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?
A.opportunity
B.Fixed
C. Sunk
D. Erosion
E. Incremental
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
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
Average accounting rate of return



The discount rate that makes the net present value of an
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
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
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.
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

toymakers are required to improve their safety standards A. internal return period. market risk C. unsystematic risk unsystematic risk  Which of the following are examples of diversifiable risk? I. B. discounted profitability period. E. I and IV only B.Capital asset pricing model  Which one of the following risks is irrelevant to a welldiversified investor? A. C. II and III only C. internal return period. valuation period. payback period payback period  The length of time a firm must wait to recoup. D. 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. net present value period. and IV only D. systematic portion of a surprise B. systematic risk D. E. discounted cash period. I. employment taxes increase nationally IV. Discounted payback period  Which of the following are advantages of the payback method of project analysis? . C. in present value terms. federal government imposes a $100 fee on all business entities III. I and III only E. discounted payback period. B. profitability period. payback period. III. earthquake damages an entire town II. nondiversifiable risk E. the money it has in invested in a project is referred to as the: A. D.

discount rate which causes the net present value of a project to equal zero. discount rate that equates the net cash inflows of a project to zero. C. liquidity bias III.64%  A project's average net income divided by its average book value is referred to as the project's average: A. E. rate of return a project will generate if the project in financed solely with internal funds. profitability index. D. discount rate that causes the profitability index for a project to equal zero. II and IV only E. B. III. 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.300 3 6. net present value. II. II and III only B. ease of use IV. exclusion of time value of money considerations . I and II only II and III  The IRR for the following set of cash flows is what percent? 0 −$9.I. and IV only D. I and III only C. works well for research and development projects II. E. D. Accounting return  The internal rate of return is defined as the: A.900 23. internal rate of return. payback period.400 2 5. accounting return. B. C.868 1 3. maximum rate of return a firm expects to earn on a project. arbitrary cutoff point A.

scenario E. payback E. break-even C. simulation D. II. internal rate of return Net present value  Which two methods of project analysis are the most biased towards short-term projects? A. Project B would use that outdoor space for creating a drive-thru service window. and IV I. A. II. and IV only E. based on accounting values A. the firm should rely most heavily on which one of the following analytical methods? A. discounted payback and profitability index B. II. I. net present value and internal rate of return D. net present value C. easily obtainable information for computation IV.II. profitability index D. When trying to decide which project to accept. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. II and III only B. I. net present value and discounted payback E. and IV  Southern Chicken is considering two projects. 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. forecasting Sensitivity  Which one of the following is a risk that applies to most securities? . I and IV only D. I only C. accounting rate of return B. payback and discounted payback C. need of a cutoff rate III. sensitivity B. III.

total D. portfolio E. is compensated for by the risk premium. spreading an investment across many diverse assets will eliminate some of the total risk. unsystematic B. market B. B. E. total E. concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. can be effectively eliminated by portfolio diversification. B. concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. What type of risk does this news flash represent? A. asset-specific C. standard deviation B. is related to the overall economy. nondiversifiable C. D. reward-to-risk ratio . systematic Systematic  A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent. 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. D.A. diversifiable D. spreading an investment across many diverse assets will eliminate all of the systematic risk. is measured by beta. E. spreading an investment across five diverse companies will not lower the total risk Spreading an investment across many diverse sets will eliminate some of the total risk  Unsystematic risk: A. C. is measured by standard deviation. C. unsystematic Unsystematic  The principle of diversification tells us that: A.

price-earnings ratio 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. Maximize the current value per share of the existing stock D. Balance sheet D. corn prices increase due to increased demand for alternative fuels B. risk ratio Beta  Which one of the following is an example of systematic risk? A. Income statement B. Avoid financial distress B. Longer the time to Maturity C. Value of the bond increases Value of the bond decreases  The financial statement summarizing a firm's performance over a period of time A.Maximize firm efficiency Maximize the current value per share of the existing stock  As the Yield to maturity increases the: A.C. a flood washes away a firm's warehouse D. a city imposes an additional one percent sales tax on all products C. Maximize dividends per share C. statement of cash flows C. Value of the bond decreases B. Shareholders' Equity sheet Income statement  An analysis of what happened to NPV when you change only one variable is? . Lower the Desired coupon D. investors panic causing security prices around the globe to fall precipitously E. beta D.

