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Wiley CPA Examination Review Outlines And Study Guides Volume 1 - 2012-2013 39th Edition Patrick R. Delaney, O. Ray Whittington - Solutions
Which of the following techniques recognizes that management often faces a series of decisions that may affect the value of an investment?a. Probability analysis.b. Risk-adjusted discount rate.c. Decision tree.d. Sensitivity analysis.
Assume that the standard deviation of the returns for the project is $150,000. What is the coefficient of variation for the project?a. .2345b. .3191c. .4256d. 1.10
What is the expected return for the project?a. $750,000b. $500,000c. $470,000d. $400,000
Which of the following capital budgeting techniques would allow management to justify investing in a project that could not be justified currently by using techniques that focus on expected cash flows?a. Real options.b. Net present value.c. Accounting rate of return.d. Internal rate of return.
Philip Enterprises, distributor of compact disks (CDs)is developing its budgeted cost of goods sold for 2013.Philip has developed the following range of sales estimates and associated probabilities for the year.Sales Estimate Probability$ 60,000 25%85,000 40%100,000 35%Philip’s cost of goods sold
The Madison Company has decided to introduce a new product. The company estimates that there is a 30% probability that the product will contribute 700, 000 to pr of it s, a 30 200,000, and a 40%probability that the contribution will be a negative $400,000.The expected contribution of the new
What is the net present value of the investment?a. $175,000b. $ 58,000c. $ 1,135d. $ (12,340)Considering Risk in Capital Budgeting
What is the amount of the after-tax cash flows in year 2?a. $140,000b. $125,000c. $ 98,000d. $ 70,000
Buff Co. is considering replacing an old machine with a new machine. Which of the following items is economically relevant to Buff’s decision? (Ignore income tax considerations.)Carrying amount of old machine Disposal value of new machinea. Yes Nob. No Yesc. No Nod. Yes Yes
Andrew Corporation is evaluating a capital investment that would result in a 30, 000 hi gh er co nt ri bu ti on ma rg in be ne fi ta nd in cr ea se da nn ua lp er so nn el co st so f20,000.The effects of income taxes on the net present value computation on these benefits and costs for the project
A depreciation tax shield isa. An after-tax cash outflow.b. A reduction in income taxes.c. The cash provided by recording depreciation.d. The expense caused by depreciation.
Which project(s) should Capital Invest Inc. undertake during the upcoming year if it has only $300,000 of capital funds available?a. Project 1.b. Projects 2, 3, and 4.c. Projects 3 and 4.d. Project 3.Determining Future Cash Flows
Which project(s) should Capital Invest Inc. undertake during the upcoming year if it has only $600,000 of funds available?a. Projects 1 and 3.b. Projects 2, 3, and 4.c. Projects 2 and 3.d. Projects 3 and 4.
Which project(s) should Capital Invest Inc. undertake during the upcoming year assuming it has no budget restrictions?a. All of the projects.b. Projects 1, 2, and 3.c. Projects 2, 3, and 4.d. Projects 1, 3, and 4.
Bennet Inc. uses the net present value method to evaluate capital projects. Bennet’s required rate of return is 10%.Bennet is considering two mutually exclusive projects for its manufacturing business. Both projects require an initial outlay of $120,000 and are expected to have a useful life of
Neu Co. is considering the purchase of an investment that has a positive net present value based on Neu’s 12%hurdle rate. The internal rate of return would bea. 0b. 12%c. > 12%d. < 12%
How are the following used in the calculation of the internal rate of return of a proposed project? Ignore income tax considerations.Residual sales value of project Depreciation expensea. Exclude Includeb. Include Includec. Exclude Excluded. Include Exclude
Tam Co. is negotiating for the purchase of equipment that would cost 100, 000, w it ht he ex pe ct at io nt ha t20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is ten years, with no residual value, and would be
If the discount rate is 5% and the discounted payback period of Project D is exactly two years, then the year two cash inflow for Project D isa. $ 5,890b. $10,000c. $12,075d. $14,301
The payback period of Project C isa. 0 years.b. 1 year.c. 2 years.d. 3 years.
