Q&A Hero

Q: In order to compensate for inflation in capital budgeting procedures, it is necessary to: a. use constant dollar estimates of costs and revenues b. use a low discount rate to avoid double counting for inflationary effects c. rely heavily on the payback procedures d. adjust for inflation, because the discount rate used in evaluating project net cash flows incorporates an inflation premium.

Q: The objective in solving capital rationing problems is to: a. accept all projects with a PI greater than 1.1 b. maximize the IRR of the projects that are accepted c. maximize the NPV of the projects that are accepted d. minimize the opportunity cost of the firm's funds

Q: In the case of mutually exclusive projects, NPV and PI are likely to yield conflicting decisions when: a. the projects require the same net investment b. the projects are significantly different in size c. multiple rates of return are a possibility d. none of these are correct

Q: The profitability index (PI) approach: a. fails to directly consider the timing of a project's cash flows b. considers only a project's contributions to net income and does not consider cash flow effects c. always gives the same accept-reject decisions for independent projects as does NPV and IRR d. always gives the same accept-reject decisions for mutually exclusive projects as does NPV and IRR

Q: When a project has multiple internal rates of return: a. the analyst should choose the highest rate to compare with the firm's cost of capital. b. the analyst should choose the lowest rate to compare with the firm's cost of capital c. the analyst should choose the rate that seems most "reasonable", given the project's cash flows, to compare with the firm's cost of capital. d. the analyst should compute the project's net present value and accept the project if its NPV is greater than $0

Q: The relationship between NPV and IRR is such that: a. both approaches always provide the same ranking of alternative investment projects. b. the IRR of a project is equal to the firm's cost of capital if the NPV of a project is $0. c. if the NPV of a project is negative, the IRR must be greater than the cost of capital. d. the IRR approach is normally superior to the NPV approach

Q: One weakness of the internal rate of return approach is that: a. it does not directly consider the timing of the cash flows from a project b. it fails to provide a straightforward decision-making criterion c. it implicitly assumes that the firm is able to reinvest the interim cash flows from a project at the firm's cost of capital. d. it is possible to have multiple internal rates of return.

Q: The disadvantages of the payback approach include: a. cash flows after the payback period are ignored in the calculation b. payback ignores the time value of money c. payback fails to provide an objective decision-making criterion d. All of these answers are correct.

Q: The advantages of the payback approach include all of the following except: a. it is easy to compute b. it considers a project's liquidity c. it considers cash flows, not net income d. it provides an objective measure of profitability

Q: The payback period of an investment is defined as: a. the number of years required for cumulative profits from a project to equal the initial outlay. b. the number of years required for the cumulative cash flows from a project to equal the initial outlay. c. the number of years required for the cumulative cash flows from a project to equal the average investment in the project, when depreciation is considered. d. a period of time sufficient to earn a rate of return equal to the firm's cost of capital.

Q: According to the profitability index criterion, a project is acceptable if its profitability index is a. greater than 1 plus the cost of capital b. greater than 0 c. greater than or equal to 1 d. greater than 1.1

Q: The payback method is at best a crude measure of the risk of a project because it fails to consider the ____ of a project's returns. a. liquidity b. variability c. timing d. magnitude

Q: The ____ measures the present value return for each dollar of initial investment. a. payback period b. internal rate of return c. net present value d. profitability index

Q: Multiple internal rates of return can occur when there is (are): a. large abandonment costs at the end of a project's life b. a major shutdown and rebuilding of a facility sometime during its life c. more than one sign change in the pattern of cash flows over a project's life. d. All of these answers are correct.

Q: What is a capital expenditure and list some examples.

Q: The net present value and the internal rate of return methods of determining the acceptance or rejection of projects may result in different outcomes. This is because of:a. The source of the capital used to purchase the asset.b. The life expectancy of the asset.c. The reinvestment rate assumptiond. The type of industry that is considering the purchase.

