Finance- Final Exam

The ________ is the rate of return that a firm must earn on its investments in order to maintain the market value of its stock. cost of capital
The ________ is the rate of return required by the market suppliers of capital in order to attract their funds to the firm. cost of capital
The cost of capital reflects the cost of funds ________. over a long-run time period
Although a firm’s existing mix of financing sources may reflect its target capital structure, it is ultimately ________. the marginal cost of capital that is relevant for evaluating the firm’s future investment opportunities
The ________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions. cost of capital
The ________ is the firm’s desired optimal mix of debt and equity financing. target capital structure
The cost to a firm of each type of capital is dependent upon ________. the risk-free rate of each type of capital plus the business risk and the financial risk of the firm
In order to recognize the interrelationship between financing and investments, a firm should use ________ when evaluating an investment. the weighted average cost of all financing sources
The four basic sources of long-term funds for a firm are ________. long-term debt, common stock, preferred stock, and retained earnings
Which of the following is true of long-term funds? They are the sources that supply the financing necessary to support a firm’s capital budgeting activities.
Which of the following is a source of long-term funds? retained earnings
Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is ________. long-term debt, preferred stock, retained earnings, new common stock
Generally the least expensive source of long-term capital is ________. long-term debt
A tax adjustment must be made in determining the cost of ________. long-term debt
The ________ from the sale of a security are the funds actually received from the sale after ________. net proceeds; reducing the flotation costs
The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par value bond selling at $950 is ________. 10.7 percent
The approximate before-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is ________. 5.97 percent
The before-tax cost of debt for a firm, which has a marginal tax rate of 40 percent, is 12 percent. The after-tax cost of debt is ________. 7.2 percent
The specific cost of each source of long-term financing is based on ________ and ________ costs. after-tax; current
When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amounts by considering ________. the flotation costs
If a corporation has an average tax rate of 40 percent, the approximate, annual, after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950 is ________. 7.7 percent
If a corporation has an average tax rate of 40 percent, the approximate annual, after-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is ________. 3.6 percent
The approximate after-tax cost of debt for a 20-year, 7 percent, $1,000 par value bond selling at $960 (assume a marginal tax rate of 40 percent) is ________. 4.43 percent
Debt is generally the least expensive source of capital. This is primarily due to ________. the tax deductibility of interest payments
Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30-year maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm’s tax rate is 35 percent. Given this information, the after-tax cost of debt for Nico Trading would be ________. 7.26%
Tangshan Mining is considering issuing long-term debt. The debt would have a 30 year maturity and a 12 percent coupon rate and make semiannual coupon payments. In order to sell the issue, the bonds must be underpriced at a discount of 2.5 percent of face value. In addition, the firm would have to pay flotation costs of 2.5 percent of face value. The firm’s tax rate is 33 percent. Given this information, the after-tax cost of debt for Tangshan Mining would be ________. 8.48%
What is the dividend on an 8 percent preferred stock that currently sells for $45 and has a face value of $50 per share? $4.00
A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of issuing and selling the stock was $2 per share. The firm’s marginal tax rate is 40 percent. The cost of the preferred stock is ________. 10.2 percent
A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is ________. 12.4 percent
A firm has determined it can issue preferred stock at $115 per share par value. The stock will pay a $12 annual dividend. The cost of issuing and selling the stock is $3 per share. The cost of the preferred stock is ________. 10.7 percent.
