Q&A Hero

Q: The total return to stockholders, ke, is composed of the a. opportunity cost plus a risk premium b. dividend yield plus the price appreciation of the security c. opportunity cost plus an inflation premium d. none of the above

Q: The constant growth valuation model approach to calculating the cost of equity assumes that a. earnings and dividends grow at a constant rate, but stock price growth is indeterminate b. the growth rate is greater than or equal to ke c. dividends are constant d. earnings, dividends, and stock price will grow at a constant rate

Q: For firms subject to the 34% marginal tax rate, the after-tax cost of ____ is roughly two-thirds the cost of preferred stock. a. retained earnings b. new common stock c. long-term debt d. retained earnings and new common stock

Q: The CAPM assumes that the only risk of concern to the investor is ____, which is measured by ____. a. Unsystematic risk, beta b. Systematic risk, the return to the market portfolio c. Systematic risk, beta d. Unsystematic risk, the return to the market portfolio

Q: A firm can raise up to $700 million for investment from a mixture of debt, preferred stock and retained equity. Above $700 million, the firm must issue new common stock. Assuming that debt costs and preferred stock costs remain unchanged, the marginal cost of capital for amounts up to $700 million will be ____ the marginal cost of capital for amounts over $700 million. a. less than b. equal to c. greater than d. cannot be determined from the information given

Q: The cost of capital is a. the rate of return required by investors in the firm's securities b. the minimum rate of return required on new investments of average risk undertaken by the firm c. approximately 10 percent for most firms d. a and b only

Q: For a company that is not planning to change its target capital structure, the proportions of debt and equity used in calculating the weighted cost of capital should be based on the current ____ weights of the individual components. a. book value b. market value c. replacement value d. book and market value

Q: What are marginal costs and how does it compare to historical costs?

Q: Which of the following items would be a method that common equity is raised?I. It is raised internally by selling preferred stock.II. It is raised externally by selling long-term bonds.a. I onlyb. II onlyc. Both I and IId. Neither I nor II

Q: Which of the following techniques may be used to determine the cost of equity? I. The constant growth model II. The capital asset pricing model a. I only b. II only c. Both I and II d. Neither I nor II

Q: Name the four decision models for evaluating capital expenditures and indicate what criteria is used to determine the acceptability of a project?

Q: American Biodyne (AB) is considering expanding into a new line of business. The expansion will require an investment of $500,000 in new equipment. This equipment which will cost another $300,000 to install, will be depreciated on a straight-line basis over an 8-year period to an estimated salvage value of zero. If the expansion project is accepted, working capital will increase by $100,000 immediately. Revenues for the first 3 years are forecasted at $650,000 per year and at $800,000 in years 4-8. Operating costs exclusive of depreciation are expected to be $310,000 per year for 3 years and increase to $400,000 per year for the following 5 years. AB has a marginal tax rate of 40% and its required rate of return for the project under consideration is 16%. If AB assumes that the new equipment will have an actual market value of $50,000 at the end of the 8th year, should the expansion be undertaken?a. Yes, NPV = $275,114b. Yes, NPV = $265,964c. Yes, NPV = $302,934d. Yes, NPV = $272,434

Q: Quick Flick is considering two investments. Both require a net investment of $120,000 and have the following net cash flows: Year Project X Project Y 1 $50,000 $25,000 2 40,000 45,000 3 30,000 50,000 4 25,000 60,000 5 20,000 70,000 Quick uses a combination of the net present value approach and the payback approach to evaluate investment alternatives. The firm uses a discount rate of 14 percent and requires that all projects have a payback period no longer than 3 years. Which investment or investments should Quick accept? a. only Project X b. only Project Y c. both projects X and Y d. reject both projects

Q: Colex wishes to bid on a contract that is expected to yield after-tax net cash flows of $25,000 in year 1, $30,000 in year 2, and $35,000 per year in years 3 - 8. To obtain the contract, Colex will need to invest $110,0000 to reconfigure a packaging system, $20,000 (after-tax) to retrain current employees, and $15,000 (after-tax) on an environmental impact study that is required to be completed on acceptance of the contract. What is the project's internal rate of return? a. 16.7% b. 14.1% c. 16.2% d. 14.9%