Q: Com-Cat is considering expanding its production facility. This year Com-Cat had an operating income (EBIT) of $760,000, interest expenses of $120,000, depreciation expenses of $45,000, and capital expenditures of $160,000. Next year, after the expansion is completed, operating income is expected to be $880,000, interest expenses will remain at $120,000, but depreciation will increase to $61,000. To support the expansion, cash is to expected to increase by $5,000, accounts receivable by $12,000, inventories by $8,000, and accounts payable by $7,000. What is the change in Com-Cat's net operating cash flows attributable to this project, if the tax rate is 40%? a. $80,400 b. $88,000 c. $106,000 d. $70,000

Q: Anderson Clayton will purchase a new pellet mill that replace an older, less efficient, mill. The new mill costs $360,000 and shipping costs are $10,000. Improving the steam lines to the new mill will cost an additional $22,000. The old mill has a book value of $25,000 and can be sold for $12,000. The installation of the new mill will cause inventories to increase by $8,000, accounts receivable will go up $20,000, and accounts payable will increase $10,000. If Anderson Clayton has a marginal tax rate of 40%, what is the NINV for the new mill? a. $392,800 b. $412,800 c. $374,800 d. $398,000

Q: Felix Industries purchased a grinder 5 years ago for $15,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It could be sold now for $6,000. The firm is considering selling it and purchasing a new one. The new grinder would cost $25,000 installed and would be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. The company's marginal tax rate is 40%. Determine the net investment if the old grinder is sold and the new one purchased.a. $19,000b. $16,600c. $17,400d. Cannot be computed from the information provided

Q: Rupp Pumps is purchasing an extruder for $80,000. The extruder will require an expenditure of $12,000 for installation and $4,000 for training new operators. The new equipment will require an increase of $5,000 in inventory, $4,000 in accounts receivable, and $3,000 in accounts payable. What is the net investment for this project? a. $108,000 b. $102,000 c. $ 98,000 d. $ 99,000

Q: Basin Manufacturing is considering a plant expansion project. The equipment will cost $100,000 and will require an additional $10,000 for delivery and installation. The expansion also will require Basin to increase immediately its net working capital by $25,000. The expansion is expected to generate revenues of $150,000 per year, and its marginal tax rate is 40%. Calculate the project's net investment. a. $ 81,000 b. $125,000 c. $131,000 d. $135,000

Q: Baker Company is considering an investment in a new metal lathe. If the new lathe is purchased, revenues will increase by $5,000 per year and cash operating costs will decline by $10,000 per year. The lathe will cost $60,000 and will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. Baker's marginal tax rate is 40%. Determine the annual net cash flows generated by the lathe. a. $11,400 b. $9,000 c. $600 d. $5,400

Q: Allen Company is considering an investment project that is expected to generate $100,000 in annual earnings before taxes. Annual depreciation will be $50,000. Allen's marginal tax rate is 40%. Determine the project's annual net cash flows. a. $150,000 b. $110,000 c. $90,000 d. $60,000

Q: What is the net investment required for a pitting machine that will cost $35,000 including installation? The machine replaces a machine that cost $5,000 when purchased five years ago. The old machine has been fully depreciated but has a market value of $6,000. Assume the marginal tax rate is 40 percent. a. $29,000 b. $31,400 c. $32,600 d. $11,600

Q: LISP Inc. is planning to purchase a new mixer/dubber for $50,000. The new equipment will replace an older mixer that has been fully depreciated but has a salvage value of $5,000. Compute the net investment required for this project. Assume a marginal tax rate of 40 percent. a. $47,000 b. $45,000 c. $48,000 d. $55,000

Q: Moon Pie Company is considering automated baking equipment that costs $500,000 installed and would replace the present hand-made production method. The present equipment has a zero book and salvage value. The new equipment will not increase revenues but will reduce operating costs from a current level of $600,000 to $300,000 per year. The depreciation of the new equipment will be $73,000 per year. What are the annual incremental net cash flows? Assume a marginal tax rate of 40 percent. a. $296,800 b. $136,200 c. $192,200 d. $209,200

Q: Jim Bo's currently has annual cash revenues of $240,000 and annual operating expenses of $185,000 including $35,000 in depreciation. The firm's marginal tax rate is 40 percent. A new cutting machine can be purchased for $120,000 that will increase revenues by$50,000 per year while operating expenses would increase to$205,000, including$42,000 in depreciation. Compute Jim Bo's annual incremental after-tax net cash flows. a. $25,000 b. $20,800 c. $93,000 d. $19,000