Tangshan Mining is considering issuing preferred stock. The preferred stock would have a par value of $75 and a 5.50 percent dividend. What is the cost of preferred stock for Tangshan if flotation costs would amount to 5.5 percent of par value? 5.82%
The cost of common stock equity is ________. the rate at which investors discount the expected dividends of the firm to determine its share value
The cost of common stock equity may be estimated by using the ________. Gordon model
The cost of common stock equity may be estimated by using the ________. capital asset pricing model
The cost of retained earnings is ________. equal to the cost of common stock equity
A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can ________. increase the proportion of common stock equity to decrease financial risk
The constant-growth valuation model is based on the premise that the value of a share of common stock is ________. equal to the present value of all expected future dividends
In calculating the cost of common stock equity, the model which describes the relationship between the required return and the nondiversifiable risk of the firm is ________. the capital asset pricing model
A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. The estimated cost of common stock equity is ________. 15.6 percent
One major expense associated with issuing new shares of common stock is ________. underpricing
One of the circumstances in which the Gordon growth valuation model for estimating the value of a share of stock should be used is ________. a steady growth rate in dividends
A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5 percent. The cost of the firm’s common stock equity is ________. 13 percent
A firm has common stock with a market price of $55 per share and an expected dividend of $2.81 per share at the end of the coming year. The dividends paid on the outstanding stock over the past five years are as follows:Year- Dividend1-$2.002-$2.143-$2.494-$2.455-$2.62The cost of the firm’s common stock equity is ________. 12.1 percent
Using the capital asset pricing model, the cost of common stock equity is the return required by investors as compensation for ________. a firm’s nondiversifiable risk
An approach to capital rationing that involves graphing project returns in descending order against the total dollar investment to determine the group of acceptable projects is called the ________. internal rate of return approach
If a firm has a limited capital budget to fund its capital projects, it is said to be facing the problem of ________. capital rationing
An IRR approach to capital rationing involves graphically plotting project IRRs in descending order against total dollar investment on an ________ graph. IOS
The objective of ________ is to select the group of projects that provides the highest overall net present value and does not require more dollars than are budgeted. capital rationing
A(n) ________ allows management to avoid or minimize losses on projects that turn bad. abandonment option
The option to develop follow-on projects, expand markets, expand or retool plants, and so on thatwould not be possible without implementation of the project that is being evaluated is called ________. growth option
One type of simulation program made popular by the widespread use of personal computers is called ________. Monte Carlo Simulation
A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for $98, with $2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $1 per share. The dividends paid on the outstanding stock over the past five years are as follows:Year-Dividend1-$42-$4.283-$4.584-$4.905-$5.24The cost of this new issue of common stock is ________. 12.8 percent
In comparing the constant-growth model and the capital asset pricing model (CAPM) to calculate the cost of common stock equity, ________. the CAPM directly considers risk as reflected in the beta, while the constant-growth model uses the market price as a reflection of the expected risk-return preference of investors
In calculating the cost of common stock equity, ________. the use of the constant-growth valuation model is often preferred, because the data required are more readily available
Given that the cost of common stock is 18 percent, dividends are $1.50 per share and the price of the stock is $12.50 per share, what is the annual growth rate of dividends? 6 percent
What would be the cost of new common stock equity for Tangshan Mining if the firm just paid a dividend of $4.25, the stock price is $55.00, dividends are expected to grow at 8.5 percent indefinitely, and flotation costs are $6.25 per share? 17.22%
What would be the cost of retained earnings equity for Tangshan Mining if the expected return on U.S. Treasury Bills is 5.00%, the market risk premium is 10.00 percent, and the firm’s beta is 1.3? 18.0%
The cost of new common stock financing is higher than the cost of retained earnings due to ________. flotation costs and underpricing
Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is ________. less than the cost of new common stock equity
Which of the following is a reason for a firm to underprice new issues? When the market is in equilibrium, additional demand for shares can be achieved only at a lower price.
