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54 terms

FIN 322

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following?
Incremental cash flows
Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?
Stand-alone principle
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost?
Which one of the following terms refers to the best option that was foregone when a particular investment is selected?
Opportunity cost
Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?
A pro forma financial statement is a financial statement that:
projects future years' operations
The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:
tax shield.
Which one of the following refers to a method of increasing the rate at which an asset is depreciated?
Accelerated cost recovery system
Forecasting risk is best defined as
estimation risk.
Jamie is analyzing the estimated net present value of a project under various what if scenarios. The type of analysis that Jamie is doing is best described as:
scenario analysis
Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value. What type of analysis is Mark conducting?
Sensitivity analysis
The opportunities that a manager has to modify a project once it has started are called
managerial options
Contingency planning focuses on the
managerial options implicit in a project
Which one of the following refers to the option to expand into related businesses in the future?
Strategic option
Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best describes the firm's situation?
Capital rationing
Marcos Enterprises has three separate divisions. The firm allocates each division $1.5 million per year for capital purchases. Which one of the following terms applies to this allocation process?
Soft rationing
The Blackwell Group is unable to obtain financing for any new projects under any circumstances. Which term best applies to this situation?
Hard rationing
Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, Weston's can no longer use the furnace nor have they been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost?
The managers of H.R Construction are considering remodeling plans for an old building the firm
currently owns. The building was purchased 8 years ago for $689,000. Over the past 8 years, the
firm rented out the building and used the rent to pay off the mortgage. The building is now owned
free and clear and has a current market value of $898,000. The firm is considering remodeling the
building into a conference centre and sandwich bar at an estimated cost of $1.7 million. The
estimated present value of the future income from this centre is $2.9 million. Which one of the
following defines the opportunity cost of the remodeling project?
Current market value of the building
The Green Shingle purchased a parcel of land 6 years ago for $299,500. At that time, the firm
invested $64,000 grading the site so that it would be usable. Since the firm wasn't ready to use the
site itself at that time, it decided to lease the land for $28,000 a year. The Green Shingle is now
considering building a hotel on the site as the rental lease is expiring. The current value of the land
is $347,500. The firm has no loans or mortgages secured by the property. What value should be
included in the initial cost of the hotel project for the use of this land?
Six years ago, Global Exporters paid cash for a new packaging machine that cost $287,000. Three
years ago, the firm spent $2,900 on repairs and modifications to the machine. The machine is now
fully depreciated and has just sat idly in a back corner of the shop for the past 7 months. The
estimated value of the machine today is $124,500. The firm is considering using this machine in a
new project. If it does so, what value should be assigned to this machine and included in the initial
costs of the new project?
The relevant cost is the opportunity cost of $124,500.
Great Woods sells specialty equipment for mountain climbers. Its sales for last year included
$238,000 of tents and $411,000 of climbing gear. For next year, management has decided to sell
specialty sleeping bags also. As a result of this change, sales projections for next year are $254,000
of tents, $426,000 of climbing gear, and $51,000 of sleeping bags. How much of next year's sales
are derived from the side effects of adding the new product to its sales offerings?
Side effects = ($254,000 + $426,000) - ($238,000 + $411,000) = $31,000
A 9-year project is expected to generate annual revenues of $114,500, variable costs of $73,600,
and fixed costs of $14,000. The annual depreciation is $3,500 and the tax rate is 34 percent. What is
the annual operating cash flow?
Operating cash flow = ($114,500 $73,600 - $14,000) × (1 - 0.34) + ($3,500 × 0.34) = $18,944
An all-equity firm has net income of $27,300, depreciation of $7,400, and taxes of $2,050. What is
the firm's operating cash flow?
Operating cash flow = $27,300 + $7,400 = $34,700
Lakeside Winery is considering expanding its wine-making operations. The expansion will require
new equipment costing $649,000 that would be depreciated on a straight-line basis to a zero balance
over the 4-year life of the project. The estimated salvage value is $187,000. The project requires
$38,000 initially for net working capital, all of which will be recouped at the end of the project. The
projected operating cash flow is $198,500 a year. What is the net present value of this project if the
relevant discount rate is 14 percent and the tax rate is 35 percent?
