BEC MCQ 3.3

Question 1

Capital budgeting decisions

Answer 1

doesn’t include short term financing needs they are more of operational

Question 2

The annual depreciation expense on an asset reduces income taxes

Answer 2

The firms marginal tax rate times the depreciation amount

Question 3

Manufacturing equipment replacement decision

Answer 3

Disposal price of the old equipment

Question 4

Items included in discounted cash flow analysis

Answer 4

Future operating cash saving
current asset disposal price
tax effects of future asset depreciation
future asset disposal price

Question 5

not included in discounted cash flow analysis

Answer 5

future asset depreciation expense

Question 6

A project should be accepted

Answer 6

if the NPV is greater or equal to zero

Question 7

Rates used in Net present value analysis

Answer 7

The discount rate, hurdle rate and cost of capital. These are the synonymous terms for an arbitrary rate set by management
Rates which will Decrease NPV
Increase in discount rate will reduce NPV.
Increase in NPV
Increase the estimated salvage value
Extend the project life and associated cash inflow
Decrease the estimated effective income tax rate
If the NPV of a proposed investment is negative the discount rate used must be greater than the project IRR.
The IRR is the discount rate that results in a NPV of zero
The disadvantage of NPV is that it does not provide the true rate on investment. The NPV indicates whether the investment will earn the hurdle rate used in the NPV calculation.

Question 8

Sensitive analysis

Answer 8

is a what if technique that’s asks how a given organization will change if the original estimates used in capital budgeting are changed

Question 9

IRR

Answer 9

is the rate of return that produces a npv of zero. IRR valuation do not require cash flows that are constant. IRR an be determined even the profitability index is less than one. IRR is defined as the technique that determines the present value factor after the tax flows equals the initial investment of the project. Alternatively IRR is the discount rate that produces a npv of zero . NPV will greater than zero when IRR is higher than the hurdle rate

Question 10

Pay back method

Answer 10

is the length of time required to recover the initial cash outlay of a project. It emphasis liquidity

Question 11

A firm with a higher degree of operating leverage

Answer 11

implies that firms profit are more sensitive to changes in sales volume
higher variable costs implies a lower degree of operating leverage
A firm using significant amount of debt has higher degree of financial leverage

Question 12

when the cost of funds from the sale of Common stock is asked

Answer 12

annual dividend/sale price of common shares -floatation cost-underpricing

Question 13

Strategies for creating an optimal capital structure is

Answer 13

Maximizing earning per share
Minimizing cost of debt
minimizing cot of equity
maximizing cash flow

Question 14

If a company becomes more conservative in its working policy

Answer 14

it would tend to have an increase of ratio of current assets to current units of output

Question 15

Turnaround document

Answer 15

Is a computer output that can be later used as a source document

Question 16

Converting accounts receivable to cash

Answer 16

Collection agencies: Used to collect overdue A/R
Selling AR or factoring AR
Cash discount
Electronic fund transfers

Question 17

Commercial paper

Answer 17

does not have an active secondary market. Commercial papers are sold by money markets by highly credit worthy companies. The maturity is less than 270 days. The interest on commercial paper is below prime rate but above Treasury bill rate.
There are restrictions as to the type of corporation that can enter into a commercial market for short term financing since to use of the open market is restricted to a small number of most credit worthy large corporations
ADvantage
it avoids the expense of maintaining a compensating balance
provides a broad distribution for borrowing
accrues a benefit to the borrower because its name is more widely known

Question 18

Negotiable certificate of deposit

Answer 18

Negotiable CD have former secondary market
are regulated by Federal Reserve System
Are sold in denominations of 100000.
It carry lower interest than banker acceptance and commercial paper

Question 19

The primary motivation for holding cash

Answer 19

Transactions demand
Speculative demand
Precautionary demand

Question 20

If we are asked to Determine additional investment in Accounts receivable

Answer 20

Step 1: Determine average accounts receivable and the additional accounts receivable as follows:
it is new credit policy minus old credit policy it will give additional A/R
Determine the additional investment in additional accounts receivable
It is the receivable balance minus variable cost
then calculate the returned on investment
that is the amount

Question 21

IF a seller extends credit to a purchaser more than his operating cycle

Answer 21

it means in effect financing more than inventory needs

Question 22

Comparing a change in credit policy

Answer 22

Cost of funds
Bank may require that a day sales O/S cannot exceed certain number of days.
Customers may feel they should be given extended terms. If this is true additional working capital may be even greater

Question 23

what does not affect safety stock

Answer 23

re-order level
The facts that affect safety stock are
uncertain sales forecasts
dissatisfaction of customers
uncertain lead times

Question 24

Re-order point is

Answer 24

safety stock+ stock units used during lead time

Question 25

inventory carrying costs

Answer 25

uinspections are part of ordering costs not carrying cots. Disruption of productions schdules,quantity discount lost, handling cost
Inventory cost or carrying cost include
insurance
opportunity cost on inventory investment
obsolescence and spoilage
Cost of capital invested in industry

Question 26

expected stock out cost + carrying costs

Answer 26

safety stock costs

Question 27

Ordering costs primarily consist of

Answer 27

production set up

Question 28

Average inventory

Answer 28

Re-order quantity/2 Average inventory excluding safety stock + Avg safety stock= avg. Inventory including safety stock.

Question 29

Operating leverage

Answer 29

Fixed costs/Variable costs

Question 30

Historical weighted average cost of capital

Answer 30

It is often used as target or hurdle rate not the optimal rate

Question 31

residual income

Answer 31

first step=Average invested capital=sales/capital turnover

second step=operating income-(imputed rate x average invested capital)

Question 32

Return on assets

Answer 32

Income/Ave.Assets or income /sales or sales /avg.assets

Question 33

ROI

Answer 33

Net Income/ Invested Capital

Question 34

Cost of fund from retained earnings

Answer 34

Dividend /stock price

Question 35

Free cash flow`

Answer 35

Net operating profits after taxes+ Depreciation + Amortization -Capital expenditures-net increase in WC

Question 36

Interest on investment

Answer 36

Invested capital x required rate of return

Question 37

Economic value added

Answer 37

Net operating profit after taxes-cost of financing

Question 38

Cost of financing

Answer 38

Total assets-current liabilities x WACC

Question 39

Economic rate of return on C.S

Answer 39

Dividends+change in price/ Beginning price

Question 40

ROI based on assets

Answer 40

Net Income/ Total assets or Average invested capital

Question 41

Du point ROI analysis=Return on salesx asset turnover

Answer 41

Return on sales= Net Income/sales

Asset turnover= Sales/total assets

Question 42

Market capitalization

Answer 42

Common Stock price per share x common stock O/S

Question 43

Market Ratio

Answer 43

Common stock price per share/Book value per share

Market capitalization/ Common Stockholders Equity

Question 44

Cost of funds from sale of C.S

Answer 44

Annual dividend/ Sale price of common share -flotation costs-underpricing

Question 45

Coefficient of variation

Answer 45

Standard Deviation/Rate of return