This is a net source of cash. 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. No no  What are the three financial management decisions? Capital budgeting. Net working capital expenses. Payments to creditors will slow. yes B. E. D. accounts payable by $35.A.000. Sensitivity Sensitivity  Do NPV and IRR always lead to the same decision? A. Net working capital has increased. Erosion costs. B. Net working capital had increased  . Salvage value expenses. E.000. Opportunity costs. Simulation C. and inventory by $30. Net working capital has decreased. C. Break-even B.000. Scenario D. D. Sales will increase. Sunk costs. Erosion costs  A firm is considering a project which would increase accounts receivable by $10. Which of the following is true? A. C. B.

An increase in inventory IV. Dealer transactions occur on a trading floor. beginning annuity. b. Dealer trading occurs over-the-counter. An increase in receivables II. 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. average Marginal  16. 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. next b. I and IV only b. IV. absolute c. c. III. II. e.Which of the following would be considered a use of funds? I. Which of the following correctly describe a dealer market? I. III. marginal e. Dealers buy and sell for themselves at their own risk. perpetuity. I and III only c. and III only E. a. II. An increase in payables III. Annuity due  . Dealers match buyers with sellers. total D. I. and IV only I and III only  The tax rate applicable to the next dollar of taxable income is called the _____ tax rate. annuity due. D. a. ordinary annuity. perpetuity due. II and IV only d.

scenario c. III. Should a new product be introduced? II. taxes. inflation. sustainable growth C. market risk. D. Should the firm merge with a competitor? II. a. What is the yield-to-maturity of a bond? A bondholder's required rate of return for holding a bond  18. auditors  Which of the following questions are appropriate to address during the financial planning process? I. and IV only  . Should additional shares of stock be sold? III. B. simulation e. Should a particular division be sold? IV. profitability ratios e. Inflation  An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis. forecasting b. What kind of issues do I get to vote on as a common shareholder Directors. sensitivity d. E. default risk. interest rate risk. equity analysis b. mergers. Du Pont identity d. C. break-even Simulation  7. efficiency breakout Du Pont Identity  A real rate of return has been adjusted for: A.Which one of the following is a breakdown of the ROE into its three component parts? a.

cash flow to stockholders. I and III only D. II and III only C. III. operating cash flow. You plan on investing a single lump sum today to fund this goal. Invest in a different account paying a higher rate of interest. net capital spending. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire? I. D. net capital spending D. the lower the present value . C. cash flow from assets. taxes E. the higher the present value III: For a given time period .the higher the interest rate. A.The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the A. Invest in a different account paying a lower rate of interest. II only E.the longer the time period. the higher the future value II: For a given interest rate . depreciation B. Retire sooner. net working capital. the lower the future value IV: For a given time period . Retire later. E.the longer the time period. change in net working capital C. You are planning on investing in an account which will pay 7.the higher the interest rate. I only I and III only  Which of these important relationships are true? I: For a given interest rate . B. Cash Flow from Assets  For a tax-paying firm. I and IV only B. A. production costs Deprecation  You want to have $1 million in your savings account when you retire. IV.5 percent annual interest. II. an increase in _____ will cause the cash flow from assets to increase.

increase the coupon rate D. a premium. higher than C. Capital Structure  Which one of the following is a capital budgeting decision? A. increase the market price C. C. a discount.A. deciding whether or not to purchase a new machine for the production line deciding whether or not to purchase a new machine for the production line . less than B. working capital management. II and III only D. less than D. and IV B. A. II and IV only C. par. decrease the coupon rate E. less than  The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond? A. equal to a discount. I and III only E. deciding how to refinance a debt issue that is maturing C. I. increase the time period decrease the market price  The mixture of debt and equity used by a firm to finance its operations is called: A. III. decrease the market price B. a discount. a bond will sell at _____ when the coupon rate is _____ the yield to maturity. agency cost analysis. determining how many shares of stock to issue B. determining how much inventory to keep on hand D. financial depreciation. capital budgeting. E. less than E. I and IV only I and IV only  All else constant. a premium. B. D. II. determining how much money should be kept in the checking account E. capital structure.

determining how to allocate investment funds to multiple projects E. cash flow to creditors Operating cash flow  . determining whether to pay cash for a purchase or use the credit offered by the supplier D. determining the number of shares of stock to issue to fund an acquisition C. minimize shareholder wealth. determining how much debt should be assumed to fund a project C. determining the amount of equipment needed to complete a job E. D. E. Maximize share price  Which term relates to the cash flow which results from a firm's ongoing. B. determining which one of two projects to accept B. capital spending E. determining whether or not a project should be accepted determining whether to pay cash for a purchase or use the credit offered by the supplier  The primary goal of a publicly-owned firm interested in serving its stockholders should be to: A. maximize expected total corporate profit. determining how much inventory will be needed to support a project D. operating cash flow C. determining the amount of long-term debt required to complete a project B. maximize share price. Which one of the following is a capital structure decision? A. minimize expected EPS. cash flow from assets B. minimize the chances of losses. C. normal business activities? A. determining the amount of funds needed to finance customer purchases of a new product determining how much debt should be assumed to fund a project  Which one of the following is a working capital management decision? A. net working capital D.

