Question 1(0.2 points)

The IRR and NPV decisions are consistent with each other when a project's cash flows follow a conventional pattern.

Question 1 options:

TrueFalse

Question 2(0.2 points)

When to harvest an asset: Farmer Ag owns a special species of cotton-producing plant that, if left unharvested, grows a bigger bowl of cotton through time. The NPV, at the beginning of the year that harvesting takes place, is as follows. When should Farmer Ag harvest its cotton? Assume a discount rate of 14 percent.

NPV1= $50,000

NPV2= $60,000

NPV3= $69,000

NPV4= $77,280

NPV5= $85,008

Question 2 options:

Harvest in year 1

Harvest now

Harvest in year 3

Harvest in year 2

Question 3(0.2 points)

The payback method is consistent with the goal of shareholder wealth maximization.

Question 3 options:

TrueFalse

Question 4(0.2 points)

Since our perspective when evaluating a project is that of all of the investors in the firm, creditors as well as stockholders, then we should evaluate the pretax cash flows produced by a project.

Question 4 options:

TrueFalse

Question 5(0.2 points)

Contingent projects would imply that

Question 5 options:

a)

the acceptance of one project is dependent on the acceptance of the other.

b)

the projects can be either mandatory or optional.

c)

Both a and b.

d)

None of these.

Question 6(0.2 points)

Which of the following is an aspect of independent projects?

Question 6 options:

None of these.

Selecting one would automatically eliminate accepting the other.

The cash flows are unrelated.

The cash flows are related.

Question 7(0.2 points)

The MACRS depreciation tax schedule for three-year equipment provides a depreciation rate for a total of four years.

Question 7 options:

TrueFalse

Question 8(0.2 points)

Carmen Electronics bought new machinery for $5 million. This is expected to result in additional cash flows of $1.2 million over the next seven years. The firm's cost of capital is 12 percent. What is the discounted payback period for this project? If the firm's acceptance period is five years, will this project be accepted? (Do not round intermediate computations. Round your answer to one decimal place.)

Question 8 options:

6.1 years; no

6.1 years; yes

5.4 years; no

4.2 years; yes

Question 9(0.2 points)

Capital budgeting decisions, once made, are not easy to reverse because of the huge investments involved.

Question 9 options:

TrueFalse

Question 10(0.2 points)

Conceptually, free cash flows are what is left over for distribution to creditors and stockholders after the firm has made the necessary investments in working capital and long-term assets.

Question 10 options:

TrueFalse

Question 11(0.2 points)

The expected cash flows for a project are fixed amounts that have zero variability in the projected values.

Question 11 options:

TrueFalse

Question 12(0.2 points)

The NPV method determines how much the present value of cash inflows exceeds the present value of costs.

Question 12 options:

TrueFalse

Question 13(0.2 points)

Incremental cash flow from operations is the cash flow from a project that is expected to be generated after all operating expenses and taxes have been paid.

Question 13 options:

TrueFalse

Question 14(0.2 points)

Projects with different lives: Your firm is deciding whether to purchase a high-quality printer for your office or one of lesser quality. The high-quality printer costs $40,000 and should last four years. The lesser quality printer costs $30,000 and should last three years. If the cost of capital for the firm is 13 percent, then what is the equivalent annual cost for the best choice for the firm? Round to the nearest dollar.

Question 14 options:

$10,000, lesser quality printer

$12,706,lesser quality printer

$13,448, high-quality printer

$10,000, eitherprinter

Question 15(0.2 points)

All contingent projects are mandatory projects.

Question 15 options:

TrueFalse

Question 16(0.2 points)

The internal rate of return is

Question 16 options:

a)

the discount rate that makes the NPV greater than zero.

b)

the discount rate that makes the NPV equal to zero.

c)

the discount rate that makes the NPV less than zero.

d)

Both a and c are correct.

Question 17(0.2 points)

Average versus Marginal Tax Rate: Suppose Franklin Corporation had pre-tax income of $300,000 in 2010 and that the firm would have paid $100,250.00 in federal income taxes. What is Franklin's average income tax rate? (Round off to the nearest 0.1%)

Question 17 options:

38.6%

34.7%

33.4%

39.0%

Question 18(0.2 points)

Terminal-year free cash flows may differ from the cash flows provided in the typical year of a project for reasons such as the return/repayment of increases/reductions in additional working capital in the prior years.

Question 18 options:

TrueFalse

Question 19(0.2 points)

Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the MIRR on this project? (Do not round intermediate computations. Round final answer to the nearest percent.)