Q: What is the internal rate of return for a project that has a net investment of $370,000 and net cash flows of $60,000 in year 1, $75,000 in year 2, and $85,000 in years 3 through 8?a. 15.5%b. 13.6%c. 17.4%d. 19.0%

Q: G-III Apparel is considering increasing the size of a warehouse. The cost of the expansion is $825,000 and the increase in inventories and accounts payable will be $410,000 and $360,000 respectively. G-III expects that the expansion will increase net cash flows by $150,000 a year for the next 5 years and $200,000 a year for years 6-12. G-III has a 14% cost of capital and a marginal tax rate of 35%. What is the NPV of the warehouse expansion? a. -$3,450 b. $60,050 c. $10,050 d. -$338,570

Q: Ecogen is considering the purchase of some new equipment that will cost $340,000 installed. The equipment will produce a product that must be FDA approved and this will require at least a year. Net cash flow in Year 1 will be a negative $110,000 but is expected to be a positive $50,000 in Year 2. Net cash flows will be $150,000, $240,000, and $330,000 in the next 3 years. At the end of 5 years the equipment and the product will be obsolete. If the firm's marginal tax rate is 40% and their costs of capital is 15%, should they invest in the new equipment? a. Yes, NPV = $2,090 b. Yes, NPV = $12,390 c. No, NPV = -$63,210 d. No, NPV = -$12,210

Q: Calculate the net present value for an investment project with the following cash flows using a 12 percent cost of capital: Year 0 1 2 3 Net Cash Flow $-100,000 $80,000 $80,000 $-30,000 a. $56,560 b. $30,000 c. $13,840 d. cannot be determined with information given

Q: Consider a capital expenditure project that has forecasted revenues equal to $32,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipment's estimated salvage value at the end of the project is $9,000. The equipment's $23,000 cost will be depreciated on a straight-line basis to $0 over a 10-year estimated economic life. Assume that the project requires an initial $7,000 working capital investment. The company's marginal tax rate is 30%. Calculate the project's net present value using a 12% discount rate. a. about -$10,610 b. about -$12,530 c. about -$ 9,954 d. about +$9,462

Q: Road Hawk Inc. is adding a new production line that will cost $720,000. The line will be depreciated on a straight-line basis over a 7-year period and will generate net cash flows of $160,000 in each of the 7 years. At the end of the project, it is expected the line can be sold as scrap for $10,000. If the firm's marginal tax rate is 40% and it's required rate of return is 14 percent, what is the net present value of this project? a. $70,091 b. -$27,920 c. $64,091 d. -$31,520

Q: What is the internal rate of return for a project that has a net investment of $60,000 and the following net cash flows: Year 1 = $15,000; Year 2 = $20,000; Year 3 = $25,000; Year 4 = $30,000? a. 17.3% b. 16.7% c. 15.7% d. 16.3%

Q: What is the internal rate of return for a project that has a net investment of $169,165 and net cash flows of $25,000 in the first year and 40,000 in years 2-7? a. 12.5% b. 13% c. 12% d. 13.5%

Q: What is the net present value of a project that has a net investment of $148,000 and net cash flows of $25,000 in the first year, $45,000 in years 2-7 and a negative net cash flow of $27,000 in year 8? Assume the cost of capital is 11 percent. a. $34,302 b. $74,847 c. $57,738 d. "$2,238

Q: Decode Genetics purchased lab equipment for $600,000 that will generate net cash flows of $130,000 per year for 10 years. What is the IRR for this project? a. 16.76% b. 17.26% c. 18.13% d. 17.76%

Q: ZPS Models is considering a project that has a NINV of $564,000 and generates net cash flows of $105,000 per year for 10 years. What is the NPV of this project if ZPS has a cost of capital of 12.45%? a. $47,625 b. $18,503 c. $17,490 d. $8,329

Q: Using the profitability index, which of the following projects should be accepted? Project M: NPV = $60,000 NINV = $200,000 Project N: NPV = $10,000 NINV = $30,000 Project O: NPV = $2,000 NINV = $5,000 a. Project M b. Project N c. Project O d. All projects should be accepted

Q: Kinetics is considering a project that has a NINV of $874,000 and generates net cash flows of $170,000 per year for 12 years. What is the NPV of this project if Kinetics cost of capital is 14%? a. $252,760 b. $110,840 c. $88,200 d. $47,570