If the discount rate is 10%, the net present value (NPV)of Project B isa. $ 4,079b. $ 6,789c. $ 9,869d. $39,204
If Project A has an internal rate of return (IRR) of 15%, then it has a cost ofa. $ 8,696b. $22,832c. $24,869d. $27,232
Project B’s internal rate of return is closest toa. 15%b. 18%c. 20%d. 22%
Using the net present value method, Project A’s net present value isa. $ 316,920b. $0c. $(265,460)d. $(316,920)
An organization is using capital budgeting techniques to compare two independent projects. It could accept one, both, or neither of the projects. Which of the following statements is true about the use of net present value (NPV)and internal rate of return (IRR) methods for evaluating these two
As used in capital budgeting analysis, the internal rate of return uses which of the following items in its computation?Net incremental investment Incremental average operating income Net annual cash flowsa. Yes No Yesb. Yes Yes Noc. No No Yesd. No Yes Yes
The internal rate of return is thea. Rate of interest that equates the present value of cash outflows and the present value of cash inflows.b. Minimum acceptable rate of return for a proposed investment.c. Risk-adjusted rate of return.d. Required rate of return.
The discount rate (hurdle rate of return) must be determined in advance for thea. Payback period method.b. Time-adjusted rate of return method.c. Net present value method.d. Internal rate of return method.Capital Budgeting: Internal Rate of Return
A project’s net present value, ignoring income tax considerations, is normally affected by thea. Proceeds from the sale of the asset to be replaced.b. Carrying amount of the asset to be replaced by the project.c. Amount of annual depreciation on the asset to be replaced.d. Amount of annual
For the next two years, a lease is estimated to have an operating net cash inflow of 7, 500 pe ra nn um, b ef or ea dj us ti ng fo r5,000 per annum tax basis lease amortization, and a 40% tax rate. The present value of an ordinary annu1188 ity of $1 per year at 10% for two years is 1.74. What is
Pole Co. is investing in a machine with a three-year life.The machine is expected to reduce annual cash operating costs by $30,000 in each of the first two years and by 20, 000 in ye ar th re e.P re se nt va lu es of an an nu it yo f1 at 14% are Period 1 0.88 2 1.65 3 2.32 Using a 14% cost of
Kern Co. is planning to invest in a two-year project that is expected to yield cash flows from operations, net of income taxes, of 50, 000 in th ef ir st ye ar an d80,000 in the second year. Kern requires an internal rate of return of 15%.The present value of 1f or on ep er io da t15 1 for one
The net present value (NPV) method of investment project analysis assumes that the project’s cash flows are reinvested at thea. Computed internal rate of return.b. Risk-free interest rate.c. Discount rate used in the NPV calculation.d. Firm’s accounting rate of return.
If an investment project has a profitability index of 1.15, then thea. Project’s internal rate of return is 15%.b. Project’s cost of capital is greater than its internal rate of return.c. Project’s internal rate of return exceeds its net present value.d. Net present value of the project is
The capital budgeting technique known as accounting rate of return uses Revenue over life of project Depreciation expensea. No Yesb. No Noc. Yes Nod. Yes Yes Capital Budgeting: Net Present Value
Lin Co. is buying machinery it expects will increase average annual operating income by 40, 000.T he in it ia li nc re as ei nt he re qu ir ed in ve st me nt is 60,000, and the average increase in required investment is $30,000. To compute the accrual accounting rate of return, what amount should
Tam Co. is negotiating for the purchase of equipment that would cost 100, 000, w it ht he ex pe ct at io nt ha t20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is ten years, with no residual value, and it would be
Which of the following is an advantage of the accounting rate of return method of evaluating investment returns?a. The technique considers depreciation.b. The technique corresponds to the measure that is often used to evaluate performance.c. The technique considers the time value of money.d. The
All of the following capital budgeting analysis techniques use cash flows as the primary basis for the calculation except for thea. Net present value.b. Payback period.c. Discounted payback period.d. Accounting rate of return.