Question 19 options:

36%

38%

39%

37%

Question 20(0.2 points)

The payback method is a discounted cash flow technique.

Question 20 options:

TrueFalse

Question 21(0.2 points)

The unadjusted NPV of two projects with different useful lives can be compared to evaluate which project is the better of the two.

Question 21 options:

TrueFalse

Question 22(0.2 points)

Binder Corp. has invested in new machinery at a cost of $1,450,000. This investment is expected to produce cash flows of $640,000, $715,250, $823,330, and $907,125 over the next four years. What is the payback period for this project? (Round your answer to two decimal places.)

Question 22 options:

4.00 years

1.88 years

2.12 years

3.00 years.

Question 23(0.2 points)

Quick Sale Real Estate Company is planning to invest in a new development. The cost of the project will be $23 million and is expected to generate cash flows of $14,000,000, $11,750,000, and $6,350,000 over the next three years. The company's cost of capital is 20 percent. What is the internal rate of return on this project? (Do not round intermediate computations. Round final answer to the nearest percent.)

Question 23 options:

24%

20%

28%

22%

Question 24(0.2 points)

Which one of the following statements is NOT true?

Question 24 options:

Accepting a zero NPV project has a negative impact on shareholder wealth.

Managers are indifferent about accepting or rejecting a zero NPV project.

Accepting a negative-NPV project decreases shareholder wealth.

Accepting a positive-NPV project increases shareholder wealth.

Question 25(0.2 points)

If the current market price of corn is $100 per bushel and the nominal rate of interest is 10 percent, then the real price of corn next period should also be $100.

Question 25 options:

TrueFalse

Question 26(0.2 points)

Using a firm's overall cost of capital to evaluate a project's cash flows is problematic in that the firm is a collection of projects, with the possibility that each project has a different level of risk than the other projects currently working for the firm.

Question 26 options:

TrueFalse

Question 27(0.2 points)

If the market risk premium is currently 6 percent and the risk-free rate of return is 4 percent, then what is the expected return on a common share with a beta equal to 2?

Question 27 options:

10.0%

16.0%

8.0%

12.0%

Question 28(0.2 points)

ElecHuit Inc. is in the process of determining whether to purchase a high-capacity machine to make textbooks for the upcoming school year. The high-capacity machine will generate fixed costs of $11,000 per year versus the $2,500 fixed costs of using a low-capacity machine. The variable costs per unit when using the high-capacity machine will be $32. The firm will charge $62 for each textbook and has determined that the high-capacity machine will maximize pretax operating cash flow if sales are greater than 850 books. What is the variable cost per unit under the low-capacity machine scenario?

Question 28 options:

$89

$35

$42

$25

Question 29(0.2 points)

The Diverse Co. has invested 40 percent of the firm's assets in a project with a beta of 0.4 and the remaining assets in a project with a beta of 1.8. What is the beta of the firm?

Question 29 options:

0.96

None of these.

1.28

1.24

Question 30(0.2 points)

Long-term debt typically describes debt that will mature in two years or more.

Question 30 options:

TrueFalse

Question 31(0.2 points)

Poly's Parrot Shops has found that its cost of common equity capital is 17 percent. It has 7-year maturity semiannual bonds outstanding with a price of $767.03 that have a coupon rate of 7 percent. The firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt. What is the after-tax weighted average cost of capital for Poly's, if it is subject to a 35 percent marginal tax rate? Round your final percentage answer to two decimal places.

Question 31 options:

13.32%

11.88%

10.20%

11.76%

Question 32(0.2 points)

Ronnie's Comics has found that its cost of common equity capital is 15 percent and its cost of debt capital is 12 percent. The firm is financed with $250,000,000 of common shares (market value) and $750,000,000 of debt. What is the after-tax weighted average cost of capital for Ronnie's, if it is subject to a 35 percent marginal tax rate?

Question 32 options:

6.05%

8.75%

9.6%

13.65%

Question 33(0.2 points)

You are analyzing the cost of capital for a firm that is financed with $300 million of equity and $200 million of debt. The cost of debt capital for the firm is 9 percent, while the cost of equity capital is 19 percent. What is the overall cost of capital for the firm? Assume there are no taxes.

Question 33 options:

13.0%

16.0%

15.0%

14.0%

Question 34(0.2 points)

The estimated cost of capital the financial manager use for efficiency projects tends to be higher than the cost of capital used to evaluate new projects.

