finance 3
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1)
1
________ is the process of evaluating and selecting long-term investments consistent with the firm's goal of owner wealth maximization.
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1)
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_______ A)
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Ratio analysis
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B)
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Restructuring debt C)
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Capital budgeting
8
D)
9
Recapitalizing assets
2)
10
Fixed assets that provide the basis for the firm's profit and value are often called
11
2)
12
_______ A)
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book assets.
14
B)
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tangible assets. C)
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earning assets.
17
D)
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non-current assets.
3)
19
The final step in the capital budgeting process is
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3)
21
_______ A)
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implementation.
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B)
24
re-evaluation. C)
25
follow-up.
26
D)
27
education.
4)
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A firm with limited dollars available for capital expenditures is subject to
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4)
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_______ A)
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capital rationing.
32
B)
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mutually exclusive projects. C)
34
working capital constraints.
35
D)
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capital dependency.
5)
37
A non-conventional cash flow pattern associated with capital investment projects consists of an initial
38
5)
39
_______ A)
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outflow followed by a series of both cash inflows and outflows. B)
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inflow followed by a series of outflows. C)
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outflow followed by a series of inflows. D)
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inflow followed by a series of both cash inflows and outflows.
6)
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The evaluation of capital expenditure proposals to determine whether they meet the firm's minimum acceptance criteria is called
45
6)
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_______ A)
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the accept-reject approach.
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B)
49
the ranking approach. C)
50
an independent investment.
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D)
52
a mutually exclusive investment.
Table 10.1
7)
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The cash flow pattern depicted is associated with a capital investment and may be characterized as ________. (See Table 10.1)
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7)
55
_______ A)
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an annuity and non-conventional cash flow B)
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a mixed stream and conventional cash flow C)
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an annuity and conventional cash flow D)
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a mixed stream and non-conventional cash flow
8)
60
Which of the following capital budgeting techniques ignores the time value of money?
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8)
62
_______ A)
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Internal rate of return.
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B)
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Payback. C)
66
Net present value.
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D)
68
Two of the above.
9)
69
The ________ measures the amount of time it takes the firm to recover its initial investment.
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9)
71
_______ A)
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average rate of return
73
B)
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payback period C)
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internal rate of return
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D)
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net present value
10)
78
All of the following are weaknesses of the payback period EXCEPT
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10)
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______ A)
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a disregard for cash flows after the payback period. B)
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it uses cash flows, not accounting profits. C)
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the difficulty of specifying the appropriate payback period. D)
84
only an implicit consideration of the timing of cash flows.
11)
85
Many firms use the payback method as a guideline in capital investment decisions. Reasons they do so include all of the following EXCEPT
86
11)
87
______ A)
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it is easy to calculate. B)
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it is a measure of risk exposure. C)
90
it gives an implicit consideration to the timing of cash flows. D)
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it recognizes cash flows which occur after the payback period.
12)
92
Payback is considered an unsophisticated capital budgeting because it
93
12)
94
______ A)
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gives explicit consideration to risk exposure due to the use of the cost of capital as a discount rate. B)
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gives explicit consideration to the timing of cash flows and therefore the time value of money. C)
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gives explicit consideration to the timing of cash flows and therefore the time value of money. D)
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none of the above.
13)
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Which of the following statements is false?
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13)
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______ A)
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If the payback period is less than the maximum acceptable payback period, reject the project B)
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If the payback period is less than the maximum acceptable payback period, accept the project. C)
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If the payback period is greater than the maximum acceptable payback period, reject the project. D)
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Two of the above.
14)
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Evaluate the following projects using the payback method assuming a rule of 3 years for payback.
Year Project A Project B0 -10,000 -10,0001 4,000 4,0002 4,000 3,0003 4,000 2,0004 0 1,000,000
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14)
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______ A)
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Project A can be accepted because the payback period is 2.5 years but Project B can not be accepted because it's payback period is longer than 3 years.
B)
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Both projects can be accepted because the payback is less than 3 years. C)
111
Project B should be accepted because even thought the payback period is 2.5 years for project A and 3.001 project B, there is a $1,000,000 payoff in the 4th year in Project B.
D)
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Project B should be accepted because you get more money paid back in the long run.
15)
113
A firm is evaluating three capital projects. The net present values for the projects are as follows:
The firm should
114
15)
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______ A)
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accept Project 1 and reject Projects 2 and 3. B)
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reject all projects. C)
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accept Projects 1 and 2 and reject Project 3. D)
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accept Projects 1 and 3 and reject Project 2.
16)
120
What is the NPV for the following project if its cost of capital is 12 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and ($1,300,000) in year 4?
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16)
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______ A)
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$158,011
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B)
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$(1,494,336) C)
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$1,494,336
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D)
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Two of the above
17)
129
Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project B also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25 percent?
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17)
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______ A)
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Project Y.
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B)
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Project X. C)
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Neither.
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D)
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Not enough information to tell.
