Q&A Hero

Q: All of the following factors can complicate the post-audit process except a. each element of the cash flow forecast is subject to uncertainty. b. projects sometimes fail to meet expectations for reasons beyond the control of operating executives. c. it is often difficult to separate the operating results of one investment from those of a larger system. d. executives who were responsible for a given decision might have moved on by the time the time the results of the long term project are known. e. the most successful firms, on average, are the ones that put the least emphasis on the post-audit.

Q: The ____ involves comparing the actual results with those predicted by the project's sponsors and explaining why any differences occur. a. discounted payback b. internal rate of return c. post-audit d. net present value e. economic value added

Q: Refer to the above table. If the marginal revenue product is $21, how many workers will the profit maximizing monopsonist hire and what wage will they pay each worker?A) 1; $17 B) 2; $19 C) 2; $21 D) 3; $21

Q: Net present value is preferred to internal rate of return for capital budgeting decisions because a. the internal rate of return does not allow you to determine if the project is acceptable. b. the net present value is the only method that allows you to determine which independent project is acceptable. c. the net present value allows you to compare mutually exclusive projects. d. the internal rate of return for a project is different for each firm. e. NPV contains information about a projects "safety margin" which is not inherent in IRR.

Q: Labor unions that consist of workers from a particular industry, such as automobile manufacturing, are calledA) craft unions. B) industrial unions. C) collective unions. D) closed unions.

Q: What were the ratios of workers paying into Social Security to retirees receiving benefits for 1950 and 2009, respectively? a. 1950: 16.5 to 1 2009: 3 to 1 b. 1950: 10.5 to 1 2009: 6 to 1 c. 1950: 8.5 to 1 2009: 8 to 1 d. 1950: 6.5 to 1 2009: 10 to 1 e. 1950: 3.5 to 1 2009: 16 to 1

Q: Marginal factor cost is computed asA) total cost of the resource/total amount of the resource being used.B) change in the total cost of the resource/total amount of the resource being used. C) total cost of the resource/change in the amount of the resource being used.D) change in the total cost of the resource/change in the amount of the resource being used.

Q: Which of the following statements concerning the internal rate of return is false? a. The internal rate of return for a capital budgeting project is the same for all firms regardless of their cost of capital. b. A project is acceptable long as the project's internal rate of return is greater than the hurdle rate for the project. c. The internal rate of return is dependent on the timing of the cash flows. d. A project with a positive internal rate of return will always increase the value of the firm if the project is accepted. e. You do not need to know the required rate of return to solve for the internal rate of return.

Q: Suppose a dangerous workplace is made safer through the installation of guards and other equipment that reduce the physical hazards of the work environment. If we observe no reduction in injuries, we might conclude thatA) the safety equipment isnʹt adequate and better equipment should be installed.B) the firm has responded by lowering wages and hiring less capable people who are more likely to be injured.C) the injury rate before installation of the safety equipment had been underreported.D) workers responded to the safer environment by not exercising as much care themselves, generating more injuries than if they had not changed their behavior.

Q: Discounted payback's primary advantage over traditional payback is that a. discounted payback considers cash flows that occur after the discounted payback period. b. discounted payback is always shorter than traditional payback making more projects acceptable. c. discounted payback does consider the time value of money. d. discounted payback will let you accept projects whose discounted payback period is longer than the useful of the project. e. all of the above are true.

Q: When a falloff in usage of a product by some consumers causes others to stop purchasing the item there isA) price leadership. B) negative-sum game.C) positive market feedback. D) negative market feedback.

Q: Which of the following is not a rationale for using the NPV method in capital budgeting? a. An NPV of zero signifies that the project's cash flows are just sufficient to repay the invested capital and to provide the required rate of return on that capital. b. A project whose NPV is positive will increase the value of the firm if that project is accepted. c. A project is considered acceptable if it has a positive NPV. d. A project is not considered acceptable if it has a negative NPV. e. All of the above are true.