00 per share on its common stock for the past fifteen years and is expected to continue paying a dollar a share long into the future. one share of the firm's stock is: A. basically worthless as it offers no growth potential. . total equity A. I. discounted price II. III only B. premium price III. B. depreciation IV. yield-to-maturity that is less than the coupon rate A. worth $1 a share in the current market. warrant B. II and IV only I and II only  A bond has a market price that exceeds its face value. C. net income III. sales II. all else constant? I. debenture C. II and III only C. I and IV only D. and III only B. II and IV only II and IV  Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities? A. I and III only C. Given this. I only E. Which of the following features currently apply to this bond? I. preferred stock E. senior bond Preferred stock  National Trucking has paid an annual dividend of $1.An increase in which of the following will increase the return on equity. yield-to-maturity that exceeds the coupon rate IV. I and II only D. II. II and III only E. common stock D. equal in value to the present value of $1 paid one year from today.

C.  The capital structure weights used in computing the weighted average cost of capital: A. E.D. weighted average cost of capital. E. increase B. E. the smaller the _________ present value . are based on the market value of the firm's debt and equity securities. Decrease Increase  A decision to issue additional shares of stock is what kind of decision? Capital structure decision  For a given time period. are based on the market value of the firm's debt and equity securities.  Most loans are a form of a(n) annuity  Decreasing the required rate of return will ________ the net present value of a project. D. priced the same as a $1 perpetuity Priced the same as a $1 perpetuity  The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the: A. subjective cost of capital. are computed using the book value of the long-term debt and the book value of equity. are restricted to the firm's debt and common stock. B. structured cost of capital. valued at an assumed growth rate of one percent. the higher the interest rate. D. reward to risk ratio. remain constant over time unless the firm issues new securities. are based on the book values of total debt and total equity. A. weighted average cost of capital. weighted capital gains rate. B. C.

biased towards liquidity  Disadvantages of discounted payback requires cut off point. it is the current required market rate. adjusts for uncertainty of later cash flows  Disadvantages of payback requires cut off point. and needed information will usually be available  Disadvantages of Account rate of return exclusion of time value of money. biased against long term projects. the lower the present value future value  What is a bond call option? it gives the company the right to call or purchase the bonds at a specified price from bondholders  What is the yield-to-maturity of a bond? a bondholders required rate of return for holding a bond. residual assets in a liquidation  Advantages of payback liquidity basis.  Advantages of Account rate of return easy to calculate. share in profits. For a given interest rate. easy to understand. and ignores time value money  Advantages of discounted payback includes time value money. ignores cash flows beyond cut off point and may reject positive NPV investments.  If the coupon is higher than the YTM then it is a ____ bond Discount  What is a common shareholder entitled to? voting. ease of use. the higher the ______. need a cut off rate and based on accounting values  .

We can use the CAPM to determine its expected return.  What two models can estimate the cots of equity? Capital asset pricing model and dividend growth model  What are the two ways to estimate the growth in dividends? historical growth and analysts' forecast  How do you measure the cost of debt? is it equal to the coupon outstanding company debt? yield to maturity // not the coupon rate  Which components of the capital structure is adjusted for taxes and why? Debt is adjusted for taxes because. Companies are not allowed to adjust dividends. only interest is tax deductible.Advantages of Profitability index easy to understand and communicate. and expected equity on return. useful when investment funds are limited  Disadvantages of Profitability index leads to incorrect decisions in comparison of mutually exclusive investments  Side effects (positive and negative) positive: benefits to other projects Negative: costs to other projects  should operating cash flows be pre tax or after tax? after tax  What is the capital asset pricing model and what does it measure? it defines the relationship between risk and return.  In calculating the weighted average cost of capital do you use the market value or the book value? Market value  If you one of the models and compare a cost of equity to be less than the cost of debt does this make sense? .