18)
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A firm with a cost of capital of 13 percent is evaluating three capital projects. The internal rates of return are as follows:
The firm should
139
18)
140
______ A)
141
accept Project 1 and reject Projects 2 and 3. B)
142
accept Project 2 and reject Projects 1 and 3. C)
143
accept Project 3 and reject Projects 1 and 2. D)
144
accept Projects 2 and 3 and reject Project 1.
Table 10.4
A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent.
19)
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Using the internal rate of return approach to ranking projects, which projects should the firm accept? (See Table 10.4)
146
19)
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______ A)
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1, 2, 3, and 5
149
B)
150
2, 3, 4, and 6
151
C)
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1, 2, 3, 4, and 5
153
D)
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1, 3, 4, and 6
20)
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In comparing the internal rate of return and net present value methods of evaluation,
156
20)
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______ A)
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net present value is theoretically superior, but financial managers prefer to use internal rate of return. B)
159
financial managers prefer net present value, because it is presented as a rate of return. C)
160
internal rate of return is theoretically superior, but financial managers prefer net present value. D)
161
financial managers prefer net present value, because it measures benefits relative to the amount invested.
21)
162
Unlike the net present value criteria, the internal rate of return approach assumes an interest rate equal to
163
21)
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______ A)
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the project's opportunity cost.
166
B)
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the relevant cost of capital. C)
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the market's interest rate.
169
D)
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the project's internal rate of return.
22)
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When evaluating projects using internal rate of return,
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22)
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______ A)
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projects having higher early-year cash flows tend to be preferred at lower discount rates. B)
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projects having lower early-year cash flows tend to be preferred at higher discount rates. C)
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projects having higher early-year cash flows tend to be preferred at higher discount rates. D)
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the discount rate and magnitude of cash flows do not affect internal rate of return.
23)
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Initial cash flows and subsequent operating cash flows for a project are sometimes referred to as
179
23)
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______ A)
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necessary cash flows.
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B)
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ordinary cash flows. C)
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consistent cash flows.
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D)
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relevant cash flows.
24)
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Relevant cash flows for a project are best described as
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24)
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______ A)
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incidental cash flows.
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B)
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incremental cash flows. C)
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accounting cash flows.
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D)
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sunk cash flows.
25)
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Cash flows that could be realized from the best alternative use of an owned asset are called
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25)
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______ A)
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opportunity costs.
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B)
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incremental costs. C)
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sunk costs.
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D)
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lost resale opportunities.
26)
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The basic variables that must be considered in determining the initial investment associated with a capital expenditure are all of the following EXCEPT
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26)
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______ A)
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cost of the new asset. B)
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taxes on the sale of an existing asset. C)
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proceeds from the sale of the existing asset. D)
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incremental annual savings produced by the new asset.
27)
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A corporation is considering expanding operations to meet growing demand. With the capital expansion the current accounts are expected to change. Management expects cash to increase by $10,000, accounts receivable by $20,000, and inventories by $30,000. At the same time accounts payable will increase by $40,000, accruals by $30,000, and long-term debt by $80,000. The change in net working capital is
213
27)
214
______ A)
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a decrease of $90,000.
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B)
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an increase of $80,000. C)
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an increase of $10,000.
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D)
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a decrease of $10,000.
28)
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A corporation is selling an existing asset for $1,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is
222
28)
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______ A)
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$0 tax liability.
225
B)
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$280 tax benefit. C)
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$3,600 tax liability.
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D)
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$1,100 tax liability.
29)
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The portion of an asset's sale price that is below its book value and below its initial purchase price is called
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29)
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______ A)
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recaptured depreciation.
234
B)
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a capital loss. C)
236
book value.
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D)
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a capital gain.
Table 11.3
Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.
30)
239
The cash flow pattern for the capital investment proposal is ________. (See Table 11.3)
240
30)
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______ A)
242
a mixed stream and conventional
243
B)
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an annuity and non-conventional C)
245
an annuity and conventional
246
D)
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a mixed stream and non-conventional
31)
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The tax effect on the sale of the existing asset results in ________. (See Table 11.3)
249
31)
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______ A) B)
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$6,000 tax liability $1,000 tax liability
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C)
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$1,100 tax liability D) $800 tax benefit
32)
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A corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate the terminal cash flow. The proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $2,000. The machine has an original purchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percent tax rate on ordinary income and long-term capital gain. The terminal cash flow is
255
32)
256
______ A)
257
$5,800.
258
B)
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$6,200.
260
C)
261
$8,200.
262
D)
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$7,800.
33)
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In a capital budgeting context, risk refers to
265
33)
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______ A)
267
the chance that a project will prove unacceptable. B)
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the degree of variability of cash flows. C)
269
neither A nor B is correct. D)
270
both A and B are correct.
34)
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Behavioral approaches for dealing with project risk
272
34)
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______ A)
274
are used both to get a feel for project risk and also explicitly recognize project risk. B)
275
are used to get a feel for project risk. C)
276
explicitly recognize project risk. D)
277
none of the above.
