1. .XYZ Corp has just identified a project with an NPV of -$65,000 (negative). T
ID: 1169895 • Letter: 1
Question
1. .XYZ Corp has just identified a project with an NPV of -$65,000 (negative). The project will end after five years, but will have long term, unquantifiable returns for the company in that an inner city park will be constructed on the site after the project is finished. Which of the following is TRUE?
a.The project should be rejected because the NPV is negative.
b.The project might be accepted because the public relations benefit might offset the $65,000 loss on the project.
c.The project should be accepted because there probably was a mistake in the figures and the NPV may not be negative at all.
d.The project should be rejected because there are too many parks as it is.
e.None of the above is true.
2. Brynna has three stocks in her portfolio: Whole Foods, Dierbergs and Starbucks. What is the biggest weakness in Brynna’ portfolio?
a. None of the stocks are local companies.
b. They are all in the food industry.
c. She should buy more stocks in larger companies.
d. All three companies are extremely risky.
e. None of the above.
3. What is the present value of a project with five cash flows of $6,000 each, an initial investment of $23,000 and a discount rate of 9%?
a. $824.62
b. 925.57
c. 337.91
d. 587.26
e. None of the above
4. If a company expects to sell 4,500 units, has a DOL of 2 and a % change in Operating Cash Flow of 22% (positive), how many units did they actually sell?
a. 400
b. 440
c. 4,440
d. 4,995
e. None of the above
5. Which of the following is FALSE about the efficient markets hypothesis?
a. EMH implies that the market has already incorporated characteristics such as dividend policy into its price.
b. EMH is the idea that actual capital markets, such as the NYSE, are efficient.
c. EMH means that it does not matter how you invest your money, the market will keep you from a mistake.
d. Much of the criticism of EMH stems from a misunderstanding of the concept.
e. EMH implies that the price a firm will obtain when it sells a share of its stock is a “fair” price.
6. Year two in each of the MACRS depreciation schedules
a.Is the year in which MACRS depreciation is greater than straight line depreciation.
b.Is the year in which taxes are saved by the company.
c.Is the point at which tax savings can be invested to earn income.
d.Is important because of the time value of money.
e.All of the above.
7. When computing after tax salvage value, if book value is less than market value,
a.There will be a gain.
b.There will be a loss.
c.The tax adjustment will add to market value.
d.The tax adjustment will subtract from book value.
e.None of the above.
8. The Equivalent Annual Cost computation is important when
a.The useful lives are different on the two choices.
b.The initial costs of the two choices are the same.
c.There is no annual maintenance cost to be considered.
d.This is one time purchase and the machine will not be replaced when it wears out.
e.Both machines could be purchased if it is cost effective to do so.
9. One of the most important reasons why companies try to grow over time is
a. So that they can have more influence politically in their local elections.
b. So that their officers can have higher salaries and bonuses.
c. To increase the prestige and status of employees and officers.
d. To increase the profits of the firm.
e. To reduce the degree of operating leverage and thereby forecasting risk.
10. Which of the following is TRUE about what if analysis?
a. Scenario analysis is used to analyze the impact of one variable on the bottom line.
b. Sensitivity analysis is a combination of scenario and simulation and uses a computer modeling program.
c. Simulation analysis tests the limits by computing plus or minus ten percent, for example.
d. The base case scenario is our best guess of what the numbers will be.
e. None of the above is true.
11. If you found an investment with a 23% total return (in today’s economy), what would be your best course of action?
a. Buy it quickly before others discover this lucrative investment and the price goes down.
b. Do not buy it because there has to be something wrong with that return number.
c. Investigate further to see why the return on this stock is so much greater than elsewhere in the marketplace.
d. Buy it because they could not advertise 23% if it was not really getting that.
e. Report the stock to the Securities and Exchange Commission.
12. In computing current and capital gains yields, which of the following isTRUE?
a. You always divide by the initial price.
b. You always divide by the ending price.
c. Dividend yield can be positive or negative.
d. Capital gains yield is the total of dividend (current) yield and total yield.
e. Capital gains yield will always be negative.
13. In capital budgeting analysis,
a. we are looking for projects that add value to the firm’s owner’s equity.
b. we are looking for projects that have a large payoff several years down the line.
c. we are looking for projects that won’t cost the firm too much up front.
d. we are looking for projects with large incomes in the early years.
e. we are looking for projects that do not have any additional investments after the initial one.
14. A disadvantage of the Internal Rate of Return method of evaluating projects is
a.It does not take into account the time value of money.
b.It is difficult to compute, even with level cash flows.
c.It sometimes results in more than one answer.
d.Managers do not understand the concept of Internal Rate of Return.
e.It is biased toward short term projects.
15. If total production costs for one year are $6,500,000, fixed costs are $900,000, and variable cost per unit is $27.00, how many units were produced?
a. 232,143
b. 264,286
c. 250,000
d. 207,407
e. 200,000
16. Which of the following are characteristics associated with positive NPV projects?
I. Access to distribution channels
II. Economies of scale
III. Favorable government policies
a.I and II only
b.I and III only
c.II and III only
d.I, II, and III.
e.II only
17. The financial break even point is the most important of the three break evens because
a. The result is the point at which net income is zero.
b. It uses more reliable figures than the other two break even formulas.
c. Below that level the net present value would be negative, so you would not do the project.
d. The financial break even point takes into account the time value of money.
e. The result is the point at which operating cash flow is equal to zero.
18. Discounting the cash flows to evaluate projects takes a little time, but the discounted amounts can be used for which of the following methods?
I. Payback II. Discounted Payback
III.Average Accounting Return IV. Net Present Value
V. Profitability Index
a.I, II, and III
b.III, IV, and V
c.I, III, and V
d.II, IV and V
e.I, IV and V
19. In computing your total yield on your portfolio,
a. the quarterly dividend amount is irrelevant.
b. you divide the dollar return by the initial price.
c. you divide the change in price by the ending price.
d. you subtract the capital gains yield from the dollar return.
e. you add the dollar return to the dividend yield.
20. A certain company has sales of $400,000, costs of $250,000, depreciation expense of $20,000 and a tax rate of 35%. Sharon has computed the operating cash flow to be $64,500. Which of the following is FALSE?
a.Sharon’s answer is correct.
b.Sharon’s answer is off by $40,000.
c.Sharon used the bottom up method and subtracted depreciation instead of adding it.
d.Sharon could have used any of the methods to find operating cash flow.
e.Sharon’s income statement could be right or wrong.
Explanation / Answer
1)
a.The project should be rejected because the NPV is negative.
When a project has a negative NPV, it should be rejected as other benefits are unquantifiable
2)
b. They are all in the food industry.
She should chooses stocks from different industry as it will reduce risk.
3)
Net present value = present value of cash inflows - present value of cash outflows
NPV = -23,000 + 6000 / ( 1 + 0.09)1 + 6000 / ( 1 + 0.09)2 + 6000 / ( 1 + 0.09)3 + 6000 / ( 1 + 0.09)4 + 6000 / ( 1 + 0.09)5
NPV = 337.91
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