taxes.

Answer 159

Depreciation increases cash flow by reducing income taxes. Depreciation is the systematic expensing of a prior cash outflow. It is not a cash flow in a current period; however, it does reduce the amount of taxes that are paid in a particular period since it is a deductible expense. Since taxes are a cash outflow, any deductible expense reduces the amount of taxes that must be paid, thus increasing cash flow for that period.

Question 160

Beyond the identification of the subject of a valuation, it is important to determine the premise of value before initiating any work on the engagement. Which of the following is the correct definition of premise of value? An assumption regarding the most likely set of transactional circumstances that may be applicable to the subject of the valuation The actual observed exchange price that is used in the marketplace The advantages of ownership based upon the perceived benefits at a particular point in time and for a particular use The amount that would be received in exchange for an asset between willing parties in an arm’s-length transaction

Answer 160

An assumption regarding the most likely set of transactional circumstances that may be applicable to the subject of the valuation The International Glossary of Business Valuation Terms defines the premise of value as “an assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation.”

Question 161

BOND MARKET VALUES The market value of bonds is based upon the present value of ____cash flows, comprised of an annuity plus a lump sum. The bond's market value fluctuates with changes in the market interest rates. If the ___rate equals the market interest rate, then the market value of the bond will be equal to the face value (par val If the ___interest rate is above the ____rate, the bond will be selling at a discount to par. If the ___interest rate is lower than the ___rate, the bond will sell at a premium to par.

Answer 161

discounted future coupon market , Coupon market , Coupon

Question 162

Which of the following observations regarding the valuation of bonds is correct? The market value of a discount bond is greater than its face value during a period of rising interest rates. When the market rate of return is less than the stated coupon rate, the market value of the bond will be more than its face value, and the bond will be selling at a premium. When interest rates rise so that the required rate of return increases, the market value of the bond will increase. For a given change in the required return, the shorter its maturity, the greater the change in the market value of the bond.

Answer 162

When the market rate of return is less than the stated coupon rate, the market value of the bond will be more than its face value, and the bond will be selling at a premium. The market value of bonds is based upon the present value of discounted future cash flows, comprised of an annuity plus a lump sum. The bond’s market value fluctuates with changes in the market interest rates.

Question 163

When an organization is in liquidation, all of the following are true except: few, if any, receivables will be created. accounts receivable will be easy to collect. inventories must be sold at reduced prices. leasehold improvements will be of no further use.

Answer 163

accounts receivable will be easy to collect. When in liquidation, accounts receivable is often very difficult to collect, due to debtors’ unwillingness to pay and lack of collection staff. Organizations in liquidation must sell inventories at reduced prices . All leasehold improvements will be lost and few, if any, receivables will be created.

Question 164

Fair value measurement assumes the object will be used to maximize its value and utility. Which of the following statements is false when measuring fair value? The value of the object is physically possible. The value of the object is legally permissible. The value of the object is financially feasible. The best use of the object is determined by its current holder.

Answer 164

The best use of the object is determined by its current holder. The fair value measurement assumes that the best use for the object is not determined by its current holder, but by its future owner. The value of the object is physically possible. The value of the object is legally permissible, and the value of the object is financially feasible.

Question 165

The net present value of a proposed investment is negative; therefore, the discount rate used must be: greater than the project's internal rate of return. less than the project's internal rate of return. greater than the firm's cost of equity. less than the incremental borrowing rate.

Answer 165

greater than the project's internal rate of return.