35)
278
One type of simulation program made popular by the widespread use of personal computers is called
279
35)
280
______ A)
281
Monte Carlo Simulation.
282
B)
283
Monaco Simulation. C)
284
Cannes Simulation.
285
D)
286
Lemans Simulation.
36)
287
In international capital budgeting decisions, political risks can be minimized using all of the following strategies EXCEPT
288
36)
289
______ A)
290
structuring the financing of such investments as equity rather than as debt. B)
291
structuring the financing of such investments as debt rather than as equity. C)
292
structuring the investment as a joint venture and selecting well-connected local partner. D)
293
none of the above.
37)
294
The amount by which the required discount rate exceeds the risk-free rate is called
295
37)
296
______ A)
297
the opportunity cost.
298
B)
299
the excess risk. C)
300
the risk equivalent.
301
D)
302
the risk premium.
38)
303
The ________ reflects the return that must be earned on the given project to compensate the firm's owners adequately according to the project's variability of cash flows.
304
38)
305
______ A)
306
cost of capital
307
B)
308
internal rate of return C)
309
risk-adjusted discount rate
310
D)
311
average rate of return
Table 12.2
A firm is considering investment in a capital project which is described below. The firm's cost of capital is 18 percent and the risk-free rate is 6 percent. The project has a risk index of 1.5. The firm uses the following equation to determine the risk adjusted discount rate, RADR, for each project: RADR = Rf + Risk Index (Cost of capital - Rf)
39)
312
The discount rate that should be used in the net present value calculation to compensate for risk is ________. (See Table 12.2)
313
39)
314
______ A)
315
18 percent
316
B)
317
15 percent
318
C)
319
24 percent
320
D)
321
6 percent
40)
322
It has been found that the value of the stock of corporations whose shares are traded publicly in an efficient marketplace is
323
40)
324
______ A)
325
generally negatively affected by diversification, because of the increase in risk. B)
326
generally positively affected by diversification, because of the reduction in risk. C)
327
generally negatively affected by diversification, because of the increase in the required rate of return. D)
328
generally not affected by diversification, unless greater returns are expected.
41)
329
The ________ approach is used to convert the net present value of unequal-lived projects into an equivalent annual amount (in net present value terms).
330
41)
331
______ A)
332
investment opportunities schedule
333
B)
334
annualized net present value C)
335
internal rate of return
336
D)
337
risk-adjusted discount rate
Table 12.6Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent.
42)
338
The Annualized NPV of project B is ________. (See Table 12.6)
339
42)
340
______ A)
341
$12,947
342
B)
343
$21,828
344
C)
345
$11,673
346
D)
347
$38,227
43)
348
Which project should be chosen using the Annualized NPV approach? (See Table 12.6)
349
43)
350
______ A)
351
Project A
352
B)
353
Project B
354
C)
355
neither
356
D)
357
both
44)
358
Major types of real options include all of the following EXCEPT the
359
44)
360
______ A)
361
conversion option.
362
B)
363
timing option. C)
364
abandonment option.
365
D)
366
growth option.
45)
367
If a firm's fixed operating costs decrease, the firm's operating breakeven point will
368
45)
369
______ A)
370
change in an undetermined direction.
371
B)
372
increase. C)
373
decrease.
374
D)
375
remain unchanged.
46)
376
If a firm's variable costs per unit increase, the firm's operating breakeven point will
377
46)
378
______ A)
379
remain unchanged.
380
B)
381
change in an undetermined direction. C)
382
increase.
383
D)
384
decrease.
47)
385
A major assumption of breakeven analysis and one which causes severe limitations in its use is that
386
47)
387
______ A)
388
fixed costs really are fixed.
389
B)
390
revenues and operating costs are linear. C)
391
total revenue is nonlinear.
392
D)
393
all costs are really semi-variable.
48)
394
Mark must buy four new tires for his car. He is considering buying tires that are $25 a piece more than his regular brand, because the higher priced tires are supposed to increase his miles per gallon by 20%. If the tires are good for 48,000 miles and Mark drives an average of 1000 miles per month, gas costs $2.50 per gallon over the next 4 years, and Mark's car gets 30 miles to the gallon now (on the old tires), should Mark purchase the more expensive tires?
395
48)
396
______ A)
397
Yes, because Mark will save about $660 dollars in gas over the four years but the new tires will only be $100 more.
B)
398
There is not enough information given in the problem to make the decision. C)
399
No, because Mark will only save about $60 dollars in gas over the four years but the new tires will only be $100 more.
D)
400
Yes, because Mark will save about $560 dollars in gas over the four years but the new tires will only be $100 more.
401
49)
402
The payment of cash dividends to corporate stockholders is decided by the
403
49)
404
______ A)
405
stockholders.
406
B)
407
management. C)
408
board of directors.
409
D)
410
SEC.
50)
411
The purpose of a reverse stock split is to
412
50)
413
______ A)
414
reduce trading activity.
415
B)
416
issue additional shares. C)
417
increase the price of stock.
418
D)
419
increase the dividend.
420
421
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