Q: The management of Jasper Equipment Company is planning to purchase a new milling machine that will cost $160,000 installed. The old milling machine has been fully depreciated, but can be sold for $15,000. The new machine will be depreciated on a straight line basis over its 10-year economic life to an estimated salvage value of $10,000. If the milling machine will save Jasper $20,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent. a. $15,000 b. $18,000 c. $27,000 d. $58,000

Q: Capital Foods purchased an oven 5 years ago for $45,000. The oven is being depreciated over its estimated 10-year life using the straight line method to a salvage value of $5,000. Capital is planning to replace the oven with a more automated one that will cost $150,000 installed. If the old oven can be sold for $30,000, what is the tax liability? Assume a marginal tax rate of 40 percent. a. $900 b. $2,000 c. $127,000 d. $6,000

Q: Shunt Technology will spend $800,000 on a piece of equipment that will manufacture fine wire for the electronics industries. The shipping and installation charges will be $240,000 and net working capital will increase $48,000.The equipment will replace an existing machine that has a salvage value of $75,000 and a book value of $125,000. If Shunt has a current marginal tax rate of 34 percent, what is the net investment? a. $1,030,000 b. $1,163,000 c. $1,033,000 d. $996,000

Q: What is the net investment for an extruder that costs $42,000 if shipping costs are $1,500 and installation is $4,800? Assume this efficient machine is replacing an older extruder with a book and market value of zero. The replacement investment will reduce operating costs by $6,600 a year. a. $48,300 b. $54,900 c. $43,500 d. None of these are correct.

Q: In Step Video is considering expanding its video rental library to 8,000 tapes. The purchase price of the additional videos will be $80,000 and the shipping cost is another $4,000. To house the tapes, the owner will have to spend another $10,000 for display shelves, increase net working capital by $5,000, and interest expenses will add another $8,000 to the operating cost. What is the net investment to In Step Video for this project? a. $95,000 b. $99,000 c. $84,000 d. $107,000

Q: Ten years ago J-Bar Company purchased a lathe for $250,000. It was being depreciated on a straight-line basis to an estimated $25,000 salvage value over a 15-year period. The firm is considering selling the old lathe and purchasing a new one that would cost $500,000. The firm's marginal tax rate is 40 percent. Determine the net investment required to purchase the new lathe, if the old lathe is sold for $100,000. a. $380,000 b. $397,500 c. $400,000 d. $200,000

Q: An investment project is expected to generate earnings before taxes (EBT) of $60,000 per year. Annual depreciation from the project is $30,000 and the firm's tax rate is 40 percent. Determine the project's annual net cash flows. a. $48,000 b. $66,000 c. $36,000 d. $12,000

Q: A drill press costs $30,000 and is expected to have a 10 year life. The drill press will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. This machine is expected to reduce the firm's cash operating costs by $4,500 per year. If the firm is in the 40 percent marginal tax bracket, determine the annual net cash flows generated by the drill press. a. $4,500 b. $900 c. $5,700 d. $3,900

Q: ____ have cash flow patterns with more than one sign change. a. Conventional projects b. Non-normal projects c. Normal projects d. Contingent projects

Q: When calculating the net cash flow in a project's expected final year, a. recovery of any working capital invested is disregarded b. the after-tax salvage value of any project equipment is considered c. the remaining principal on any borrowed funds is considered d. the sales proceeds from any land associated with the project is disregarded

Q: The net investment calculation for an asset replacement decision normally includes any ____. a. after-tax salvage value of the old asset b. increase in net working capital c. after-tax salvage value of the old asset and increase in net working capital d. cannot be determined from the information given.

Q: There is a capital gain on the sale of an asset for ____. a. more than its original cost b. more than its book value but less than its original cost c. more than its original cost and book value d. All of these answers could be correct.

