FINANCE WEEK 5 QUIZ.
uestion 1
All of the following are incremental costs of commuting to college in your hometown except:
Answer
Costs of books
Tuition
Student fees
Room and board
Question 2
Tanya believes noncash expenses should be ignored when making capital budgeting decisions because they have no impact on cash flows. She is mistaken because:
Answer
noncash expenses increase net income and must be added back to appropriately calculate cash flows
noncash expenses decrease the cost of goods sold and therefore increase cash flows
noncash expenses reduce taxable income, decrease tax payments, and increase cash flows
noncash expenses (such as depreciation) allow a firm to spread the cost of fixed assets over many years and therefore balance cash outflows
noncash expenses increase net working capital and therefore are cash outflows
Question 3
Which of the following should not be included as a cash flow in evaluating a new piece of equipment for manufacturing?
Answer
Portion of current fixed administrative costs
Salvage value
Cost reductions
Reduction in production from other equipment if new equipment is put in place
Question 4
A(n) __________ in working capital represents a(n) __________.
Answer
increase; cash inflow
decrease; cash inflow
decrease; cash outflow
increase; equivalent annual cost (EAC)
decrease; equivalent annual cost (EAC)
Question 5
Why is accelerated depreciation (MACRs) useful for a firm?
Answer
Since depreciation is not a cash flow, it is not useful, merely required by the tax code
Accelerating the depreciation reduces book value; increasing book-value based return ratios
MACRs is consistently applied in other countries
MACRS reduces taxes and increases cash flow
Question 6
The acronym MACRS stands for:
Answer
Modified Accelerated Curve Residual System
Modified Accelerated Curve Resource Source
Most Accelerated Cost Residual System
Modified Accelerated Cost Recovery System
Question 7
Everafter, Inc. is considering two substitutable devices to replace aging, low-tech equipment. The first device costs less initially, will last 7 years, and has higher maintenance costs than the second device. The second device will last 8 years. When evaluating these alternatives, it would be most efficient to find the device with:
Answer
the lowest equivalent annual cost (EAC)
the highest equivalent annual cost (EAC)
the lowest net present value (NPV)
the highest net present value (NPV)
the lowest maintenance costs
Question 8
When evaluating a firm with excess capacity, which of the following statements is false?
Answer
Excess capacity is often treated as a free asset.
Firms operating at less than full capacity can effectively measure the cost of using excess capacity.
The cost of using an asset with excess capacity is zero because there is no short run marginal cost associated with using the asset.
The cost of using the asset must consider the fact that more capacity may be needed more quickly in the future.
Question 9
Which statement concerning cash flows included in the capital budgeting process is accurate?
Answer
An increase in the cash account would represent a cash inflow when considering a working capital change.
Depreciation expense is included as a cash outflow.
Year-end profits represent the bottom line cash flow used for each year of the project’s life.
Only incremental cash flows are considered.
Question 10
When a U.S. firm uses accelerated depreciation for tax purposes and straight-line depreciation for financial reporting:
Answer
only accelerated depreciation should be used when determining project cash flows
only straight-line depreciation should be used when determining project cash flows
NPV analysis of a given project must consider cash flows under both depreciation methods
potential tax benefits are not being maximized someone might go to jail
Question 11
Ideally, weights in the WACC formula should be determined using
Answer
market value of equity and market value of debt
book value of equity and market value of debt
market value of equity and book value of debt
book value of equity and book value of debt 4 points
Question 12
Identifying a(n) __________ is tantamount to identifying future points at which it may be possible for managers to create and sustain competitive advantage.
Answer
asset beta
real option
debt beta
pure play
project
beta
Question 13
A real estate developer considers buying land that currently has substantial pine trees (pine trees are a desired timber). The development will not occur for several years and is somewhat flexible, but when it does, the pine trees will be harvested. The developer determines that the price uncertainty of the timber will increase over the next few years (future prices are expected to be very volatile). Does this increase or decrease the value of the land to the developer?
Answer
It decreases the value of the land as the timber price is more uncertain
It decreases the value of the land because increased volatility increases the discount rate
It decreases the value of the land because the value of the timber option decreases
It increases the value of the land because the value of the timber option increases
Question 14
Which of the following would explain a positive NPV calculation?
Answer
Perfect competition
Perfect capital markets
Capital market frictions
Barriers to entry
Question 15
Operating and financial leverage may exist for firms. Which of the following statements is accurate concerning leverage?
Answer
The presence of common equity creates financial leverage.
The presence of high levels of variable costs creates operating leverage.
The presence of higher sales prices creates financial leverage.
The presence of debt creates financial leverage.
Question 16
All of the following are examples of real options facing corporations EXCEPT:
Answer
Expansion options
Abandonment options
Follow-on investment options
Executive stock options
Flexibility options
Question 17
If the firm applies its WACC to all projects, it will tend to accept some negative-NPV projects that are
Answer
of shorter lifetime than the firm’s existing operations
of longer lifetime than the firm’s existing operations
riskier than the firm’s existing operations
Safer than the firm’s existing operations
Question 18
Requiring that all projects with risk comparable to that of the firm as a whole earn at least the __________ means that firms will only invest in projects that have positive NPVs.
Answer
Operational efficiency
Cost of debt
Cost of equity
WACC
Question 19
Two firms have the same asset beta but different equity betas. The direct cause is likely:
Answer
The importance of variable costs varies across these firms
The firms have different proportions of debt relative to equity
One firm’s sales are more cyclical than the other
The importance of variable costs is the same across these firms
Question 20
Which of the following is not a competitive advantage for a firm?
