Final Exam Flashcards by Mariajose Romero

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:

incremental cash flows

internal cash flows

external cash flows

internal cash flows

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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?

underlying value principle

stand-alone principle

equivalent cost principle

stand-alone principle

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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?

storing banner supplies in the same space currently used for strong poster materials

expanding the poster production manager’s responsibilities to include overseeing banner production

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

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

incremental

side

sunk

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

$2000 in lost sales because an item was out of stock

$2000 paid last year to rent equipment

$2000 project that must be forfeited if another project is accepted

$2000 reduction in Product A revenue if a firm commences selling Product B

$2000 paid last year to rent equipment

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

providing free ice and condiments for customers

repairing the canopy over the snack stand because of wind damage

selling fewer cookies because ice cream was added to the menu

offering french fries but not onion rings

selling fewer cookies because ice cream was added to the menu

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

increase in accounts payable related to purchasing inventory of the new product

reduction in sales for a current product once the new product is introduced

market value of a machine owned by the firm which will be used to produce the new product

money already spent for research and development of the new product

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

expressed in a foreign currency

that express the assets as a percentage of total assets, and the costs as a percentage of sales

that states projected values for future time periods

that state projected values for future time periods

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

plus the project’s depreciation expense, minus both the project’s taxes and capital spending

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

minus the project’s change in net working capital. plus all of the depreciation expenses

plus the project’s depreciation expenses, minus the project’s taxes

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

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Net working capital:

can be ignored in project analysis because any expenditure is normally recouped at the end of the project

requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project

is rarely affected when a new product is introduced

can create wither an initial cash inflow or outflow

can create either an initial cash inflow or outflow

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changes in the net working capital requirements:

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

only affect the initial cash flows of a project

only affect the initial and final cash flows of a project

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

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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?

$213,000(1-.20)(.32)

$213,000/(1-.20-.32)

$213,000(1.32)

$213,000(1-.32)

$213,000(.32)

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

depreciation tax shield

tax due on the current salvage value of that asset

current year’s operating cash flow

tax due on the current salvage value of that asset

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

EBIT + depreciation

EBIT(1+ taxes)

Net income + depreciation

net income + depreciation

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forecasting risk is defined as the possibility that:

some proposed projects will be rejected

some proposed projects will be temporarily delayed

incorrect decisions will be made due to erroneous cash flow projections

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the key means of defending against forecasting risk is to:

reply primarily on the net present value method of analysis

increase the discount rate assigned to a project

shorten the life of a project

identify sources of value withing a project

identify sources of value within a project

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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?

simulation testing

sensitivity analysis

break-even analysis

rationing analysis

scenerio analysis

scenario analysis

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

determining how fixed costs affect NPV

estimating the residual value of fixed assets

identifying the potential range of reasonable outcomes

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

minimal number of units that are expected to be produced and sold

the lowest expected salvage value that can be obtained for a project’s fixed assets

the most anticipated sales price per unit

the lowest variable cost per unit that can reasonably be expected

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

fixed costs and units value

variable cost and sales price

fixed costs and sales price

salvage value and units sold

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salvage value and units sold

Sensitivity analysis determines the:

range of possible outcomes given that most variables are reliable only within a stated range.

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

net present value range that can be realized from a proposed project.

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

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 in an attempt to maximize their firm’s value. Given this specific desire, which type of analysis should they require for each project and why?

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

Scenario analysis; to guarantee each project will be profitable

Cash breakeven; to ensure the firm recoups its initial investment

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

Simulation analysis is based on assigning a _____ and analyzing the results.

narrow range of values to a single variable

narrow range of values to multiple variables simultaneously

wide range of values to a single variable

wide range of values to multiple variables simultaneously

single value to each of the variables

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wide range of values to multiple variables simultaneously

Scenario analysis is defined as the:

determination of the initial cash outlay required to implement a project.

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

isolation of the effect that a single variable has on the NPV of a project.

separation of a project’s sunk costs from its opportunity costs.

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

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? The capital gain would have been less had Vanessa not received the dividends. The total dollar return per share is $.55. The capital gains yield is positive. The dividend yield is greater than the capital gains yield.

The capital gains yield is positive.

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: was unaffected by the announcement increased proportionately with the dividend decrease. decreased proportionately with the dividend decrease.

decreased proportionately with the dividend decrease.