Q: The net investment calculation for an ____ project normally includes ____. a. asset expansion; pretax proceeds from the sale of the old asset b. asset replacement; pretax proceeds from the sale of the old asset c. asset expansion; after-tax proceeds from the sale of the old asset d. asset replacement; after-tax proceeds from the sale of the old asset

Q: The net cash flows for any year during the life of capital expenditure project are equal to the change in ____ plus the change in ____. a. earnings before interest and taxes; depreciation b. earnings before taxes; depreciation c. earnings after taxes; depreciation d. revenues; costs

Q: A (n) ____ is a cash outlay that is expected to generate a flow of future cash benefits lasting longer than 1 year. a. depreciation charge b. operating expenditure c. capital expenditure d. sunk cost

Q: The capital budgeting process is very important to the firm because it: a. highlights the impacts of a project on net income b. essentially plots the company's future direction c. is used in working capital analysis d. indicates the net cash flows available for employee education

Q: Depreciation a. does not affect cash flows b. does not affect profits c. is not a cash outflow d. is a cash inflow

Q: In terms of the capital budgeting process, net cash flows are a. the net cash outlays required to place a project in service b. the funds invested in additional assets c. incremental changes in a firm's cash flow d. the outlays that have already been made

Q: The ____ the amount of depreciation charged in a period, the ____ will be the firm's taxable income. a. greater, lower b. lower, lower c. lower, higher d. greater, higher

Q: If a firm sells an asset for less than its book value, a. there are no tax consequences b. the loss is treated as lost depreciation c. the loss reduces depreciation expenses d. the loss may be used to offset operating income

Q: Depreciation ____ reported profits and it ____ taxes paid by a firm. a. increases, reduces b. reduces, reduces c. reduces, increases d. increases, increases

Q: Depreciation is based on the asset cost plus all of the following except a. shipping costs b. increase in inventory c. installation d. cost of attached equipment acquired at the same time

Q: In estimating the net investment, an outlay that has already been made is known as a (n) ____. a. sunk cost b. cash outflow c. opportunity cost d. expansion cost

Q: When a firm sells an asset for ____, it realizes a capital gain and must pay income taxes on it. a. book value b. less than book value c. more than book value but less than original cost d. more than its original cost

Q: Cash flows for all investment projects should be projected over the ____ of the project. a. MACRS recovery period b. depreciable life c. economic life d. smaller of depreciable or economic lives

Q: The determination of net cash flows (NCF) should never include a. changes in depreciation b. changes in operating costs c. interest charges d. changes in depreciation or operating costs

Q: Determining the net investment (NINV) of a project includes explicit consideration of all of the following except: a. estimated net cash flow b. project cost plus installation and shipping costs c. increases in net working capital d. taxes associated with the sale of an existing asset and/or the purchase of a new one

Q: The dollar amount of interest charges is: a. always considered in the net cash flow calculation b. normally not considered in the net cash flow calculation c. always considered as a part of the net investment d. None of these answers are correct.

Q: The effect of a one dollar increase in depreciation expenses is to ____ the typical firm's net cash flows by ____ one dollar. a. increase, less than b. increase, exactly c. decrease, more than d. increase, more than

Q: Which of the following items is notconsidered as a part of the net investment calculation? a. the first year's net cash flow b. increase in net working capital c. salvage of an old piece of equipment that is being replaced d. installation and shipping charges

Q: Which of the following is a basic principle when estimating a project's cash flows? a. cash flows should be measured on a pretax basis b. cash flows should ignore depreciation because it is a non-cash charge c. only direct effects of a project should be included in cash flow calculations d. cash flows should be measured on an incremental basis

Q: A firm's cost of capital is: a. an important financial ratio b. equal to 10 percent c. rarely used in practice d. an important input in the capital budgeting process

Q: Which of the following would not be classified as a capital expenditure for decision-making purposes? a. purchase of a building b. investment in a management training program c. purchase of 90-day Treasury Bills d. development of a major advertising campaign

Q: There is neither a gain or a loss on the sale of a depreciable asset for an amount exactly equal to its ____. a. acquisition cost b. tax book value c. opportunity cost d. historical cost

Q: Sale of an asset for less than book value creates an operating loss which effectively reduces the company's taxes by an amount equal to ____ times ____. a. one-half the loss, the company's marginal tax rate b. the loss, one minus the company's marginal tax rate c. one-half the loss, one minus the company's marginal tax rate d. the loss, the company's marginal tax rate

Q: The value of resources used in an investment project should be measured in terms of their a. acquisition cost b. historical cost c. opportunity cost d. depreciated cost

Q: Why is preferred stock considered a hybrid security?

Q: Explain some features of preferred stock.