Tam Co. is negotiating for the purchase of equipment that would cost 100, 000, w it ht he ex pe ct at io nt ha t20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is ten years, with no residual value, and would be
Which of the following is a strength of the payback method?a. It considers cash flows for all years of the project.b. It distinguishes the source of cash inflows.c. It considers the time value of money.d. It is easy to understand.
The capital budgeting technique known as payback period uses Depreciation expense Time value of moneya. Yes Yesb. Yes Noc. No Nod. No Yes
How is the discounted payback method an improvement over the payback method in evaluating investment projects?a. It involves better estimates of cash flows.b. It considers the overall profitability of the investment.c. It considers the time value of money.d. It considers the variability of the
At what stage of the capital budgeting process would management most likely apply present value techniques?a. Identification stage.b. Search stage.c. Selection stage.d. Financing stage.Capital Budgeting: Payback and Discounted Payback
The market price of a bond issued at a discount is the present value of its principal amount at the market (effective)rate of interesta. Less the present value of all future interest payments at the market (effective) rate of interest.b. Less the present value of all future interest payments at the
On December 31, 2013, Jet Co. received a $10,000 note receivable from Maxx, Inc. in exchange for services rendered.Interest is calculated on the outstanding balance at the interest rate of 3% compounded annually and payable at maturity. The note from Maxx, Inc. is due in five years.The market
Para Co. is reviewing the following data relating to an energy saving investment proposal:Cost $50,000 Residual value at the end of 5 years 10,000 Present value of an annuity of 1 at 12% for 5 years 3.60 Present value of 1 due in 5 years at 12% 0.57 What would be the annual savings needed to make
If a 1, 000 bo nd se ll sf or 1,125, which of the following statements are correct?I. The market rate of interest is greater than the coupon rate on the bond.II. The coupon rate on the bond is greater than the market rate of interest.III. The coupon rate and the market rate are equal.IV. The bond
The risk of loss because of fluctuations in the relative value of foreign currencies is calleda. Expropriation risk.b. Sovereign risk.c. Multinational beta.d. Exchange rate risk.Present Value
A company has recently purchased some stock of a competitor as part of a long-term plan to acquire the competitor.However, it is somewhat concerned that the market price of this stock could decrease over the short run. The company could hedge against the possible decline in the stock’s market
Banner Electronics has subsidiaries in several international locations and is concerned about its exposure to foreign exchange risk. In countries where currency values are likely to fall, Banner should encourage all of the following excepta. Granting trade credit wherever possible.b. Investing
When a firm finances each asset with a financial instrument of the same approximate maturity as the life of the asset, it is applyinga. Working capital management.b. Return maximization.c. Financial leverage.d. A hedging approach.
An American importer of English clothing has contracted to pay an amount fixed in British pounds three months from now. If the importer worries that the US dollar may depreciate sharply against the British pound in the interim, it would be well advised toa. Buy pounds in the forward exchange
Which of the following risks relates to the possibility that a derivative might not be effective at hedging a particular asset?a. Credit risk.b. Legal risk.c. Market risk.d. Basis risk.
Which of the following techniques is used to value stock options?a. Black-Scholes method.b. Zero-coupon method.c. Weighted-average method.d. Expected earnings method.
In valuing interest rate swaps, the zero-coupon method uses all of the following variables excepta. Discount rate.b. Timing of cash flows as specified by the contract.c. Estimated net settlement cash flows.d. Underlying assets.
Strobel Company has a large amount of variable rate financing due in one year. Management is concerned about the possibility of increases in short-term rates. Which of the following would be an effective way of hedging this risk?a. Buy Treasury notes in the futures market.b. Sell Treasury notes in
The return paid for the use of borrowed capital is referred to asa. Cash dividends.b. Stock dividends.c. Interest.d. Principal payment.Derivatives and Hedging
A curve on a graph with the rate of return on the vertical axis and time on the horizontal axis depictsa. The internal rate of return on an investment.b. A yield curve showing the term structure of interest rates.c. The present value of future returns, discounted at the marginal cost of capital,
According to the expectations theory of the term structure of interest rates, if inflation is expected to increase, the yield curve isa. Humped, with an upward slope that peaks and then turns downward.b. Downward sloping.c. Upward sloping.d. Flat.
