Conducting scenario analysis on a proposed project helps managers determine the:
-impact that an individual variable has on the outcome of the project.
-initial cost that will be required to implement the project.
-actual profitable life of the project.
-
potential range of reasonable outcomes that might be realized.
The point where a project produces a rate of return equal to the required return is known as the:
point of zero operating leverage.
cash break-even point.
accounting break-even point.
financial break-even point.
internal break-even point
financial break-even point
Forecasting risk is defined as the:
-possibility that some proposed projects will be rejected.
-process of estimating future cash flows relative to a project.
-possibility that errors in projected cash flows will lead to incorrect decisions.
-process of a
possibility that errors in projected cash flows will lead to incorrect decisions.
Scenario analysis is different than sensitivity analysis:
-as no economic forecasts are changed.
-as several variables are changed together.
-because scenario analysis deals with actual data versus sensitivity analysis which deals with a forecast.
-becaus
as several variables are changed together.
The base case values used in scenario analysis are the ones considered the most:
-optimistic.
-desired by management.
-pessimistic.
-conducive to creating a positive net present value.
-likely to occur
likely to occur.
Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:
-method of analysis used to make the decision.
-initial cash outflow.
-ability to recoup any investment in net working c
accuracy of the projected cash flows
Assume you graph the changes in net present value against the changes in the value of a single variable used in a project. The steepness of the resulting function illustrates the:
-degree of operating leverage within the project.
-trade-off of variable ve
degree of sensitivity of the project's outcome to changes in the single variable.`
Theoretically, the NPV is the most appropriate method to determine the acceptability of a project. A false sense of security can be overwhelm the decision-maker when the procedure is applied properly and the positive NPV results are accepted blindly. Sens
All of the above.
The sales level that results in a project's net income exactly equaling zero is called the _____ break-even.
-operational
-leveraged
-accounting
-cash
-financial
accounting
Which of the following statements are correct concerning the security market line (SML) approach to determining the cost of equity for a firm?
I. The SML approach considers the amount of unsystematic risk associated with a firm.
II. The SML approach can b
II and IV only
The return lenders require on loaned funds to a firm is called the:
-coupon rate.
-current yield.
-cost of debt.
-capital gains yield.
-cost of capital.
cost of debt.
The return shareholders require on their investment in a firm is called the:
dividend yield.
cost of equity.
capital gains yield.
cost of capital.
income return.
cost of equity
Which one of the following statements is correct concerning the weighted average cost of capital (WACC)?
-The WACC may decrease as a firm's debt-equity ratio increases.
-When computing the WACC, the weight assigned to the preferred stock is based on the c
The WACC may decrease as a firm's debt-equity ratio increases.
The weighted average cost of capital for a firm is the:
-discount rate which the firm should apply to all of the projects it undertakes.
-rate of return a firm must earn on its existing assets to maintain the current value of its stock.
-coupon rate the f
rate of return a firm must earn on its existing assets to maintain the current value of its stock
The aftertax cost of debt generally increases when:
I. a firm's bond rating increases.
II. the market rate of interest increases.
III. tax rates decrease.
IV. bond prices rise.
I and III only
II and III only
I, II, and III only
II, III, and IV only
I, II,
II and III only
The cost of equity for a firm is:
-dependent upon the firm's debt-equity ratio.
-based on estimates derived from financial models.
-equivalent to a leveraged firm's cost of capital.
-equal to the risk-free rate of return plus the market risk premium.
-equ
based on estimates derived from financial models.
The flotation cost for a firm is computed as
-the arithmetic average of the flotation costs of both debt and equity.
-the weighted average of the flotation costs associated with each form of financing.
-the geometric average of the flotation costs associa
the weighted average of the flotation costs associated with each form of financing.
The pre-tax cost of debt for a firm:
-is based on the yield to maturity on the firm's outstanding bonds.
-is equal to the coupon rate for the latest bond issue.
-is equivalent to the current yield on the outstanding bonds of the firm.
-is based on the yie
is based on the yield to maturity on the firm's outstanding bonds.
The cost of preferred stock is computed the same as the:
pre-tax cost of debt.
return on an annuity.
aftertax cost of debt.
return on a perpetuity.
cost of an irregular growth common stock.
return on a perpetuity.
The capital structure weights used in computing the weighted average cost of capital:
-are based on the book values of total debt and total equity.
-are based on the market value of the firm's debt and equity securities.
-are computed using the book value
are based on the market value of the firm's debt and equity securities.
All else constant, which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $2.10 a share and has a beta of 1.1.
a reducti
an increase in the market rate of return
Incorporating flotation costs into the initial cash flow of a project will:
-cause the project to be improperly evaluated.
-increase the net present value of the project.
-increase the project's internal rate of return.
-increase the initial cash outflow
increase the initial cash outflow of the project thereby lowering the project's net present value
DTK, Inc. uses both preferred and common stock as well as long-term debt to finance its operations. An increase in which one of the following will increase the capital structure weight of the debt, all else equal?
market price of the common stock
number o
number of bonds outstanding
The weighted average cost of capital for a firm is dependent upon the firm's:
I. level of systematic risk.
II. debt-equity ratio.
III. preferred dividend amount.
IV. outstanding bonds' yield to maturity.
I and III only
II and IV only
I, II, and IV only
I,
I, II, III, and IV
The pre-tax salvage value of an asset is equal to the:
book value if straight-line depreciation is used.
book value if MACRS depreciation is used.
market value minus the book value.
book value minus the market value.
market value.
market value
Which of the following are examples of erosion?
I. the loss of current sales due to increased competition in the product market
II. the loss of current sales because your chief competitor just opened a store across the street from your store
III. the loss
III only
The tax savings generated as a result of a firm's depreciation expense is called the:
aftertax depreciation savings.
depreciable basis.
depreciation tax shield.
operating cash flow.
aftertax salvage value.
depreciation tax shield.
A company which utilizes the MACRS system of depreciation
-will have equal depreciation costs each year of an asset's life.
-will have a greater tax shield in year two of a project than they would have if the firm had opted for straight-line depreciation.
will have a greater tax shield in year two of a project than they would have if the firm had opted for straight-line depreciation.
Pro forma statements for a proposed project should:
I. be compiled on a stand-alone basis.
II. include all the incremental cash flows related to a project.
III. generally exclude interest expense.
IV. include all project-related fixed asset acquisitions a
I, II, III, and IV
All of the following are related to a proposed project. Which should be included in the cash flow at time zero?
I. initial inventory increase of $2,500
II. loan of $125,000 to commence a project
III. depreciation tax shield of $1,100
IV. initial purchase
I and IV only
The book value of a fixed asset must be used in the computation of which one of the following?
annual tax shield
tax due on the sale of a fixed asset
operating cash flow
change in net working capital
MACRS depreciation
tax due on the sale of a fixed asset
The evaluation of a project based solely on its incremental cash flows is the basis of the:
future cash flow method.
stand-alone principle.
dividend growth model.
salvage value model.
equivalent cost principle.
stand-alone principle.
Russell's of Westerfield is a furniture store which is considering offering carpet for sale. Which of the following should be considered incremental cash flows of theproject?
I. utilizing the credit offered by a carpet supplier to build an initial invento
I, II, and IV only