Q: Calco is a multi-divisional firm with a weighted cost of capital of 14 percent and a risk-adjusted discount rate for its can division of 17 percent. A planned expansion in the can division requires a net investment of $170,000 and results in expected cash inflows of $42,000 a year for seven years. Should Calco invest in this expansion?a. Yes, NPV = $10,096b. Yes, NPV = $ 9,896c. No, NPV = -$5,276d. Yes, NPV = $3,840

Q: What is the NPV of a project that required a net investment of $500,00 and produced net cash flows of $150,000 per year for 5 years and $110,000 for the next 5 years? Assume the cost of capital is 14%. a. $211,080 b. $392,580 c. $588,710 d. $160,920

Q: A project requires a net investment of $100,000. At the firm's cost of capital of 10%, the project's profitability index is 1.15. Determine the net present value of the project. a. $15,000 b. $215,000 c. $115,000 d. cannot be determined from the information given

Q: Calculate the profitability index for a project that has a net present value equal to -$10,000. The project's net investment is $20,000, and the firm has a 40 percent marginal tax rate. a. -0.5 b. 0 c. 0.8 d. 0.5

Q: Red Lake Mines, Inc. is considering adoption of a new project requiring a net investment of $10 million. The project is expected to generate 5 years of net cash inflows of $5 million per year. In the project's sixth, and final, year it is expected to have a net cash outflow of $1 million. What is the project's net present value, using a discount rate of 12 percent? a. about $8.52 million b. about $8.00 million c. about $7.52 million d. about $6.00 million

Q: Hydroponics is considering adding another greenhouse that would cost $95,000 and generate $20,000 in annual net cash flows over it's 8 year expected life. The greenhouse would be depreciated on a straight-line basis to zero and the salvage value is also expected to be zero. If the firm has a marginal tax rate of 40 percent, what is this project's internal rate of return? a. between 20 and 24% b. between 13 and 14% c. between 28 and 32% d. between 7 and 8%

Q: GoFlo is a small growing firm that is considering the purchase of another truck to serve GoFlo's expanding customer base. The new truck will cost $21,000 and should generate annual net cash flows of $6,000 over the truck's 5-year life. What is the payback period for this project? a. 3 years b. 4.2 years c. 3.5 years d. 3.3 years

Q: Turntec is considering replacing an automatic shuttle machine that has a book value of $2,000 and a $0 market value with a more efficient machine that will cost $24,000. The annual net cash flows from the new equipment are expected to be $6,000 for the next 6 years. What is the net present value of this project? Assume the firm's cost of capital is 12 percent and it's marginal tax rate is 40 percent. a. $666 b. $1,466 c. $1,866 d. - $134

Q: Using the profitability index, which of the following mutually exclusive projects should be accepted? Project A: NPV = $6,000; NINV = $50,000 Project B: NPV = $10,000; NINV = $120,000 Project C: NPV = $8,000; NINV = $80,000 a. A b. B c. C d. all projects should be accepted

Q: What is the internal rate of return for a project that has a net investment of $150,000 and net cash flows of $40,000 for 5 years? a. between 10% and 11% b. between 9% and 10% c. between 11% and 12% d. between 12% and 13%

Q: What is the internal rate of return for a project that has a net investment of $14,600 and a single net cash flow of $25,750 in 5 years? a. 10% b. 12% c. 15.3% d. 13.1%

Q: What is the internal rate of return for a project that has a net investment of $76,000 and net cash flows of $20,507 per year for 7 years? a. 16% b. 17% c. 18.2% d. 19%

Q: Sigma is thinking about purchasing a new clam digger for $14,000. The expected net cash flows resulting from the digger are $9,000 in year 1, $7,000 in year 2, $5,000 in year 3, and $3,000 in year 4. Should Sigma purchase this digger if its cost of capital is 12 percent? a. Yes, NPV = $3,176 b. Yes, NPV = $5,084 c. Yes, NPV = $16,605 d. Yes, NPV = $19,084

Q: Would you invest in a project that has a net investment of $14,600 and a single net cash flow of $24,900 in 5 years, if your required rate of return was 12 percent? a. Yes - the NPV is $862.90 b. No - the NPV is -$1,975.70 c. No - the NPV is -$481.70 d. Yes - the NPV is $165.70