Answer
superior engineering
superior R & D
low-cost manufacturing process
unique marketing programs
superior executive
compensation
All of the following are incremental costs of commuting to college in your hometown except:
Answer
Costs of books
Tuition
Student fees
Room and board
Question 2
Tanya believes noncash expenses should be ignored when making capital budgeting decisions because they have no impact on cash flows. She is mistaken because:
Answer
noncash expenses increase net income and must be added back to appropriately calculate cash flows
noncash expenses decrease the cost of goods sold and therefore increase cash flows
noncash expenses reduce taxable income, decrease tax payments, and increase cash flows
noncash expenses (such as depreciation) allow a firm to spread the cost of fixed assets over many years and therefore balance cash outflows
noncash expenses increase net working capital and therefore are cash outflows
Question 3
Which of the following should not be included as a cash flow in evaluating a new piece of equipment for manufacturing?
Answer
Portion of current fixed administrative costs
Salvage value
Cost reductions
Reduction in production from other equipment if new equipment is put in place
Question 4
A(n) __________ in working capital represents a(n) __________.
Answer
increase; cash inflow
decrease; cash inflow
decrease; cash outflow
increase; equivalent annual cost (EAC)
decrease; equivalent annual cost (EAC)
Question 5
Why is accelerated depreciation (MACRs) useful for a firm?
Answer
Since depreciation is not a cash flow, it is not useful, merely required by the tax code
Accelerating the depreciation reduces book value; increasing book-value based return ratios
MACRs is consistently applied in other countries
MACRS reduces taxes and increases cash flow
Question 6
The acronym MACRS stands for:
Answer
Modified Accelerated Curve Residual System
Modified Accelerated Curve Resource Source
Most Accelerated Cost Residual System
Modified Accelerated Cost Recovery System
Question 7
Everafter, Inc. is considering two substitutable devices to replace aging, low-tech equipment. The first device costs less initially, will last 7 years, and has higher maintenance costs than the second device. The second device will last 8 years. When evaluating these alternatives, it would be most efficient to find the device with:
Answer
the lowest equivalent annual cost (EAC)
the highest equivalent annual cost (EAC)
the lowest net present value (NPV)
the highest net present value (NPV)
the lowest maintenance costs
Question 8
When evaluating a firm with excess capacity, which of the following statements is false?
Answer
Excess capacity is often treated as a free asset.
Firms operating at less than full capacity can effectively measure the cost of using excess capacity.
The cost of using an asset with excess capacity is zero because there is no short run marginal cost associated with using the asset.
The cost of using the asset must consider the fact that more capacity may be needed more quickly in the future.
Question 9
Which statement concerning cash flows included in the capital budgeting process is accurate?
Answer
An increase in the cash account would represent a cash inflow when considering a working capital change.
Depreciation expense is included as a cash outflow.
Year-end profits represent the bottom line cash flow used for each year of the project’s life.
Only incremental cash flows are considered.
Question 10
When a U.S. firm uses accelerated depreciation for tax purposes and straight-line depreciation for financial reporting:
Answer
only accelerated depreciation should be used when determining project cash flows
only straight-line depreciation should be used when determining project cash flows
NPV analysis of a given project must consider cash flows under both depreciation methods
potential tax benefits are not being maximized someone might go to jail
Question 11
Ideally, weights in the WACC formula should be determined using
Answer
market value of equity and market value of debt
book value of equity and market value of debt
market value of equity and book value of debt
book value of equity and book value of debt 4 points
Question 12
Identifying a(n) __________ is tantamount to identifying future points at which it may be possible for managers to create and sustain competitive advantage.
Answer
asset beta
real option
debt beta
pure play
project
beta
Question 13
A real estate developer considers buying land that currently has substantial pine trees (pine trees are a desired timber). The development will not occur for several years and is somewhat flexible, but when it does, the pine trees will be harvested. The developer determines that the price uncertainty of the timber will increase over the next few years (future prices are expected to be very volatile). Does this increase or decrease the value of the land to the developer?
Answer
It decreases the value of the land as the timber price is more uncertain
It decreases the value of the land because increased volatility increases the discount rate
It decreases the value of the land because the value of the timber option decreases
It increases the value of the land because the value of the timber option increases
Question 14
Which of the following would explain a positive NPV calculation?
Answer
Perfect competition
Perfect capital markets
Capital market frictions
Barriers to entry
Question 15
Operating and financial leverage may exist for firms. Which of the following statements is accurate concerning leverage?
Answer
The presence of common equity creates financial leverage.
The presence of high levels of variable costs creates operating leverage.
The presence of higher sales prices creates financial leverage.
The presence of debt creates financial leverage.
Question 16
All of the following are examples of real options facing corporations EXCEPT:
Answer
Expansion options
Abandonment options
Follow-on investment options
Executive stock options
Flexibility options
Question 17
If the firm applies its WACC to all projects, it will tend to accept some negative-NPV projects that are
Answer
of shorter lifetime than the firm’s existing operations
of longer lifetime than the firm’s existing operations
riskier than the firm’s existing operations
Safer than the firm’s existing operations
Question 18
Requiring that all projects with risk comparable to that of the firm as a whole earn at least the __________ means that firms will only invest in projects that have positive NPVs.
Answer
Operational efficiency
Cost of debt
Cost of equity
WACC
Question 19
Two firms have the same asset beta but different equity betas. The direct cause is likely:
Answer
The importance of variable costs varies across these firms
The firms have different proportions of debt relative to equity
One firm’s sales are more cyclical than the other
The importance of variable costs is the same across these firms
Question 20
Which of the following is not a competitive advantage for a firm?
Answer
superior engineering
superior R & D
low-cost manufacturing process
unique marketing programs
superior executive
compensation