Q: Because the short-run average total cost curve slopes downward for an information product, the firm experiencesA) a downward sloping marginal cost curve.B) a downward sloping average variable cost curve.C) short-run economies of operation. D) long-run diseconomies of scale.

Q: If the NPV for a project is positive it must be that a. the discounted payback period is longer than the useful life of the project. b. the internal rate of return is lower than the discount used. c. the project is not acceptable on a risk adjusted basis. d. this project is preferred to any other mutually exclusive project. e. accepting the project increases the value of the firm.

Q: The demand curve for a monopolistically competitive firm is A) elastic because the products produced are homogeneous. B) inelastic because of barriers to entry.C) inelastic because of the profit maximizing behavior of the firm.D) elastic because of product differentiation.

Q: The advantage of the payback period over other capital budgeting techniques is that a. it is the simplest and oldest formal model to evaluate capital budgeting model. b. it directly accounts for the time value of money. c. it ignores cash flows beyond the payback period. d. it always leads to decisions that maximize the value of the firm. e. it incorporates risk into the discount rate used to solve the payback period.

Q: A monopoly will maximize profits at the level of output at whichA) MR = MC. B) MR = AFC. C) MC = ATC. D) MC = P.

Q: When economic profits in a perfectly competitive industry are positive, A) new firms will be attracted to the industry, and economic profits will decline to zero. B) the industry is in equilibrium. C) firms will increase output to earn even higher profits. D) firms will increase prices while they have the opportunity.

Q: The importance of capital budgeting decisions is due to all of the following factors except for: a. the impact of a capital budgeting decision is long term; the firm loses some decision-making flexibility when capital projects are purchased. b. effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased. c. the acquisition of fixed assets typically involves substantial expenditures, and before a firm spends a large amount of money, it must have the funds available. d. capital budgeting techniques overcome the problems with error in forecasts for asset requirements and projected sales, we will still be able to determine if we should fund the project. e. all of the above are factors that make capital budgeting important.

Q: A college intern working at Anderson Paints evaluated potential investments⎯that is, capital budgeting projects⎯using the firm's average required rate of return (WACC), and he produced the following report for the capital budgeting manager: Project NPV IRR Risk LOM $1,500 12.5% High QUE 0 11.0 Low YUP 800 9.5 Average DOG (450) 10.0 Low The capital budgeting manager usually considers the risks associated with capital budgeting projects before making her final decision. If a project has a risk that is different from average, she adjusts the average required rate of return by adding or subtracting 2 percentage points. If the four projected listed above are independent, which one(s) should the capital budgeting manager recommend be purchased? a. Project LOM only, because it has both the highest NPV and the higher IRR. b. Projects LOM, QUE, and YUP, because they all have positive NPVs and their IRRs. c. Projects DOG and QUE, because their IRRs are greater than their risk-adjusted discount he projects returns are higher than the rates of return that capital budgeting manager uses to evaluate them. d. Projects QUE, YUP, and DOG, because their IRRs are greater than their risk-adjusted discount rates-that is, the projects returns are higher than the rates of return that capital budgeting manager uses to evaluate them. e. There is not enough information to answer this question, because the firm's average required rate of return cannot be determined.

Q: When a firm is operating at an output rate at which total revenue equal total costs, this is calledA) its shutdown point. B) its breakeven point.C) a short-run profit. D) a loss.

Q: If, in the short run, the level of output is zero, which of the following statement is true?A) total variable cost is zero but total cost equals total fixed cost, and both of the latter exceed zeroB) total cost and total fixed cost graphs will begin at the originC) total fixed cost will also be zero at first but will rise once output risesD) none of the above

Q: Union Atlantic Corporation, which has a required rate of return equal to 14 percent, is evaluating a capital budgeting project that has the following characteristics: Year Cash Flows 0 $(170,000) 1 60,750 2 60,750 3 60,750 4 60,750 Union Atlantic's capital budgeting manager has determined that the project's net present value is $7,008. According to this information, which of the following statements is correct? a. The project's internal rate of return (IRR) must be greater than 14 percent. b. The project's discounted payback must be less that its economic life. c. The project should be purchased by Union Atlantic. d. All of these statements are correct. e. None of these statements is correct.

