fin 301 exam 2 Flashcards
You discover that a glue your company developed ten years ago can be formed into a super bouncy ball if cooked at the right temperature. How should you treat the original $125,000 of R&D expenditures that went into developing the glue in your present capital budgeting decision of whether or not to begin production of the balls?
As a sunk cost since that R&D expenditure has no bearing on today’s decision
When we evaluate a project on the basis of its incremental after-tax cash flows, we are employing…
the stand-alone principle
What describes the situation in which the cash flows of a new project come at the expense of a firm’s existing projects?
Erosion
You are considering investing in a process that promises to save you $75 per year (Sales - Costs). The process has an expected life of 5 years with an initial cost of $100. This cost is straight line depreciated over 5 years. Assume a 33% tax bracket and a discount rate of 15%.
What is operating cash flow in each of the four periods? Use the information above
56.85
You are considering investing in a process that promises to save you $75 per year (Sales - Costs). The process has an expected life of 5 years with an initial cost of $100. This cost is straight line depreciated over 5 years. Assume a 33% tax bracket and a discount rate of 15%.
What is the value of the tax shield in each period from the investment in the process? Use the information above.
$6.60
Your company just bought a new distillation unit for $180,000 to be used in R&D. Such equipment has a 3-year MACRS classification. What is the book value of the distillation unit at the end of year 2 assuming salvage value of $0?
Modified ACRS Depreciation Allowances
Property Class 3-Year
Year Allowance
1 33.33%
2 44.44%
3 14.82%
4 7.41%
$40,014
What is the term describing the possibility of making a bad investment decision because of errors in projected cash flows?
Forecasting Risk
Which method of project analysis consists of computing NPV values in best-case, worst-case, and base-case situations?
Scenario Analysis
What is the contribution margin per unit is equal to?
unit selling price - unit variable cost
What is the accounting break-even point? Price = $62 per unit; variable cost = $32 per unit; fixed costs = $60,000 per year; depreciation = $0
2,000 units
Given the following, what is the operating cash flow at the accounting break-even point? Price = $36; variable cost = $11; fixed cost = $30,000; depreciation = $5,000; tax rate = 34%; sales = 10,000 units.
$5,000
What is the cash break-even point? Ignore Taxes. Price = $127 per unit; variable cost = $57 per unit; fixed cost = $105,000 per year; depreciation = $5,000 per year
1,500 units
You purchased 200 shares of preferred stock on January 1 for $14.36 per share. The stock pays an annual dividend of $1.26 per share. On December 31, the market price is $16.69 per share. What is your percent return for the year if you hold on to the stock?
25.00%
Over the 1926-2019 time period, the nominal risk premium on small company stocks has averaged ______ percent per year.
12.9
If capital markets are efficient, then:
prices will adjust quickly to correctly reflect new information.
You earn a 6.74% nominal return. If the inflation rate is 2%, what is your exact real rate of return?
4.65%
Given the following historical returns, what is the variance? Year 1 = 9%; year 2 = -11%; year 3 = 8%; year 4 = -12%; and year 5 = -9%.
.0112
Given the following historical returns, what is the standard deviation? Year 1 = 9%; year 2 = -11%; year 3 = 8%; year 4 = -12%; and year 5 = -9%
10.56%
If you had to choose only one of the following criteria for evaluating proposed investments you would most likely rely on the ______________ rule since it is considered the “best” in principle.
NPV
What is the decision rule for IRR?
Accept a project if the IRR exceeds the firm’s required rate of return
Your firm needs one delivery truck. The CFO presents you with two analyses: one for a Ford and one for a Chevrolet. This is an example of a decision involving…
mutually exclusive projects.
What is the payback period of a $45,000 investment with the following cash flows?
Year Cash Flow
1 12,000
2 27,000
3 12,000
4 10,000
5 5,000
2.5 years
What is the internal rate of return for the following set of cash flows?
Year Cash Flow
0 -$60,000
1 20,000
2 20,000
3 40,000
4 40,000
29.5%
Would you accept a project which is expected to pay $7,000 a year for 12 years if the initial investment is $60,000 and your required return is 10%?
No; the NPV is -$12,304
ABC Corporation issues bonds with a $100 face value that make coupon payments of $3.50 every 3 months. What is the coupon rate?
14.00%
The market price of a bond is $825.60, it has 15 years to maturity, a $1000 face value, and pays an annual coupon of $80. What is the yield to maturity?
10.34%
Which bond would most likely possess the lowest degree of interest rate risk?
12% coupon rate, 5 years to maturity
The written agreement between the corporation and its bond creditors is called a/an:
indenture
What is the yield to maturity on a 12-year, zero coupon bond selling for 47.5% of face?
6.40%
You earn a 6% real return. If the inflation rate is 8%, what is your exact nominal return?
14.48%
The current price of BKZ Corporation stock is $65.00. Dividends are expected to grow at 5% indefinitely and the most recent dividend was $3. What is the required rate of return on BKZ’s stock?
9.85%
If we solve the dividend growth model presented in the text for r, we find that total return is comprised of…
dividend yield and capital gains yield
Which of the following items does NOT usually appear in a Wall Street Journal or Yahoo! Finance stock quote?
capital gains yield
A grant of authority by a shareholder allowing for another individual to vote his/her shares is a __________.
proxy
There is an election being held to fill 3 seats on the board of directors of a firm in which you hold stock. There are a total of 372 shares outstanding. If the election is conducted under cumulative voting and you own 84 shares, how many more shares must you buy to be assured of earning a seat on the board?
10
If Specific Motors closed at $51.50 per share and the current quarterly dividend is $1.75, what % dividend yield would be reported in the Wall Street Journal?
13.59%
