Final Flashcards
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
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
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
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
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
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.
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
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
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
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
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
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
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
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
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%
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
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?
no
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
- 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