Q: Tara is evaluating two mutually exclusive capital budgeting projects that have the following characteristics: Cash Flows Year Project Q Project R 0 $(4,000) $(4,000) 1 0 3,500 2 5,000 1,100 IRR 11.8% 12.0% If the firm's required rate of return (r) is 10 percent, which project should be purchased? a. Both projects should be purchased, because the IRRs for both projects exceed the firm's required rate of return. b. Neither project should be accepted, because the IRRs for both projects exceed the firm's required rate of return. c. Project Q should be accepted, because its net present value (NPV) is higher than Project R's NPV. d. Project R should be accepted, because its net present value (NPV) is higher than Project Q's NPV. e. None of the above is a correct answer.

Q: When a person buys stock in a company, that person is buying , but when a person buys a bond in a company, that person is the company.A) ownership; borrowing funds from B) ownership; lending funds toC) debt; lending funds to D) debt; borrowing funds from

Q: When Richard evaluated a capital budgeting project⎯a new machine needed to manufacture inventory⎯using his firm's required rate of return, he discovered that the project's net present value (NPV) is negative. Based on this information, which of the following must be correct? a. The project's internal rate of return is also negative. b. The project's discounted payback period is greater than its economic life. c. As long as the new machine's initial investment outlay is fairly low, the firm should purchase if it is used to replace an older machine that is required to produce inventory. d. The project's traditional payback period must be greater than the maximum payback period that the firm has established. e. Two or more of these scenarios must be correct.

Q: If your business earns $10,000 in revenues, has explicit costs of $7,000, and implicit costs of $5,000, your economic profit isA) $2,000. B) -$2,000.C) $5,000. D) $3,000.

Q: Two firms evaluated the same capital budgeting project to determine whether to purchase it. The CFO of Anchor Weights Corporation (AWC) reported that she determined that the project's internal rate of return equals 9 percent, and she recommended that the project be purchased. The CFO of Sectional Spas Incorporated (SSI) simply reported that the project was unacceptable to his firm when he evaluated it using one of the capital budgeting techniques that consider the time value of money. Given this information, which of the following statements is correct? a. The net present value of the project must be positive for both firms. b. If the SSI's CFO computes the IRR for the project, he will find that it is less than 9 percent for his company. c. AWC's CFO must have used the traditional payback period method to evaluate the project. d. If the project is acceptable (unacceptable) to one firm, it must be acceptable (unacceptable) to both firms. As a result, one of the CFOs made a mistake when evaluating the project. e. SSI's must have a required rate of return that is greater than 9 percent.

Q: An indifference curve showsA) the combinations of goods that a consumer does not like very much.B) the combinations of goods that generate the same ratio of marginal utilities.C) the set of consumption alternatives that yield the same amount of total utility.D) the set of consumption alternatives that yield the same amount of marginal utility.

Q: The objective of financing the income statement under the projected balance sheet method is to determine how much income the company will earn and then retain for reinvestment in the business during the period that is forecasted. a. True b. False

Q: Suppose that Jacob is going to a buffet restaurant that allows him to eat as many chicken wings as he wants at a fixed price. How would you predict the number of chicken wings that Jack will eat using utility theory?

Q: A good control system helps to ensure that plans are executed properly and to facilitate a timely modification of plans if the assumptions upon which the initial plans are based turn out to be inaccurate. a. True b. False

Q: Suppose that the value of the long -run absolute elasticity of demand for a good is 1.21. Then, we know the short -run absolute price elasticity of demand will beA) inelastic. B) greater than 1.21. C) elastic. D) less than 1.21.

Q: With lumpy assets, a small projected increase in sales could potentially mandate a significant increase in plant and equipment, which would lead to a very large financial requirement. a. True b. False

Q: As we approach total pollution abatementA) the marginal benefit to society declines. B) the marginal benefit to society increases.C) the marginal benefit to society increases, but at a decreasing rate. D) the marginal cost to society declines.