The weights used in weighted average cost of capital must be ________. nonnegative
The preferred capital structure weights to be used in the weighted average cost of capital are ________. target weights
A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions:Source of Capital-Target Market Proportions-After tax CostLongterm Debt-40%-6%Preferred Stock-10%-11%Common Stock Equity-50%-15%The weighted average cost of capital is ________. 11 percent
A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and current market value proportions:Source of Capital-Market Proportions-After Tax CostLong-term Debt-45%-5%Preferred Stock-10%-14%Common Stock Equity-45%-22%Other things remaining constant, if the firm were to shift toward a capital structure with ________ the weighted average cost of capital will be higher. 20% long-term debt, 60% common stock, and 20% preferred stock
As the need for capital increases beyond the optimum capital structure, the cost of debt financing will ________ the firm’s weighted average cost of capital. increase, raising
When discussing weighing schemes for calculating the weighted average cost of capital, ________. market value weights are preferred over book value weights and target weights are preferred over historical weights
The firm’s before-tax cost of debt is ________. (See Table 9.1) 7.8 percent
The firm’s after-tax cost of debt is ________. (See Table 9.1) 4.67 percent
The firm’s cost of preferred stock is ________. (See Table 9.1) 13.9 percent
The firm’s cost of a new issue of common stock is ________. (See Table 9.1) 14.2 percent
The firm’s cost of retained earnings is ________. (See Table 9.1) 13.7 percent
The weighted average cost of capital up to the point when retained earnings are exhausted is ________. (See Table 9.1) 11.9 percent
If the target market proportion is reduced to 15 percent, what will be the revised weighted average cost of capital? (See Table 9.1) 12.34 percent
The firm’s before-tax cost of debt is ________. (See Table 9.2) 7.7 percent
The firm’s after-tax cost of debt is ________. (See Table 9.2) 4.6 percent
The firm’s cost of a new issue of common stock is ________. (See Table 9.2) 19.2 percent
The firm’s cost of retained earnings is ________. (See Table 9.2) 18.9 percent
The weighted average cost of capital up to the point when retained earnings are exhausted is ________. (See Table 9.2) 9.44 percent
Assuming the firm plans to pay out all of its earnings as dividends, the weighted average cost of capital is ________. (See Table 9.2) 10.44 percent
Source of Capital-After Tax CostLongterm Debt-8%Common Stock Equity-19%Given this after-tax cost of each source of capital, the weighted average cost of capital using book weights for General Talc Mines is ________. (See Table 9.3) 15.5 percent
General Talc Mines has compiled the following data regarding the market value and cost of the specific sources of capital.Source of Capital-After Tax CostLongterm Debt-8%Common Stock Equity-19%Market price per share of common stock $50Market value of long-term debt $980 per bondThe weighted average cost of capital using market value weights is ________. (See Table 9.3) 15.8 percent
________ is the process of evaluating and selecting long-term investments that are consistent with a firm’s goal of maximizing owners’ wealth. Capital budgeting
A $60,000 outlay for a new machine with a usable life of 15 years is called ________. capital expenditure
Fixed assets that provide the basis for a firm’s earning and value are often called ________. earning assets
Which of the following is true of a capital expenditure? It is commonly used to expand the level of operations.
The basic motive for capital expenditure is to ________. expand operations
One of the primary motives for adding fixed assets to a firm is ________. expansion
The final step in the capital budgeting process is ________. follow-up
The first step in the capital budgeting process is ________. proposal generation
Which of the following steps in the capital budgeting process follows the decision making step? implementation
________ projects do not compete with each other; the acceptance of one ________ the others from consideration. Independent; does not eliminate
________ projects have the same function; the acceptance of one ________ the others from consideration. Mutually exclusive; eliminates
A firm with limited dollars available for capital expenditures is subject to ________. capital rationing
Projects that compete with one another, so that the acceptance of one eliminates the others from further consideration are called ________. mutually exclusive projects
Which of the following is true of the accept-reject approach? It can be used for making capital budgeting decisions when there is capital rationing.
A conventional cash flow pattern associated with capital investment projects consists of an initial ________. outflow followed by a series of inflows
A nonconventional cash flow pattern associated with capital investment projects consists of an initial ________. outflow followed by a series of both cash inflows and outflows
Which of the following is an example of a nonconventional pattern of cash flows? Year-Cash Flow0-2001-1002- -1003-2004- -300
Which of the following is an unsophisticated capital budgeting technique? payback period
Which of the following capital budgeting techniques ignores the time value of money? payback period approach
The ________ measures the amount of time it takes a firm to recover its initial investment. payback period
An annuity is ________. a series of equal annual cash flows
Which pattern of cash flow stream is the most difficult to use when evaluating projects? nonconventional flow
The cash flow pattern depicted is associated with a capital investment and may be characterized as ________. (See Table 10.1) an annuity and a conventional cash flow
The cash flow pattern depicted is associated with a capital investment and may be characterized as ________. (See Table 10.2) a mixed stream and a conventional cash flow
Payback is considered an unsophisticated capital budgeting because it ________. it does not explicitly consider the time value of money.
