Final 2.0

Question 1

The difference between a company’s future cash flows if it accepts a project and the company’s future cash flows if it does not accept the project is referred to as the project’s:

Answer 1

incremental cash flows.

Question 2

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

Answer 2

Stand-alone principle

Question 3

Bybee Printing makes custom posters and is currently considering making large-scale outdoor banners as well. Which one of the following is the best example of an incremental operating cash flow related to the banner project?

Answer 3

Hiring additional employees to handle the increased workload should the firm accept the banner project

Question 4

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

Answer 4

Sunk

Question 5

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

Answer 5

$2,000 paid last year to rent equipment

Question 6

Which one of the following best illustrates erosion as it relates to a snack stand located on the beach?

Answer 6

Selling fewer cookies because ice cream was added to the menu

Question 7

Which one of the following should not be included in the analysis of a new product?

Answer 7

Money already spent for research and development of the new product

Question 8

Pro forma financial statements can best be described as financial statements:

Answer 8

that state projected values for future time periods.

Question 9

A project’s cash flow is equal to the project’s operating cash flow:

Answer 9

minus both the project’s change in net working capital and capital spending.

Question 10

Net working capital:

Answer 10

can create either an initial cash inflow or outflow.

Question 11

Changes in the net working capital requirements:

Answer 11

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

Question 12

Honor Computing just purchased new equipment that cost $213,000. The equipment is classified as MACRS five-year property. The MACRS rates are .2, 32, and 192 for Years 1 to 3, respectively. What is the proper methodology for computing the depreciation expense for Year 2 assuming the firm opts to forego any bonus depreciation?

Answer 12

$213,000(.32)

Question 13

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

Answer 13

Tax due on the current salvage value of that asset

Question 14

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

Answer 14

Net income + Depreciation

Question 15

Forecasting risk is defined as the possibility that:

Answer 15

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

Question 16

The key means of defending against forecasting risk is to:

Answer 16

identify sources of value within a project.

Question 17

Humberto is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is he using?

Answer 17

Scenario analysis

Question 18

When analyzing a project, scenario analysis is best suited to accomplishing which one of the following?

Answer 18

Identifying the potential range of reasonable outcomes

Question 19

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

Answer 19

The lowest variable cost per unit that can reasonably be expected

Question 20

When analyzing the best-case scenario, which of the following variables will be forecast at their highest expected level?

Answer 20

Salvage value and units sold

Question 21

Sensitivity analysis determines the:

Answer 21

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

Question 22

A firm’s managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the most critical aspect of each project n an attempt to maximize their firm’s value. Given this specific desire, which type of analysis should they require for each project and why?

Answer 22

Sensitivity analysis; to identify the key variable that affects a project’s profitability

Question 23

Simulation analysis is based on assigning a____and analyzing the results.

Answer 23

wide range of values to multiple variables simultaneously

Question 24

Scenario analysis is defined as the:

Answer 24

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

Question 25

Vanessa purchased a stock one year ago and sold it today for $3.15 per share more than her purchase price. She received a total of $2.60 per share in dividends. Which one of the following statements is correct in relation to this investment?

Answer 25

The capital gains yield is positive.

Question 26

Sung Office Products just announced it is decreasing its annual dividend from $2.20 per share to $1.85 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price:

Answer 26

decreased proportionately with the dividend decrease.

Question 27

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

Answer 27

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

Question 28

Which of the following yields on a stock can be negative?

Answer 28

Capital gains yield and total return

Question 29

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

Answer 29

smallest 20 percent of the companies listed on the NYSE.

Question 30

Which one of the following time periods is associated with low rates of inflation?

Answer 30

2014-2015

Question 31

For the period 2009-2019, U.S. Treasury bills had an annual rate of return that was:

Answer 31

between 0 and 2.5 percent.

Question 32

Which one of the following categories of securities had the highest average annual return for the period 1926-2019?

Answer 32

Small-company stocks

Question 33

While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the:

Answer 33

expected return.

Question 34

The expected return of a stock, based on the likelihood of various economic outcomes, equals the:

Answer 34

weighted average of the returns for each economic state.

Question 35

Which of the following items are included when calculating the expected return on a portfolio? 0.7/0.7 points awarded Scored 1. Percentage of the portfolio invested in each individual security Il. Projected states of the economy IlI. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy

Answer 35

1, 11, Ill, and IV

Question 36

Given a well-diversified stock portfolio, the variance of the portfolio:

Answer 36

may be less than the variance of the least risky stock in the portfolio.

Question 37

Which of the following statements is true of a portfolio's standard deviation?

Answer 37

It can be less than the standard deviation of the least risky security in the portfolio.

Question 38

Which of the following statements is true of a portfolio's standard deviation?

Answer 38

It can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

Question 39

When evaluating any capital project proposal, the cost of capital:

Answer 39

depends upon how the funds raised for that project are going to be spent.

Question 40

When determining a firm's cost of capital, the most important determinant is the:

Answer 40

use of the funds raised.

Question 41

To determine a firm's cost of capital, one must include:

Answer 41

the returns currently required by both debtholders and stockholders.

Question 42

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity?

Answer 42

A decrease in the firm's beta

Question 43

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $3.36 per share and has a beta of 1.38, all else constant, which of the following actions will increase the firm's cost of equity?

Answer 43

A decrease in the risk-free rate

Question 44

Which of the following statements is accurate regarding the dividend growth model?

Answer 44

It is only as reliable as the estimated rate of growth.

Question 45

Assume Barnes' Boots has a debt-equity ratio of .52. The firm uses the capital asset pricing model to determine its cost of equity. Accordingly, the firm's estimated cost of equity:

Answer 45

is dependent upon a reliable estimate of the market risk premium.

Question 46

When utilizing the capital asset pricing model approach to value equity, the outcome:

Answer 46

assumes the reward-to-risk ratio is constant.

Question 47

Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:

Answer 47

cost of debt.

Question 48

A firm's aftertax cost of debt will increase if there is a(n):

Answer 48

decrease in the company's tax rate.

Question 49

Which of the following statements regarding the cost of preferred stock is accurate?

Answer 49

It equals the dividend yield.