Q: Lumpy assets primarily affect the turnover of fixed assets and, consequently, the financial requirements associated with the expansion of operations. a. True b. False

Q: When poverty is defined by an absolute real income level, what will happen to the poverty rate if income per capita in a country continues to grow? A) The poverty rate will increase forever. B) The poverty rate will eventually be zero. C) The poverty rate will increase and then decrease. D) The poverty rate will never change.

Q: Potential changes in sales prices, fixed operating costs and/or variable costs should be taken into account when using breakeven analysis. a. True b. False

Q: Refer to the above table. What is the marginal factor cost when the firm employs the third unit of labor?A) $62 B) $57 C) $25 D) $21

Q: All else equal, excess capacity means that more external financing is required to support increases in sales than would be needed if the firm previously operated full capacity. a. True b. False

Q: Labor unions composed of workers who engage in a particular trade or skill, such as carpentry, are calledA) craft unions. B) industrial unions. C) collective unions. D) closed unions.

Q: The financial control phase of financial forecasting is concerned with implementing the financial plans, and with managing the feedback and adjustment process needed to ensure that the goals of the firm are pursued appropriately. a. True b. False

Q: The additional revenue associated with hiring one additional unit of some factor input, such as labor, is calledA) marginal cost. B) marginal revenue product. C) marginal factor cost. D) marginal physical product.

Q: Other things held constant, the greater the firm's use of debt, the greater the change in EPS that will result from a change in sales volume. a. True b. False

Q: The feedback effect can be thought of as a type of A) social regulation. B) economic regulation. C) creative response, which reduces the lawʹs effectiveness. D) regulatory lag.

Q: If a small change in sales results in a large change in EPS, then it must be caused by the financial leverage associated with the firm. a. True b. False

Q: When a new product is introduced in the market, Lenny always wants to see how popular the item becomes before he purchases it. Lennyʹs behavior is known asA) overt collusion. B) limit-pricing.C) a network effect. D) price leadership.

Q: The degree of financial leverage (DFL) is an index number that measures the effect of a change in sales on the financial breakeven point. a. True b. False

Q: Refer to the above figure. The above figure shows the cost structure of a firm producing an information product. Which curve would represent the average variable cost?A) Curve 1 B) Curve 2C) Curve 3 D) none of the above

Q: An advantage of breakeven analysis is that it can be applied with equal precision whether a firm's cost curve is linear or nonlinear. a. True b. False

Q: The demand curve for a monopolistically competitive firm is A) more elastic than for a perfectly competitive firm. B) more elastic than for a monopoly firm. C) more inelastic than for a monopoly firm. D) the same elasticity as a perfectly competitive firm.

Q: It is more difficult to estimate fixed and variable cost per unit for a project during planning than once the project is underway. This is because, once a project is operational, the firm has access to clearly reported and separated actual costs that the project incurs. a. True b. False

Q: For a monopolist that is maximizing profits,A) price exceeds marginal cost. B) price equals marginal revenue.C) price equals average total cost. D) marginal revenue exceeds price.

Q: A high degree of operating leverage, other things held constant, means that a relatively small change in unit sales will result in a large change in operating income. a. True b. False

Q: A constant-cost industry A) is one in which an increase in demand is matched by a proportional increases in long -run supply. B) generates increasing profits whenever demand increases because the new long -run equilibrium price is above the old price even though average costs have not changed. C) has a horizontal long-run supply curve. D) has a downward sloping long-run supply curve.

Q: The higher the DOL, the greater the firm's use of debt and the more earnings will change following a change in sales. a. True b. False

Q: A firm in a perfectly competitive market maximizes profits when it findsA) the price at which total revenue minus total cost is the greatest.B) the quantity at which total revenue minus total cost is the greatest. C) the quantity at which total revenue equals total cost.D) the quantity at which total revenue is maximized.