According to the expectations theory, if the yield curve on the New York money market is upward sloping while that on the Tokyo money market is downward sloping, then inflation ina. The United States is expected to decrease.b. The United States is expected to remain constant.c. Japan is expected to
Short-term interest rates area. Usually lower than long-term rates.b. Usually higher than long-term rates.c. Lower than long-term rates during periods of high inflation only.d. Not significantly related to long-term rates.
The yield curve shown below implies that the Interest rate %Years to maturitya. Credit risk premium of corporate bonds has increased.b. Credit risk premium of municipal bonds has increased.c. Long-term interest rates have a higher annualized yield than short-term rates.d. Short-term interest rates
Questo borrowed $100,000 from a bank on a one-year 8% term loan, with interest compounded quarterly. What is the effective annual interest on the loan?a. 8%b. 8.24%c. 2%d. 9.12%
According to market segmentation theory long-term interest rates are determined primarily bya. Commercial banks.b. Savings institutions.c. Life insurance companies.d. Individual investors.
A US company currently has domestic operations only. It is considering an equal-size investment in either Canada or Britain. The data on expected rate of return and the risk associated with each of these proposed investments are given below.Proposed investment Mean return Standard deviation British
The expected rate of return for the stock of Cornhusker Enterprises is 20%, with a standard deviation of 15%. The expected rate of return for the stock of Mustang Associates is 10%, with a standard deviation of 9%. The riskier stock isa. Cornhusker because its return is higher.b. Cornhusker because
A measure that describes the risk of an investment project relative to other investments in general is thea. Coefficient of variation.b. Beta coefficient.c. Standard deviation.d. Expected return.
A market analyst has estimated the equity beta of Modern Homes Inc. to be 1.4. This beta implies that the company’sa. Systematic risk is lower than that of the market portfolio.b. Systematic risk is higher than that of the market portfolio.c. Unsystematic risk is higher than that of the market
If management decided to sell one of the investments, which one should be selected?a. Investment A.b. Investment B.c. Investment C.d. Investment D.
What is the expected return of the portfolio?a. 10.25%b. 9.86%c. 12.5%d. 11.35%
Russell Inc. is evaluating four independent investment proposals. The expected returns and standard deviations for each of these proposals are presented below.Investment proposal Expected returns Standard deviation I 16% 10%II 14% 10%III 20% 11%IV 22% 15%Which one of the investment proposals has
The expected return of a portfolio is measured by thea. Variance.b. Weighted average.c. Standard deviation.d. Beta.
Which of the following expresses the relationship between risk and return?a. Inverse relationship.b. Direct relationship.c. Negative relationship.d. No relationship.Portfolio Returns and Risk
If an investment is expected to be held for a long period of time the preferred method of calculating the expected return isa. Arithmetic average.b. Median.c. Geometric average.d. Subjective estimate.
All of the following are ways that companies in developed countries generally may compete with companies in developing countries excepta. Technology.b. Customer service.c. Quality.d. Low-cost resources.
An oligopolist faces a “kinked” demand curve.This terminology indicates thata. When an oligopolist lowers its price, the other firms in the oligopoly will match the price reduction, but if the oligopolist raises its price, the other firms will ignore the price change.b. An oligopolist faces a
Which of the following best describes the steps involved in performing competitor analysis?a. Gathering information about the competitor and using it to predict the competitor’ behavior.b. Determining the type of market structure and the number of competitors.c. Assessing the general environment
Which of the following measures of unemployment would be of least importance to management when trying to predict the future state of the economy?a. Structural unemployment.b. Cyclical unemployment.c. Frictional unemployment.d. Overall unemployment.