Which one of the following statements related to capital gains is correct? The capital gains yield includes orily realized capital gains. An increase in an unrealized capital gain will increase the capital gains yield. The capital gains yield must be either positive or zero.

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

Which of the following yields on a stock can be negative? Dividend yield Capital gains yield Capital gains yield and total return

Capital gains yield and total return

Small-company stocks, as the term is used in the textbook, are best defined as the: 500 newest corporations in the U.S. companies whose stock trades OTC. smallest 20 percent of the companies listed on the NYSE.

smallest 20 percent of the companies listed on the NYSE.

Which one of the following time periods is associated with low rates of inflation? 1941-1942 1973-1974 2014-2015

2014-2015

For the period 2009-2019, U.S. Treasury bills Had an annual rate of return that was. between 1 and 2 percent negative in at least one year negative for two or more years. between 0 and 2.5 percent.

between 0 and 2.5 percent.

Which one of the following categories of securities had the highest average annual return for the period 1926-2019? U.S. Treasury bills Large-company stocks Small-company stocks

Small-company stocks

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: arithmetic return. historical return. expected return.

expected return.

The expected return of a stock, based on the likelihood of various economic outcomes, equals the: highest expected return given any economic state. arithmetic average of the returns for each economic state. summation of the individual expected rates of return. weighted average of the returns for each economic state. return for the economic state with the highest probability of occurrence.

weighted average of the returns for each economic state.

Which of the following items are included when calculating the expected return on a portfolio? I. Percentage of the portfolio invested in each individual security Il. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy Il and IV only I, III, and IV only Il, III, and IV only I, II, III, and IV

I, II, III, and IV

Given a well-diversified stock portfolio, the variance of the portfolio: will equal the variance of the most volatile stock in the portfolio. may be less than the variance of the least risky stock in the portfolio.

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

Which of the following statements is true of a portfolio's standard deviation? It can never be less than the standard deviation of the most risky security in the portfolio. It is equal to or greater than the lowest standard deviation of any single security held in the portfolio. It is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. It can be less than the standard deviation of the least risky security in the portfolio.

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

Which of the following statements is true of a portfolio's standard deviation? It is a weighted average of the standard deviations of the individual securties held in that portfolio. It measures the amount of diversifisble risk inherent in the portfolio. It serves as the basis for computing the appropriate risk premium for that portfolio. It can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

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

When evaluating any capital project proposal, the cost of capital: is dependent upon the source of the funds obtained to fund that project is dependent upon the firm's overall capital structure. should be applied as the discount rate for all other projects considered by the firm depends upon how the funds raised for that project are going to be spent.

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

When determining a firm's cost of capital, the most important determinant is the: marginal tax rate. pretax cost of equity. aftertax cost of equity. use of the funds raised.

use of the funds raised.

To determine a firm's cost of capital, one must include: only the current market rate of return on equity shares. the weighted costs of all future funding sources. the returns currently required by both debtholders and stockholders. the company's original debt-equity ratio.

the returns currently required by both debtholders and stockholders.

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? An increase in the dividend amount An increase in the market rate of return A decrease in the firm's beta A decrease in the risk-free rate

A decrease in the firm's beta

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? An increase in the dividend amount A decrease in the market rate of return A decrease in the firm's beta A decrease in the risk-free rate

A decrease in the risk-free rate

Which of the following statements is accurate regarding the dividend growth model? It is only as reliable as the estimated rate of growth. It can only be used if historical dividend information is available. It considers the risk that future dividends may vary from their estimated values.

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

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: Implies that the firm pays out all of its earnings to its shareholders. is dependent upon a reliable estimate of the market risk premium. would be unaffected if the dividend discount model were applied instead. will be unaffected by changes in overall market risks.

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

When utilizing the capital asset pricing model approach to value equity, the outcome: assumes the reward 1o risk ratio increases as beta increases. can only be applied to dividend-paying firms. assumes a firm's future risks will be higher than its current risks. assumes the reward-to-risk ratio is constant.

assumes the reward-to-risk ratio is constant.

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

cost of debt.

A firm's aftertax cost of debt will increase if there is a(n): decrease in the company's debt-equity ratio. decrease in the company's tax rate.

decrease in the company's tax rate.

Which of the following statements regarding the cost of preferred stock is accurate? It equals the dividend yield. It equals the yield to maturity. It is highly dependent on the dividend growth rate. It is independent of the preferred stock's price. It decreases when tax rates increase.

It equals the dividend yield.

Final Exam Flashcards

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