Filters
Question type
Study Flashcards

Currently, Powell Products has a beta of 1.0, and its sales and profits are positively correlated with the overall economy. The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than an average company project. Also, the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following statements is CORRECT?


A) The proposed new project would have more stand-alone risk than the firm's typical project.
B) The proposed new project would increase the firm's corporate risk.
C) The proposed new project would increase the firm's market risk.
D) The proposed new project would not affect the firm's risk at all.
E) The proposed new project would have less stand-alone risk than the firm's typical project.

F) D) and E)
G) B) and D)

Correct Answer

verifed

verified

A

Accelerated depreciation has an advantage for profitable firms in that it moves some cash flows forward, thus increasing their present value. On the other hand, using accelerated depreciation generally lowers the reported current year's profits because of the higher depreciation expenses. However, the reported profits problem can be solved by using different depreciation methods for tax and stockholder reporting purposes.

A) True
B) False

Correct Answer

verifed

verified

Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate, projects' initial outlays and subsequent costs can be forecasted with great accuracy. This is especially true for large product development projects.

A) True
B) False

Correct Answer

verifed

verified

False

Superior analytical techniques, such as NPV, used in combination with risk-adjusted cost of capital estimates, can overcome the problem of poor cash flow estimation and lead to generally correct accept/reject decisions.

A) True
B) False

Correct Answer

verifed

verified

Wilson Co. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $8,500 at the end of Years 1 and 2, respectively. Project Y has an expected life of 4 years with after-tax cash inflows of $4,600 at the end of each of the next 4 years. Each project has a WACC of 11%. What is the equivalent annual annuity of the most profitable project?


A) $1,345.50
B) $1,346.30
C) $1,361.52
D) $1,376.74
E) $1,411.15

F) B) and C)
G) A) and D)

Correct Answer

verifed

verified

The two methods discussed in the text for dealing with unequal project lives are approach.

A) True
B) False

Correct Answer

verifed

verified

The change in net working capital associated with new projects is always positive, because new projects mean that more working capital will be required. This situation is especially true for replacement projects.

A) True
B) False

Correct Answer

verifed

verified

Langston Labs has an overall (composite) Which set of projects would maximize shareholder wealth?


A) A and B.
B) A, B, and C.
C) A, B, and D.
D) A, B, C, and D.
E) A, B, C, D, and E.

F) C) and D)
G) A) and B)

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects.
B) One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring, whereas scenario analysis cannot account for probabilities.
C) Well-diversified stockholders do not need to consider market risk when determining required rates of return.
D) Market risk is important, but it does not have a direct effect on stock prices because it only affects beta.
E) Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions.

F) C) and D)
G) All of the above

Correct Answer

verifed

verified

Fool Proof Software is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year expected life. What is the Year 1 cash flow?


A) $30,258
B) $31,770
C) $33,359
D) $35,027
E) $36,778

F) None of the above
G) All of the above

Correct Answer

verifed

verified

The relative risk of a proposed project is best accounted for by which of the following procedures?


A) Adjusting the discount rate upward if the project is judged to have above-average risk.
B) Adjusting the discount rate downward if the project is judged to have above-average risk.
C) Reducing the NPV by 10% for risky projects.
D) Picking a risk factor equal to the average discount rate.
E) Ignoring risk because project risk cannot be measured accurately.

F) A) and E)
G) B) and C)

Correct Answer

verifed

verified

Clemson Software is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 cash flow?


A) $28,115
B) $28,836
C) $29,575
D) $30,333
E) $31,092

F) A) and D)
G) None of the above

Correct Answer

verifed

verified

Mulroney Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $7,900 at the end of Years 1 and 2, respectively. Project Y has an expected life of 4 years with after-tax cash inflows of $4,300 at the end of each of the next 4 years. Each project has a WACC of 8%. Use the replacement chain approach to determine the NPV of the most profitable project.


A) $4,242
B) $4,246
C) $4,286
D) $4,325
E) $4,433

F) A) and E)
G) B) and D)

Correct Answer

verifed

verified

A company is considering a new project. The CFO plans to calculate the project's NPV by estimating the relevant cash flows for each year of the project's life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flow) , then discounting those cash flows at the company's overall WACC. Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows?


A) All sunk costs that have been incurred relating to the project.
B) All interest expenses on debt used to help finance the project.
C) The investment in working capital required to operate the project, even if that investment will be recovered at the end of the project's life.
D) Sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year.
E) Effects of the project on other divisions of the firm, but only if those effects lower the project's own direct cash flows.