The process of dividing all potential consumers into smaller groups of buyers with distinct needs, characteristics, or behaviors, who might require a similar product or service mix, is calleda. Strategic planning.b. Market segmentation.c. Product positioning.d. Objective setting.
What is the purpose of a response profile in competitor analysis?a. To develop an understanding of the firm’s industry.b. To analyze the firm’s strengths in relation to its competitors.c. To identify possible actions by competitors.d. To understand the nature of the firm’s major markets.
Which of the following is not a likely strategy for a firm in a purely competitive market?a. Lean manufacturing.b. Supply chain management.c. Process reengineering.d. Development of a brand name.
Which of the following is a defining characteristic of supply chain management?a. Focuses on the sharing of information with suppliers and customers.b. Focuses on redesigning processes.c. Focuses on improving quality.d. Focuses on strategic alliances.
Which of the following is not one of the five forces in Porter’s model for industry analysis?a. Competitors.b. Bargaining power of customers.c. Bargaining power of suppliers.d. General economic conditions.
Calculate the predicted quantity demanded if price is set at $7.00.a. 24,213b. 88,588c. 31,234d. 18,454
What percentage of the variation in quantity demanded is explained by price?a. 86.798%b. 72.458%c. 56.4%d. 54.233%
If a firm’s customers are businesses, market segmentation might be performed along all of the following dimensions, excepta. Industry.b. Location.c. Lifestyle.d. Size.
Target marketing analysis involvesa. Analyzing the firm’s input markets.b. Understanding and segmenting the firm’s customer markets.c. Analyzing the firm’s market structure.d. Deciding on whether to offer a new product line.
Which of the following types of organizations would more likely engage in public relations type advertising?a. An airline.b. A hotel chain.c. A toy manufacturer.d. An electric utility company.
Which of the following is not an important aspect of supply chain management?a. Information technology.b. Accurate forecasts.c. Customer relations.d. Communications.
The ultimate purpose of competitor analysis is toa. Identify the competition.b. Determine the competition’s strength and weaknesses.c. Identify the competition’s major customers.d. Understand and predict the behavior of the competition.
Which of the following is not a key assumption of perfect competition?a. Firms sell a homogeneous product.b. Customers are indifferent about which firm they buy from.c. The level of a firm’s output is small relative to the industry’s total output.d. Each firm can price its product above the
A market with many independent firms, low barriers to entry, and product differentiation is best classified asa. A monopoly.b. A natural monopoly.c. Monopolistic competition.d. An oligopoly.
A natural monopoly exists becausea. The firm owns natural resources.b. The firms holds patents.c. Economic and technical conditions permit only one efficient supplier.d. The government is the only supplier.
The market for product RK-25 is perfectly competitive.The current market price is $30, and the quantity demanded is 4 million. Due to changes in consumer tastes, a permanent increase in demand for RK-25 is expected in the near term. If nothing else changes in this market, which of the following
Which type of economic market structure is composed of a large number of sellers, each producing an identical product, and with no significant barriers to entry and exit?a. Monopoly.b. Oligopoly.c. Perfect competitiond. Monopolistic competition.
Which type of economic market structure is characterized by a few large sellers of a product or service, engaging primarily in nonprice competition?a. Monopoly.b. Oligopoly.c. Perfect competition.d. Monopolistic competition.
Economic markets that are characterized by monopolistic competition have all of the following characteristics excepta. One seller of the product.b. Economies or diseconomies of scale.c. Advertising.d. Heterogeneous products.
The distinguishing characteristic of oligopolistic markets isa. A single seller of a homogeneous product with no close substitutes.b. A single seller of a heterogeneous product with no close substitutes.c. Lack of entry and exit barriers in the industry.d. Mutual interdependence of firm pricing and
Patents are granted in order to encourage firms to invest in the research and development of new products.Patents are an example ofa. Vertical integration.b. Market concentration.c. Entry barriers.d. Collusion.
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