A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is ________. between 2 and 3 years
A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years. The payback period of the project is ________. 3.3 years
Which of the following statements is true of payback period? If the payback period is less than the maximum acceptable payback period, accept the project.
What is the payback period for Tangshan Mining company’s new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4? 3.33 years
Should Tangshan Mining company accept a new project if its maximum payback is 3.5 years and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4? Yes, since the payback period of the project is less than the maximum acceptable payback period.
Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4? No, since the payback period of the project is more than the maximum acceptable payback period.
Evaluate the following projects using the payback method assuming a rule of 3 years for payback.Year-Project A-Project B0- -10,000- -10,0001-4,000-4,0002-4,000-3,0003-4,000-2,0004-0-1,000,000 Project A can be accepted because the payback period is 2.5 years but Project B cannot be accepted because its payback period is longer than 3 years.
Which of the following is a disadvantage of payback period approach? It does not explicitly consider the time value of money.
Which of the following is a strength of payback period? a measure of risk exposure
Which of the following is a reason for firms not using the payback method as a guideline in capital investment decisions? It cannot be specified in light of the wealth maximization goal.
Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision techniques, because ________. it can be viewed as a measure of risk exposure due to its focus on liquidity
Which of the following is an advantage of NPV? It takes into account the time value of investors’ money.
The minimum return that must be earned on a project in order to leave the firm’s value unchanged is ________. the cost of capital
A firm can accept a project with a net present value of zero because ________. the project would maintain the wealth of the firm’s owners
A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is ________. -$1,000
What is the NPV for a project whose cost of capital is 15 percent and initial after-tax cost is $5,000,000 and is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4? -$137,053
What is the NPV for a project if its cost of capital is 0 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4? $1,700,000
What is the NPV for a project if its cost of capital is 12 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and ($1,300,000) in year 4? -$1,494,336
What is the profitability index of a project that has an initial cash outflow of $600, an inflow of $250 for the next 3 years and a cost of capital of 10 percent? 1.036
A firm is evaluating three capital projects. The net present values for the projects are as follows:Project-NPV1-$1002-$103- -$100The firm should ________. accept Projects 1 and 2, and reject Project 3
What is the IRR for the following project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4? 13.57%
What is the IRR for the following project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in year 3, and $2,300,000 in year 4? 5.83%
Consider the following projects, X and Y, where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 10 percent? Project X, since it has a higher NPV than Project Y
Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25 percent? neither, since both the projects have negative NPV
Which of the following is true of NPV profile? It charts the net present value of a project as a function of the cost of capital.
The ________ is the discount rate that equates the present value of the cash inflows with the initial investment. internal rate of return
The ________ is the compound annual rate of return that a firm will earn if it invests in the project and receives the given cash inflows. internal rate of return
A firm with a cost of capital of 13 percent is evaluating three capital projects. The internal rates of return are as follows:Project-Internal Rate of Return1-12%2-15%3-13% The firm should ________. accept Project 2, and reject Projects 1 and 3
If the firm in Table 10.3 has a required payback of two years, it should ________. accept Project A and reject Project B
The new financial analyst does not like the payback approach (Table 10.3) and determines that the firm’s required rate of return is 15 percent. Based on IRR, his recommendation would be to ________. reject Project A and accept Project B
Using the internal rate of return approach to ranking projects, which project(s) should the firm accept? (See Table 10.4) 1, 2, 3, and 5
Using the net present value approach to ranking projects, which projects should the firm accept? (See Table 10.4) 1, 2, 3, 5, and 6
When the net present value is negative, the internal rate of return is ________ the cost of capital. less than
A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has an initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm should ________. accept Project Y because its IRR is higher than Project Z
Comparing net present value and internal rate of return ________. may give different accept-reject decisions
Unlike the net present value criteria, the internal rate of return approach assumes a reinvestment rate equal to ________. the project’s internal rate of return
When evaluating projects using NPV approach, ________. projects having higher early-year cash flows tend to be preferred at higher discount rates
Which capital budgeting method is most useful for evaluating a project that has an initial after-tax cost of $5,000,000 and is expected to provide after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3, and $2,300,000 in year 4? net present value
The underlying cause of conflicts in ranking for projects by internal rate of return and net present value methods is ________. the reinvestment rate assumption regarding intermediate cash flows
Which of the following is a reason that makes NPV a better approach to capital budgeting on a purely theoretical basis? The reinvestment rate assumed by this method is reasonable.