Q: Which of the following claims is/are paid before the claim of common stockholders?I. Board of Directors bonuses.II. Taxes owed to the federal and state agencies.a. I onlyb. II onlyc. Both I and IId. Neither I nor II

Q: During the past 7 years, Lippo's earnings have grown from $0.78 to $1.95 per share. If the past growth rates are expected to continue into the future, what is the current value of Lippo's common stock to an investor who requires a 16% rate of return?a. $97.50b. $13.93c. $111.15d. $48.50

Q: Dippity-Do-Dah Party Dips, Inc. has common stock that sells for $23.50 and its earnings are expected to grow at a rate of 12% annually. What is the current dividend (Do) for an investor who requires a 15% return?a. $0.71b. $0.63c. $0.34d. $0.31

Q: During the past 10 years, High Flying Airlines' common stock dividends have grown from $0.24 to $0.62. If the past growth of dividends is expected to continue at the same rate in the future, what is the current value of High Flying's common stock to an investor who requires an 18% rate of return? a. $7.75 b. $3.79 c. $8.53 d. $10.42

Q: Moo-Cow Creamery's common stock sells for $37 and its dividend is expected to grow at a rate of 8 percent annually. What is the expected dividend (D1) given that an investor requires a return of 16 percent? a. $2.74 b. $3.20 c. $5.92 d. $2.96

Q: Over the past 10 years the dividends of Chop Shop Barbers, Inc. have grown from $0.45 to $1.82 per share. Determine the value of Chop Shop's common stock to an investor who requires a 20% rate of return, assuming that dividends continue growing at the same rate as they grew over the past 10 years. a. $36.40 b. $41.86 c. $43.68 d. $20.93

Q: Men In Black Tuxedo Shops, Inc. currently pays a dividend of $1.20 per share. Dividends are expected to increase at the rate of $0.10 per share for the next eight years. Determine the current value of MIB's common stock to an investor who expects to be able to sell the stock for $28 after 5 years. Assume that the investor requires a 12 percent rate of return on the security. a. $66 b. $28 c. $21.20 d. $15.88

Q: The common stock of Happy Nappy Mattress Mfg. currently sells for $88.50 and its current (D0) dividend is $1.10. Determine the implied growth rate for Happy Nappy assuming that an investor's required rate of return is 14% and that earnings and dividends are expected to grow at a constant rate. a. 13.9% b. 12.3% c. 13.8% d. 12.6%

Q: Pace Enterprises' common stock sells for $29, and its dividends are expected to grow at a rate of 9 percent annually. If investors in Pace require a return of 14%, what is the expected dividend next year?a. $1.33b. $2.40c. $1.45d. $1.60

Q: Morton Industries' common stock sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If investors in Morton require a 13% rate of return, what is the current dividend?a. $2.70b. $2.50c. $4.00d. $7.02

Q: Over the past 5 years, NBA's common stock earnings per share have grown from $0.62 to $0.91. If an investor is NBA stock is assumed to have a required rate of return of 14%, what is the current value of NBA if its current dividend is 0.12? Assume EPS will continue to grow at a constant rate. a. $2.16 b. $1.62 c. $4.94 d. $2.00

Q: Helix common stock currently sells for $30 and its current dividend is $1.50. If the required rate of return on Helix stock is 15%, what is the implied growth rate of its earnings and dividends?a. 13.5%b. 9.5%c. 10.0%d. 30.0%

Q: Lawton Company common stock currently sells for $38 and pays (year 0) a dividend of $2. Determine the implied growth rate for Lawton assuming that an investor's required rate of return is 12% and that the stock can be evaluated using a constant growth valuation model.a. 6.74%b. 17.26%c. 6.4%d. 4.56%

Q: Over the past 8 years UTX Company common stock dividends have grown from $2.70 to $5.00 per share (currently). Determine the value of UTX common stock to an investor who requires a 16% rate of return, assuming that dividends continue growing for the foreseeable future at the same rate as over the past 8 years. a. $62.50 b. $31.25 c. $67.50 d. $46.96

Q: What is the current value of a share of Augat common stock if its current dividend is $1.50 and dividends are expected to grow at the annual compound growth rate of 20 percent into the foreseeable future? Assume the investor has a required rate of return of 15 percent, and expects to sell the security in 5 years. a. $56.87 b. $30.00 c. $25.00 d. none of these answers are correct.