beta coefficient. variance. eliminating all dividends II. the cost of capital _______ and the NPV of projects __________ cost of capital INCREASES and the NPV of projects DECREASE  What does beta measure? beta measures the systematic risk of market risk which cannot be divorced away. e.equity ratio? you want to minimize the cost of capital  As the firms risk increases. c. standard deviation. b.  The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is called the: a. The risk you can't get rid of such as things that impact all companies or economic downturns  If you were calculating a worst case scenario would you use high or low costs? In calculating the worst case scenario you would use high costs and low revenue and vise versa for best case scenario. risk premium. increasing the target debt-equity ratio III. systematic return.  What are you trying to minimize/maximize when you select a debt. real return. mean.No. because equity should have a higher return and debt since. D. c. Beta Coeffiecient  The return on a risky asset that is anticipated in the future is called the: a. e. expected return. increasing the profit margin . it carries more risk to the holder. B. Expected Return  Which of the following will increase the sustainable growth rate of a firm? I. risk premium. d. beta.

yield to maturity. A risk that affects a large number of assets  The discount rate that causes the net present value of a project to equal zero is called the: a. is earning a return that exactly matches the requirement. payback B. should be rejected even if the discount rate is lowered. d. C. and IV only B. profitability index e. unique to an individual firm. I. III. III and IV  Which one of the following is the preferred method of analyzing a proposed investment? a. I. I and II only e. d. increasing the total asset turnover rate a. a risk that affects a large number of assets. I. III. has no initial cost. never pays back its initial cost. average accounting return. the total risk inherent in an individual security. market rate. . e. internal rate of return d. net present value c. the principle of diversification. e. also called diversifiable risk. and IV c. b. d. and IV only I. Internal rate of return  The concept of investing in a variety of diverse assets to reduce risk is referred to as: A. required return. II. III. and III only d. b. also called asset-specific risk. E. b. accounting rate of return Net present value  A net present value of zero implies that an investment: A. internal rate of return. has an expected return that is less than the required return. II. c.IV. II. c. II. Is earning a return that exactly matches the requirement  Systematic risk is: a.

increasing the variable cost per unit III. D. I. Multiple rates of return. E. II. E. Net present value profiling. e. split investing. increasing revenue a. Only the initial cash flow is negative . The sum of the cash flows is equal to zero. Issues of scale. B. the principle of elimination. d. III and IV only b. III. a. C. and IV only d. residual Incremental  Which of the following will increase the net income of a profitable firm? I. I. III. decreasing fixed costs IV. B. the systematic risk principle. decreasing the depreciation II. II. All of the cash flows are positive. beta measuring. The principle of diversification  The change in a firm's future cash flows that results from adding a new project are referred to as _____ cash flows. and IV only I.b. Only the initial cash flow is negative. The present value of the cash flows is equal to zero. Mutually exclusive investment decisions  A conventional cash flow is defined as a series of cash flows where: A. direct b. eroded e. and III only C. The total of the cash flows is positive. Operational ambiguity. D. I and IV only e. deviated C. Mutually exclusive investment decisions. C. and IV  A situation in which taking one investment prevents the taking of another is called: A. c. III. incremental d.

B. Discounted payback Average Accounting Return  Which of the following calculations takes the time value of money into account? I. II. I and II only D. C. An investment is acceptable if its calculated payback period is less than some prespecified number of years. I and III only C. I. An investment is acceptable if its calculated payback period is less than some prespecified number of years.  Diversification works because: I. III only E. Unsystematic risk exists. Firm-specific risk can be dramatically reduced if not eliminated A. III. Net present value B. An investment should be rejected if the payback is positive and accepted if it is negative. Average accounting return III. I only B. An investment should be accepted if the payback is positive and rejected if it is negative. An investment is acceptable if its calculated payback period is greater than some pre-specified number of years. Payback II. Payback period D. Forming stocks into portfolios reduces the standard deviation of returns for each stock. Internal rate of return C. D. Which of the following decision rules has the advantage that the information needed for the computation is readily available? A. Profitability index III only  The payback rule can be best stated as: A. II. Average accounting return E. and III I and III  The CAPM shows that the expected return for a particular asset depends on: .

Systematic risk Asset-specific risk Please allow access to your computer’s microphone to use Voice Recording. I and II only C. III only D. II and III only II and III  Which of the following does NOT describe the risk that exists in a well-diversified portfolio? A.  . I. The pure time value of money. The reward for bearing systematic risk. Having trouble? Click here for help. Non-diversifiable risk D. Market risk C. II. III. II. A. I only B.I. and III E. The amount of unsystematic risk. Asset-specific risk B.