In comparing the internal rate of return and net present value methods of evaluation, ________. net present value is theoretically superior, but financial managers prefer to use internal rate of return
Initial cash outflows and subsequent operating cash inflows for a project are referred to as ________. relevant cash flows
Relevant cash flows for a project are best described as ________. incremental cash flows
When making replacement decisions, the development of relevant cash flows is complicated when compared to expansion decisions, due to the need to calculate ________ cash inflows. incremental
In developing the cash flows for an expansion project, the analysis is the same as the analysis for replacement projects where ________. all cash flows from the old asset are zero
Cash outlays that had been previously made and have no effect on the cash flows relevant to a current decision are called ________. sunk costs
Cash flows that could be realized from the best alternative use of an owned asset are called ________. opportunity costs
Which of the following would be used in the computation of an initial investment? he initial purchase price of the investment
Which of the following basic variables must be considered in determining the initial investment associated with a capital expenditure? proceeds from the sale of an existing asset
An important cash inflow in the analysis of initial cash flows for a replacement project is ________. the sale value of the old asset
When evaluating a capital budgeting project, installation costs of a new machine must be considered as part of ________. the initial investment
The change in net working capital when evaluating a capital budgeting decision is ________. the change in current assets minus the change in current liabilities
In evaluating the initial investment for a capital budgeting project, ________. an increase in net working capital is considered a cash outflow
A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is ________. an increase of $60,000
A corporation is considering expanding operations to meet growing demand. With the capital expansion the current accounts are expected to change. Management expects cash to increase by $10,000, accounts receivable by $20,000, and inventories by $30,000. At the same time accounts payable will increase by $40,000, accruals by $30,000, and long-term debt by $80,000. The change in net working capital is ________. a decrease of $10,000
If accounts receivable increase by $1,000,000, inventory decreases by $500,000, and accounts payable increase by $500,000, net working capital would ________. experience no change
The book value of an asset is equal to the ________. original purchase price minus accumulated depreciation
The tax treatment regarding the sale of existing assets that are sold for more than the original purchase price results in ________. a capital gain tax liability
The tax treatment regarding the sale of existing assets that are sold for more than the book value but less than the original purchase price results in a(n) ________. recaptured depreciation taxed as ordinary income
The tax treatment regarding the sale of existing assets that are sold for their book value results in ________. no tax benefit or liability
The portion of an asset’s sale price that is above its book value and below its initial purchase price is called ________. recaptured depreciation
The portion of an asset’s sale price that is below its book value and below its initial purchase price is called ________. a capital loss
The tax treatment regarding the sale of existing assets that are sold for less than the book value results in ________. a capital loss tax benefit
A corporation is selling an existing asset for $21,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________. $7,720 tax liability
A corporation is selling an existing asset for $1,700. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________. $0 tax liability
A corporation is selling an existing asset for $1,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________. $280 tax benefit
A firm is selling an existing asset for $5,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________. $1,320 tax liability
A loss on the sale of an asset that is depreciable and used in business is ________; a loss on the sale of a non-depreciable asset is ________. deductible from ordinary income; deductible only against capital gains
A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is ________. $54,240
A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $70,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $30,000. The new asset will cost $80,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is ________. $48,560
Benefits expected from proposed capital expenditures ________. must be on an after-tax basis because no benefits may be used until tax claims are satisfied