Q: When a firm increases its degree of operating leverage by substituting fixed costs for variable costs, it normally does so to decrease its breakeven point and to increase its profit. a. True b. False

Q: In a map showing short-run cost functions, one curve begins at the origin and rises as output expands. It is called theA) the marginal cost curve. B) the total fixed cost curve.C) the total cost curve. D) the total variable cost curve.

Q: Suppose a firm uses a high degree of operating leverage and operates in an industry whose sales are greatly affected by changes in the overall level of economic activity. The riskiness of that firm's earnings stream will likely be greater than the earnings of a firm in the same industry which has a lower degree of operating leverage. a. True b. False

Q: Bonds are A) promises to repay loans. B) promissory notes issued by partnerships. C) promissory notes issued by proprietorships. D) shares of ownership in a corporation.

Q: If firm A uses more operating leverage than firm B, firm A will probably have a greater percentage profit margin per unit than firm B, if both firms are otherwise identical and operating above their respective operating breakeven levels. a. True b. False

Q: Suppose your donut shop earns $24,000 in total revenues per month with explicit costs of $12,000 and opportunity costs of $8,000. Your accounting profit isA) $16,000. B) $12,000. C) $4,000. D) zero.

Q: The use of a high level of operating leverage can enable a firm to maintain a steady operating income despite large changes in the level of sales. a. True b. False

Q: An indifference curve provides the set of consumption alternatives thatA) yield the same total amount of satisfaction. B) maximize the utility of the consumer.C) can be purchased for the same amount of money.D) yield the same marginal utility for the last unit consumed of each good.

Q: What do we know about total utility when marginal utility is zero?

Q: Other things held constant, a high degree of operating leverage will mean that a relatively small change in sales will result in a large change in operating income. a. True b. False

Q: One potential benefit of high operating leverage is that it can reduce the average cost per unit at high levels of output, thus generating a competitive cost advantage. a. True b. False

Q: Suppose that the value of the short -run absolute elasticity of demand for a good is 0.38. Then, we know the long-run absolute price elasticity of demand will beA) 0. B) greater than 0.38. C) elastic. D) less than 0.38.

Q: Firms A and B produce exactly the same products, but use different production technology. Firm A's variable costs are greater than those of Firm B, but its operating breakeven point is lower. From this information, other things held constant, we can conclude that Firm B has greater operating leverage than Firm A. a. True b. False

Q: Assuming that pollution cannot be removed from the environment at zero cost, the optimal level of pollutionA) will be zero. B) will be negative.C) will be positive. D) cannot be determined.

Q: The operating breakeven volume in units can be found by dividing the firm's total fixed cost in dollars by its profit margin per unit (i.e., price less variable cost). a. True b. False

Q: Which of the following CANNOT be eliminated in a growing economy such as the U.S. economy? A) absolute poverty B) relative poverty C) both absolute and relative poverty D) Neither absolute nor relative poverty can be eliminated.

Q: Breakeven analysis can involve determining the magnitude of the firm's profit or losses at output levels on and around the point where revenues equal costs. a. True b. False

Q: Refer to the above table. What is the marginal factor cost when the firm employs the second unit of labor?A) $19 B) $21 C) $36 D) $38

Q: Financial control involves a feedback and adjustment process that (1) ensures that existing plans are followed, or (2) modifies existing plans in response to changes in the firm's operating environment. a. True b. False

Q: The earliest unions in the United States wereA) industrial unions. B) craft unions.C) public-sector unions. D) military unions.

Q: If any firm with a positive net worth is operating its fixed assets at full capacity, if its dividend payout ratio is 100 percent, and if it wants to hold all financial ratios constant, then for any positive growth rate in sales, the firm will require external financing. a. True b. False

Q: If the price of a product being sold in a perfectly competitive market increases,A) the MRP curve shifts to the right. B) the MPP curve shifts to the right.C) the MFC curve shifts to the right. D) the MFC curve shifts to the left.

Q: The projected balance sheet forecasting method would be appropriate if, in a regression of sales on each asset and spontaneous liability, the regression line was linear and passed through the origin. a. True b. False