Final Flashcards by Amin Shakourloo

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

Sunk cost

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Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule?

A. Project A only
B. Neither A nor B
C. Both A and B
D. Answer cannot be determined based on the information given.
E. Project B only

A. Project A only

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What has serious problems and should not be used?
A. Internal rate of return
B. Discounted payback
C. Average accounting rate of return
D. Payback
E. Net present value

C. Average accounting rate of return

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The discount rate that makes the net present value of investment exactly equal to zero is called the:
A. average accounting return
B. profitability index
C. external rate of return
D. equalizer
E. internal rate of return

E. internal rate of return

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Project cash flows should:
A. Be pre-tax
B. Include all sunk costs
C. Include all incremental costs
D. Include all financing costs
E. Include all of the above

C. Include all incremental costs

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Bell Weather Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as:
A. financial rejection.
B. project rejection.
C. soft rationing.
D. capital rationing.
E. marginal rationing.

D. capital rationing.

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Steve 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 Steve using?
A. simulation testing
B. sensitivity analysis
C. rationing analysis
D. scenario analysis
E. break-even analysis

Scenario Analysis

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Which of the following variables will be at their highest expected level under a worst-case scenario?
I. fixed cost
II. sales price
III. variable cost
IV. sales quantity

I and III

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Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk?
A. expected risk formula
B. time value of money equation
C. capital asset pricing model
D. unsystematic risk equation
E. market performance equation

Capital asset pricing model

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Which one of the following risks is irrelevant to a well-diversified investor?
A. systematic portion of a surprise
B. market risk
C. systematic risk
D. nondiversifiable risk
E. unsystematic risk

E. unsystematic risk

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Which of the following are examples of diversifiable risk?
I. earthquake damages an entire town
II. the federal government imposes a $100 fee on all business entities
III. employment taxes increase nationally
IV. toymakers are required to improve their safety standards
A. I and IV only
B. II and III only
C. I, III, and IV only
D. I and III only
E. II and IV only

I and IV

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The length of time a firm must wait to recoup the money it has invested in a project is called the:
A. internal return period.
B. valuation period.
C. profitability period.
D. discounted cash period.
E. payback period

payback period

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The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the:
A. net present value period.
B. discounted payback period.
C. internal return period.
D. payback period.
E. discounted profitability period.

discounted payback period

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Which of the following are advantages of the payback method of project analysis?
I. works well for research and development projects
II. liquidity bias
III. ease of use
IV. arbitrary cutoff point

A. II and III only
B. I and III only
C. II, III, and IV only
D. II and IV only
E. I and II only

II and III

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The IRR for the following set of cash flows is what percent?

0 −$9,868
1 3,400
2 5,300
3 6,900

23.64%

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A project's average net income divided by its average book value is referred to as the project's average:
A. accounting return.
B. internal rate of return.
C. net present value.
D. profitability index.
E. payback period.

Accounting return

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The internal rate of return is defined as the:

Discount rate which causes the net present value of a project to equal zero

Which of the following are considered weaknesses in the average accounting return method of project analysis?
I. exclusion of time value of money considerations
II. need of a cutoff rate
III. easily obtainable information for computation
IV. based on accounting values

A. II and III only
B. I only
C. I and IV only
D. I, II, and IV only
E. I, II, III, and IV

I, II, and IV

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on one of the following analytical methods?
A. accounting rate of return
B. net present value
C. profitability index
D. payback
E. internal rate of return

Net present value

Which two methods of project analysis are the most biased towards short-term projects?

A. discounted payback and profitability index
B. payback and discounted payback
C. net present value and internal rate of return
D. net present value and discounted payback
E. internal rate of return and profitability index

Payback and discounted payback

An analysis of the change in a project’s NPV when a single variable is changed is called _____ analysis.

A. sensitivity
B. break-even
C. simulation
D. scenario
E. forecasting

A. sensitivity

Which one of the following is a risk that applies to most securities?

A. unsystematic
B. asset-specific
C. diversifiable
D. total
E. systematic

Systematic

A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent. What type of risk does this news flash represent?
A. market
B. nondiversifiable
C. total
D. portfolio
E. unsystematic

Unsystematic

The principle of diversification tells us that:

Spreading investment across many diverse sets will eliminate some of the total risks

Unsystematic risk: A. is compensated for by the risk premium. B. is related to the overall economy. C. can be effectively eliminated by portfolio diversification. D. is measured by beta. E. is measured by standard deviation.

Can be effectively eliminated by portfolio diversification

``` Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset? A. standard deviation B. reward-to-risk ratio C. beta D. price-earnings ratio E. risk ratio ```

Beta

Which one of the following is an example of systematic risk? A. corn prices increase due to increased demand for alternative fuels B. a city imposes an additional one percent sales tax on all products C. a flood washes away a firm's warehouse D. investors panic causing security prices around the globe to fall precipitously E. a toymaker has to recall its top-selling toy

Investors panic causing security prices around the globe to fall precipitously

The primary goal of financial management? A. Avoid financial distress B. Maximize dividends per share C. Maximize the current value per share of the existing stock D.Maximize firm efficiency

Maximize the current value per share of the existing stock

As the Yield to maturity increases the: A. Value of the bond decreases B. Longer the time to Maturity C. Lower the Desired coupon D. Value of the bond increases

Value of the bond decreases

The financial statement summarizing a firm's performance over a period of time

Income statement

Do NPV and IRR always lead to the same decision?

What are the three financial management decisions?

Capital budgeting, capital structure and working capital

What is the agency problem?

Conflicts between management and stockholders

Financial planning model ingredients

1) Sales forecast 2) Asset requirements 3) Financial requirements 4) Economic assumptions

``` The cash flows of a new project that come at the expense of a firm's existing projects are: A. Salvage value expenses. B. Networking capital expenses. C. Sunk costs. D. Opportunity costs. E. Erosion costs. ```

Erosion costs

A firm is considering a project which would increase accounts receivable by $10,000, accounts payable by $35,000, and inventory by $30,000. Which of the following is true? ``` A. Net working capital has increased. B. Sales will increase. C. Payments to creditors will slow. D. Net working capital has decreased. E. This is a net source of cash. ```

Net working capital had increased

``` Which of the following would be considered a use of funds? I. An increase in receivables II. An increase in payables III. An increase in inventory IV. An increase in sales A) I and III only B) I and IV only C) II and III only D) II and IV only E) I, III, and IV only ```

I and III only

The tax rate applicable to the next dollar of taxable income is called the _____ tax rate. a. next b. absolute c. total D. marginal e. average

Marginal

16. Which of the following correctly describes a dealer market? I. Dealers match buyers with sellers. II. Dealers buy and sell for themselves at their own risk. III. Dealer trading occurs over the counter. IV. Dealer transactions occur on a trading floor. a. I and IV only b. I and III only c. II and IV only d. I, II, and III only E. II and III only

II and III only

A series of equal cash flows that occur at the beginning of each time period for a limited number of time periods is called a(n): a. perpetuity due. b. perpetuity. c. beginning annuity. D. annuity due. e. ordinary annuity.

Annuity due