One basic technique used to evaluate after-tax operating cash flows is to ________. add noncash charges to net income
For Proposal 1, the cash flow pattern for the expansion project is ________. (See Table 11.2) a mixed stream and conventional
For Proposal 1, the initial outlay equals ________. (See Table 11.2) $1,500,000
For Proposal 1, the depreciation expense for year 1 is ________. (See Table 11.2) $150,000
For Proposal 1, the annual incremental after-tax cash flow from operations for year 1 is ________. (See Table 11.2) $210,000
For Proposal 2, the cash flow pattern for the replacement project is ________. (See Table 11.2) a mixed stream and conventional
For Proposal 2, the book value of the existing asset at the end of the fifth year is ________. (See Table 11.2) $13,600
For Proposal 2, the tax effect on the sale of the existing asset at the end of the fifth year results in ________. (See Table 11.2) $14,560 tax liability
For Proposal 2, the initial outlay equals ________. (See Table 11.2) $164,560 cash outflow
For Proposal 2, the incremental depreciation expense for year 2 is ________. (See Table 11.2) $60,000
For Proposal 2, the annual incremental after-tax cash flow from operations for year 2 is ________. (See Table 11.2) $56,000
For Proposal 3, the cash flow pattern for the replacement project is ________. (See Table 11.2) a mixed stream and conventional
For Proposal 3, the book value of the existing asset is ________. (See Table 11.2) $80,000
For Proposal 3, the tax effect on the sale of the existing asset results in ________. (See Table 11.2) $16,000 tax liability
For Proposal 3, the initial outlay equals ________. (See Table 11.2) $211,000
For Proposal 3, the incremental depreciation expense for year 3 is ________. (See Table 11.2) $47,850
For Proposal 3, the incremental depreciation expense for year 6 is ________. (See Table 11.2) $15,750
For Proposal 3, the annual incremental after-tax cash flow from operations for year 3 is ________. (See Table 11.2) $93,800
Table 11.3Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate. The cash flow pattern for the capital investment proposal is ________. (See Table 11.3) a mixed stream and conventional
The book value of the existing asset is ________. (See Table 11.3) $7,250
The tax effect on the sale of the existing asset results in ________. (See Table 11.3) $1,100 tax liability
The initial outlay equals ________. (See Table 11.3) $44,100
The incremental depreciation expense for year 1 is ________. (See Table 11.3) $7,600
The incremental depreciation expense for year 5 is ________. (See Table 11.3) $6,360
The annual incremental after-tax cash flow from operations for year 1 is ________. (See Table 11.3) $16,600
The payback period for the project is ________. (See Table 11.5) between 3 and 4 years
The tax effect of the sale of the existing asset is ________. (See Table 11.5) a tax liability of $5,320
The initial outlay for this project is ________. (See Table 11.5) $47,820
The present value of the project’s annual cash flows is ________. (See Table 11.5) $ 51,635
The net present value of the project is ________. (See Table 11.5) $3,815
The internal rate of return for the project is ________. (See Table 11.5) greater than 12 percent
Which of the following must be considered in computing the terminal value of a replacement project? after-tax proceeds the sale of a new asset
A corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate the terminal cash flow. The proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $15,000. The machine has an original purchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percent tax rate on ordinary income and long-term capital gain. The terminal cash flow is ________. $16,000
A corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate the terminal cash flow. The proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $2,000. The machine has an original purchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percent tax rate on ordinary income and long-term capital gain. The terminal cash flow is ________. $8,200
Behavioral approaches ________. are used to get a feel for project risk
Breakeven cash inflow refers to ________. the minimum level of cash inflow necessary for a project to be acceptable, that is, NPV greater than zero
In capital budgeting, risk refers to ________. the uncertainty of cash inflows
In capital budgeting, risk refers to ________. the degree of variability of the cash inflows
Tangshan Mining Company, with a cost of capital of 10 percent, is considering investing in project A, with an initial investment of $1,000,000. Project A is expected to provide equal cash inflows over its 15 year useful life. Based on this information, the breakeven cash inflow for the project is ________. $131,474