Q: What is the net present value of a project that requires a net investment of $76,000 and produces net cash flows of $22,000 per year for 7 years? Assume the cost of capital is 15 percent. a. $ 91,520 b. $ 15,520 c. $ 78,000 d. $167,474

Q: A project requires a net investment of $450,000. It has a profitability index of 1.25 based on the firm's 12 percent cost of capital. Determine the net present value of the project. a. $ 112,500 b. $ 562,500 c. $1,012,500 d. $ 140,625

Q: An investment project requires a net investment of $100,000 and is expected to generate annual net cash inflows of $25,000 for 6 years. The firm's cost of capital is 12 percent. Determine the profitability index for this project. a. 1.50 b. 1.028 c. .028 d. .972

Q: The Atlantic Company plans to open a new branch office in a suburban area. The building will cost $200,000 and will be depreciated (on a straight-line basis) over a 20 year life to a $0 estimated salvage value. Equipment for the building will cost an additional $100,000. This equipment has a 20-year life and will be depreciated on a straight-line basis to a $0 estimated salvage value. The branch office is expected to generate additional before tax net income of $30,000 per year. The tax rate is 40 percent and the cost of capital is 12 percent. Compute the net present value for the project. a. $-63,523 b. $+246,477 c. $+53,523 d. $-53,523

Q: An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firm's cost of capital is 12 percent. Determine the internal rate of return for the project (to the nearest tenth of one percent). a. 12.0% b. 12.6% c. 3.6% d. 12.4%

Q: An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firm's cost of capital is 12 percent. Determine the net present value for the project. a. $940 b. $100,940 c. $ 77,884 d. $ 40,000

Q: An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firm's cost of capital is 12 percent. Determine the payback period for the project. a. 0.28 years b. 1.4 years c. 3.57 years d. 17.86 years

Q: The most expensive method of adjusting for total project risk in the evaluation of capital budgeting projects is the a. sensitivity analysis method b. simulation approach c. net present value/payback method d. risk-adjusted discount rate approach

Q: The ____ approach is widely used by firms that attempt to consider differential project risk in their capital budgeting procedures. a. net present value b. internal rate of return c. risk-adjusted discount rate d. profitability index

Q: When analyzing a sensitivity curve, the ____ the slope, the more sensitive the net present value is to a change in the computed variable. a. more negative b. steeper c. more general d. smaller

Q: Sensitivity analysis is a procedure that can be used in the capital budgeting process to indicate how sensitive the ____ is to changes in a particular variable. a. probability b. return distribution c. net present value d. standard deviation

Q: In a simulation analysis, a model is simulated on a computer program and run through several iterations. The results of these iterations are used to a. plot a required rate of return value profile b. compute a mean and a standard deviation of returns c. provide the decision maker with a measure of beta risk d. plot the coefficient of variation of the annual net cash flows

Q: The risk-adjusted discount rate approach is preferable to the weighted cost of capital approach when a. all projects have the same risk characteristics b. the risk-free rate is known with certainty c. the projects under consideration have different risk characteristics d. the firm is unlevered

Q: Project C has been classified into risk class II by the analyst of a major firm. The risk premium required for projects in this risk class is 8%. The current risk-free rate measured by the analyst is 10%. If the project has an estimated return of 20%, the analyst would recommend a. accepting project C b. rejecting project C c. reestimating the risk premiums for class II projects d. not enough information given to provide an answer

Q: The use of sensitivity analysis requires that a. a model of a project's cash flows be developed b. probability distributions of the determinants of a project's cash flows be estimated c. the firms have access to a very large computer d. the firm is greatly interested in the portfolio risk reduction characteristics of a project

Q: Simulation techniques are a. cheap to apply b. widely used c. mostly beneficial for large projects d. identical to sensitivity analysis

Q: The basic capital budgeting decision models, that is, NPV and IRR, handle risk by a. ignoring it b. assuming all cash flows are known with certainty c. assuming all projects are of average risk and evaluating them based on expected values d. using risk-adjusted discount rates to evaluate projects

Q: Capital expenditures levels tend ____ (in real terms) during periods of relatively high inflation than during low inflation times. a. to be higher b. to be lower c. to be the same d. to depend on business risk