Question 34 options:

TrueFalse

Question 35(0.2 points)

Resoneffect Inc. has a degree of pretax cash flow operating leverage equal to 1.12. If the firm's EBITDA was $2,000 last year while its depreciation and amortization expense was $150 in the same year, then what was the firm's degree of accounting operating leverage? (Round the final answer to two decimal places.)

Question 35 options:

1.09

2.09

2.18

1.21

Question 36(0.2 points)

A synonym for pretax operating cash flow is EBIT.

Question 36 options:

TrueFalse

Question 37(0.2 points)

Wally's War Duds has a preferred share issue outstanding with a current price of $26.57. The firm is expected to pay a dividend of $1.86 per share a year from today. What is the firm's cost of preferred equity? Round your final answer to nearest percentage.

Question 37 options:

6.50%

7.00%

8.00%

7.50%

Question 38(0.2 points)

If a firm is currently paying common share dividends to investors and those dividends are expected to grow at a low but steady rate in the future, then the cost of common equity for the firm can be determined by also using the current price of the firm's common shares.

Question 38 options:

TrueFalse

Question 39(0.2 points)

Another name for EBITDA is:

Question 39 options:

net income after tax.

accounting operating cash flow.

pretax operating cash flow.

net income before tax.

Question 40(0.2 points)

Oeta Works has a degree of pretax cash flow operating leverage of 1.25. If the firm's EBITDA was $1,000 last year while its depreciation and amortization expense was $50 in the same year, then what was the firm's degree of accounting operating leverage?

Question 40 options:

1.30

1.32

1.26

1.35

Question 41(0.2 points)

A change in sales price of a product sold by a firm will probably involve a reduction in the number of units sold, as well as the possibility of a change in the cost structure of the firm's product in question. If a firm were interested in the entire price change effect on the NPV of a project, then it would be interested in:

Question 41 options:

simulation analysis.

contribution analysis.

sensitivity analysis.

scenario analysis.

Question 42(0.2 points)

OutCinq manufactures snow boards. The firm has fixed costs of $1,500,561. The snow boards sell for $235 each and have a variable cost of $92 each. What is the pretax operating cash flow break-even point for OutCinq? (Round to the nearest unit)

Question 42 options:

6,565 units

11,565 units

10,493 units

9,566 units

Question 43(0.2 points)

If a firm is subject to income taxes, then the after-tax cost of debt for the firm will be less than the before-tax cost of debt.

Question 43 options:

TrueFalse

Question 44(0.2 points)

Which of the following statements is true of the economic break-even point?

Question 44 options:

It is the number of units that must be sold for pretax operating cash flow to be $0.

It is the number of units that must be sold each year during the life of a project so that the NPV of a project equals $0.

It is the level of unit sales at which cash flows or profitability for one project alternative switches from being lower than that of another alternative to being higher.

It is the number of units that must be sold for accounting operating profit to equal $0.

Question 45(0.2 points)

A firm can be viewed as

Question 45 options:

a portfolio of individual projects, each with its own risks, cost of capital, and returns.

a collection of debt instruments financing it.

a collection of equity shares comprising it.

a portfolio of all individual projects in the industry, each with its own risks, cost of capital, and returns.

Question 46(0.2 points)

Synthgrationhas a degree of pretax cash flow operating leverage equal to 1.266. If the firm's EBITDA was $1,500 last year while its depreciation and amortization expense was $100 in the same year, then what was the firm's degree of accounting operating leverage?

Question 46 options:

1.36

1.33

1.39

1.29

Question 47(0.2 points)

The current cost of bank debt of a firm can be determined by asking the firm's banker.

Question 47 options:

TrueFalse

Question 48(0.2 points)

If markets are not reasonably efficient, then

Question 48 options:

the estimates of expected returns are not needed.

None of these

estimates of expected returns based on security prices will not be reliable.

the need for a discount rate to analyze project cash flows is not needed.

Question 49(0.2 points)

Which of the following need to be excluded from the calculation of a firm's amount of permanent debt?

Question 49 options:

Mortgage debt

None of these

Revolving lines of credit

Long-term debt

Question 50(0.2 points)

If a firm has bonds outstanding and the firm would like to calculate the current cost of debt for the bonds, then the firm would

Question 50 options:

None of these

use the current coupon yield of the bonds to estimate the cost.

use the current yield to maturity of the bonds to estimate the cost.

use the coupon rate of the bonds to estimate the cost.