The range of the annual cash inflows for Project A is ________. (See Table 12.1) $10,000
If the projects have five-year lives, the range of the net present value for Project B is approximately ________. (See Table 12.1) $303,263
The expected net present value of Project A if the outcomes are equally probable and the project has five-year life is ________. (See Table 12.1) $17,910
A behavioral approach that evaluates the impact on a firm’s return through simultaneous changes in a number variables of a project is called ________. scenario analysis
The advantage of using simulation in the capital budgeting process is the ________. continuum of risk-return trade-offs for decision making
Which of the following strategies will help in minimizing political risk in international capital budgeting decisions? structuring the financing of such investments as debt rather than as equity
Which of the following is an important type of risk in an international capital budgeting context? political risk
________ reflects the return that must be earned on the given project to compensate the firm’s owners adequately. Risk-adjusted discount rate
The difference by which the required discount rate exceeds the risk-free rate is called the ________. risk premium
A preferred approach for risk adjustment of capital budgeting cash flows, from a practical viewpoint, is ________. risk-adjusted discount rates
The theoretical basis from which the concept of risk-adjusted discount rates is derived is ________. the capital asset pricing model
The net present value without adjusting the discount rate for risk is ________. (See Table 12.2) $87,000
The discount rate that should be used in the net present value calculation to compensate for risk is ________. (See Table 12.2) 24 percent
The net present value of the project when adjusting for risk is ________. (See Table 12.2) -$9,300
Using the risk-adjusted discount rate method of project evaluation, the NPV for Project M is ________. (See Table 12.3) $122,970
Using the risk-adjusted discount rate method of project evaluation, the NPV for Project N is ________. (See Table 12.3) $85,732
Using the risk-adjusted discount rate method of project evaluation, the better investment for Tangshan Mining is ________. (See Table 12.3) Project M because it has a higher NPV
Which project would be preferable if both projects were of average risk as the overall firm and Tangshan Mining has a beta of 1.0? (See Table 12.3) Project N because it has a higher NPV
The shares traded publicly in an efficient market are ________. generally not affected by diversification, unless greater returns are expected
Firms do not usually get rewarded by diversifying investments in different lines of business because ________. investors themselves can diversify by holding securities in a variety of firms; they do not need the firm to do it for them
The ________ approach is used to convert the net present value of unequal-lived projects into an equivalent annual amount (in net present value terms). annualized net present value
The NPVs of Projects A and B are ________. (See Table 12.6) $56,386 and $95,066, respectively
The annualized NPV of Project A is ________. (See Table 12.6) $22,674
The annualized NPV of Project B is ________. (See Table 12.6) $21,828
Which project should be chosen on the basis of the normal NPV approach? (See Table 12.6) Project B because its NPV is higher
Which project should be chosen using the Annualized NPV approach? (See Table 12.6) Project A because its annualized NPV is higher
A firm is evaluating two mutually exclusive projects that have unequal lives. The firm must evaluate the projects using the annualized net present value approach and recommend which project they should select. The firm’s cost of capital has been determined to be 14 percent, and the projects have the following initial investments and cash flows:Initial Investment of R:$40,000Initial Investment of S: $58,000Cash Flows-R-S1-$20,000-$30,0002-$20,000-$55,0003-$200004-$20,000 Choose Project S because its ANPV is $6459
Which of the following proposed projects should be accepted for the upcoming year since only $6 million is available for the next year’s capital budget. What is the total NPV of the projects that should be accepted?Project-Cost (million)-NPV (million)A-3.25-0.80B-1.75-0.52C-4.5-0.69D-3.75-0.95E-1.25-0.25F-0.50-0.25 F, B, & D; total cost = $6 million; Total NPV = $1.72
A firm with unlimited funds must evaluate five projects. Projects 1 and 2 are independent and Projects 3, 4, and 5 are mutually exclusive. The projects are listed with their returns.Project-Status-Return (%)1-Independent-142-Independent-123-Mutually Exclusive-104-Mutually Exclusive-155-Mutually Exclusive-12 4, 1, and 2

Leave a Reply

Your email address will not be published. Required fields are marked *