Q: Generally, the existence of a(n) ____ option reduces the downside risk of a project and should be considered in project analysis. a. designed-in b. abandonment c. investment timing d. output expansion

Q: Real options in capital budgeting can be classified in all of the following ways except: a. abandonment option b. investment option c. purchasing power option d. shutdown options

Q: The ____ approach takes into account both the magnitude and timing of cash flows over the entire life of a project in measuring its economic desirability. a. payback period b. accounting rate of return c. average rate of return d. internal rate of return

Q: Which of the following investment decision rules (if any) assumes that the cash flows generated are reinvested over the life of the project at the firm's cost of capital? a. payback period b. internal rate of return c. accounting rate of return d. the NPV approach

Q: The profitability index would be ____ if the present value of the net cash flows (NCF) over the life of a project were ____. a. negative; less than zero b. negative; less than the net investment c. zero; equal to the net investment d. less than zero; equal to the net investment

Q: The ____ of an investment is the period of time for the ____ to equal the initial cash outlay. a. profitability index; present value of the cash inflows b. payback period; cumulative cash inflows c. payback period; present value of the cash inflows d. profitability index, payback period

Q: The ____ is interpreted as the ____ for each dollar of initial investment. a. net present value; present value return b. profitability index; cash flow return c. profitability index; present value return d. present value return, cash flow return

Q: When dealing with ____ cash flows, the ____ is computed by trial and error. a. uniform; internal rate of return b. perpetual; internal rate of return c. uneven; internal rate of return d. uneven; net present value

Q: A capital expenditure project has an expected 20 percent internal rate of return and a $10,000 net present value. It has one cash flow sign change. a. The discount rate used to calculate NPV is greater than 20 percent b. The project has another internal rate of return in addition to the 20 percent rate mentioned above c. In the internal rate of return calculation, the project's cash inflows are assumed to be reinvested at the firm's required rate of return d. None of these answers are correct.

Q: Which of the following would increase the net present value of a project? a. increase in the net investment b. use of straight line depreciation rather than MACRS c. decrease in the expected accounts payable d. decrease in the discount rate

Q: The net present value method assumes that cash flows are reinvested at the ____, whereas the internal rate of return method assumes that cash flows are reinvested at the ____. a. discount rate, required rate of return b. cost of capital, market rate of return c. firm's cost of capital, computed internal rate of return d. marginal cost of capital, discount rate

Q: The internal rate of return does nottake into account the a. explicit risk of the net cash flows b. magnitude of cash flows over the project's life c. net investment d. timing of cash flows over the entire life of a project

Q: If the net present value of an investment project is positive then the: a. project would be unacceptable under the internal rate of return method b. project would be acceptable under the payback method c. project's rate of return is greater than the firm's cost of capital d. all of these are correct

Q: With the net present value approach, all net cash flows are discounted at the a. required rate of return b. discount rate c. cost of capital d. required rate of return, the discount rate, and the cost of capital

Q: The profitability index is the ratio of the ____ to the ____. a. net present value, net investment b. net investment, net present value c. present value of future net cash flows, net investment d. net investment, present value of future net cash flows

Q: Generally, the ____ is considered to be a more realistic reinvestment rate than the ____. a. risk-free rate, internal rate of return b. internal rate of return, cost of capital c. cost of capital, internal rate of return d. risk-free rate, cost of capital

Q: In the absence of capital rationing, the ____ method is normally superior to the ____ method when choosing among mutually exclusive investments. a. net present value, internal rate of return b. internal rate of return, profitability index c. net present value, profitability index d. a and c

Q: The internal rate of return method assumes that the cash flows over the life of the project are reinvested at: a. the risk-free rate b. the firm's cost of capital c. the computed internal rate of return d. the market capitalization rate

Q: The net present value method assumes that the cash flows over the life of the project are reinvested at a. the computed internal rate of return b. the risk-free rate c. the market capitalization rate d. the firm's cost of capital

Q: When two or more normal ____ projects are under consideration, the profitability index, the net present value, and the internal rate of return methods will yield identical accept/reject signals. a. coincident b. mutually exclusive c. independent d. expansion

Q: If a net present value analysis for a normal project gives an NPV greater than zero, an internal rate of return calculation on the same project would yield an internal rate of return ____ the required rate of return for the firm. a. greater than b. less than c. equal to d. cannot be determined from the information given