F) A) and B)
G) A) and C)

Correct Answer

verifed

verified

C

Which of the following statements is CORRECT?


A) Since depreciation is a cash expense, the faster an asset is depreciated, the lower the projected NPV from investing in the asset.
B) Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
C) Corporations must use the same depreciation method for both stockholder reporting and tax purposes.
D) Using accelerated depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a project's forecasted NPV.
E) Using accelerated depreciation rather than straight line normally has the effect of slowing down cash flows and thus reducing a project's forecasted NPV.

F) A) and D)
G) A) and E)

Correct Answer

verifed

verified

A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?


A) Increase the estimated IRR of the project to reflect its greater risk.
B) Increase the estimated NPV of the project to reflect its greater risk.
C) Reject the project, since its acceptance would increase the firm's risk.
D) Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets.
E) Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.

F) B) and D)
G) A) and B)

Correct Answer

verifed

verified

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?


A) A firm has a parcel of land that can be used for a new plant site or be sold, rented, or used for agricultural purposes.
B) A new product will generate new sales, but some of those new sales will be from customers who switch from one of the firm's current products.
C) A firm must obtain new equipment for the project, and $1 million is required for shipping and installing the new machinery.
D) A firm has spent $2 million on R&D associated with a new product. These costs have been expensed for tax purposes, and they cannot be recovered regardless of whether the new project is accepted or rejected.
E) A firm can produce a new product, and the existence of that product will stimulate sales of some of the firm's other products.

F) All of the above
G) A) and B)

Correct Answer

verifed

verified

Taussig Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both the company's other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following numbers: Project X Project Y Expected NPV $350,000 $350,000 Standard deviation (sNPV) Project beta (vs. market) Correlation of the project cash flows with cash flows from currently existing projects. Cash flows are not correlated with the cash flows from existing projects. Cash flows are highly correlated with the cash flows from existing projects. Which of the following statements is CORRECT?


A) Project X has more stand-alone risk than Project Y.
B) Project X has more corporate (or within-firm) risk than Project Y.
C) Project X has more market risk than Project Y.
D) Project X has the same level of corporate risk as Project Y.
E) Project X has less market risk than Project Y.

F) C) and D)
G) B) and C)

Correct Answer

verifed

verified

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?


A) Using some of the firm's high-quality factory floor space that is currently unused to produce the proposed new product. This space could be used for other products if it is not used for the project under consideration.
B) Revenues from an existing product would be lost as a result of customers switching to the new product.
C) Shipping and installation costs associated with a machine that would be used to produce the new product.
D) The cost of a study relating to the market for the new product that was completed last year. The results of this research were positive, and they led to the tentative decision to go ahead with the new product. The cost of the research was incurred and expensed for tax purposes last year.
E) It is learned that land the company owns and would use for the new project, if it is accepted, could be sold to another firm.

F) B) and C)
G) B) and E)

Correct Answer

verifed

verified

Your company, CSUS Inc., is considering a new project whose data are shown below. The required equipment has a 3-year tax life, and the accelerated rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year expected operating life. What is the project's Year 4 cash flow?


A) $11,814
B) $12,436
C) $13,090
D) $13,745
E) $14,432

F) A) and E)
G) A) and B)

Correct Answer

verifed

verified

Showing 1 - 20 of 73

Related Exams

Exam 1

An Overview of Financial Management

67 Questions

Exam 2

Financial Markets and Institutions

33 Questions

Exam 3

Financial Statements, Cash Flow, and Taxes

98 Questions

Exam 4

Analysis of Financial Statements

113 Questions

Exam 5

Time Value of Money

144 Questions

Exam 6

Bonds and Their Valuation

76 Questions

Exam 7

Bonds and Their Valuation

83 Questions

Exam 8

Risk and Rates of Return

132 Questions

Exam 9

Stocks and Their Valuation

74 Questions

Exam 10

The Cost of Capital

75 Questions

Exam 11

The Basics of Capital Budgeting

85 Questions

Exam 13

Real Options and Other Topics in Capital Budgeting

33 Questions

Exam 14

Capital Structure and Leverage

71 Questions

Exam 15

Distributions to Shareholders: Dividends and

65 Questions

Exam 16

Working Capital Management

120 Questions

Exam 17

Financial Planning and Forecasting

31 Questions

Exam 18

Derivatives and Risk Management

28 Questions

Exam 19

Multinational Financial Management

43 Questions

Exam 20

Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

53 Questions

Exam 21

Mergers and Acquisitions

38 Questions

Exam 22

Financial Management and Stock Equilibrium

36 Questions

Show Answer