CF0: $-687,000 (-$649,000+ -$38,000)
CF1: $198,500, F1:3
CF2:$198,500+$38,000+187,000 x (1-0.35)
I=14%, NPV=$-14,162
If the financial markets are efficient then
stock prices should only respond to unexpected news and events
According to the Efficient Market Hypothesis, professional investors will earn
a dollar return equal to the value paid for an investment
Semi-strong form market efficiency states that the value of a security is based on:
all publicly available information
Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC
stock based on the knowledge he has related to his experiments if the financial markets are:
strong form efficient.
If the financial markets are semi-strong form efficient, then:
only individuals with private information have a marketplace advantage.
You own a portfolio that has $1,900 invested in Stock A and $2,700 invested in Stock B. If the
expected returns on these stocks are 9 percent and 15 percent, respectively, what is the expected
return on the portfolio?
E(r) = [1,900/($1,900 + $2,700)][0.09] + [$2,700/($1,900 + $2,700)][0.15] = 12.52 percent
shown. What is the expected return on the portfolio?
ValueW = 300 × $11 = $3,300
ValueX = 450 × $19 = $8,550
ValueY = 100 × $48 = $4,800
ValueZ = 575 × $33 = $18,975
ValuePort = $3,300 + $8,550 + $4,800 + $18,975 = $35,625
Expected return = [($3,300/$35,625) × 0.089] + [($8,550/$35,625) × 0.116] + [($4,800/$35,625) ×
0.284] + [($18,975/$35,625) × 0.127] = 14.20 percent
Which one of the following best describes a portfolio
Group of assets held by an investor
Which one of the following terms best refers to the practice of investing in a variety of diverse
assets as a means of reducing risk?
Which one of the following measures the amount of systematic risk present in a particular risky
asset relative to that in an average risky asset?
Beta coefficient
Blue Lagoon stock is expected to produce the following returns given the various states of the
economy. What is the expected return on this stock?
Portfolio diversification eliminates which one of the following
Unsystematic risk
Systematic risk is
measured by beta.
Standard deviation measures _____ risk while beta measures _____ risk
total; systematic
You own a portfolio that is invested as follows: $11,600 of stock A, $7,800 of stock B, $14,900 of
stock C, and $3,200 of stock D. What is the portfolio weight of stock C?
WeightC = $14,900/($11,600 + $7,800 + $14,900 + $3,200) = 39.73 percent
The security market line is defined as a positively sloped straight line that displays the relationship
between which two of the following variables
Expected return and beta
Which one of the following is the minimum required rate of return on a new investment that makes
that investment attractive?
Cost of capital
Which one of the following is the best example of an announcement that is most apt to result in an
unexpected return?
Statement by a firm that it has just discovered a manufacturing defect and is recalling its product
Which one of the following is the best example of unsystematic risk?
A warehouse fire
Which one of the following is an example of systematic risk?
Increase in consumption created by a reduction in personal tax rates
Which one of the following is the best example of systematic risk?
Decrease in gross domestic product
Standard deviation measures _____ risk while beta measures _____ risk.
total; systematic
Which one of the following portfolios will have a beta of zero?
A portfolio comprised solely of U. S. Treasury bills.
Which one of the following best exemplifies unsystematic risk?
Unexpected increase in the variable costs for a firm
The risk premium for an individual security is based on which one of the following types of risk
Which one of the following represents the amount of compensation an investor should expect to
receive for accepting the unsystematic risk associated with an individual security?
Systematic risk is:
measured by beta.
Portfolio diversification eliminates which one of the following
Unsystematic risk
Diversifying a portfolio across various sectors and industries might do more than one of the
following. However, this diversification must do which one of the following?
Reduce the portfolio's unique risks