Question

4. If a company expects to sell 4,500 units, has a DOL of 2 and a % change in Operating Cash Flow of 22% (positive), how many units did they actually sell?

a.  400

b.  440

c.  4,440

d.  4,995

e.  None of the above

5.  Which of the following is FALSE about the efficient markets hypothesis?

a.  EMH implies that the market has already incorporated characteristics such as dividend policy into its price.

b.  EMH is the idea that actual capital markets, such as the NYSE, are efficient.

c.  EMH means that it does not matter how you invest your money, the market will keep you from a mistake.

d.  Much of the criticism of EMH stems from a misunderstanding of the concept.

e.  EMH implies that the price a firm will obtain when it sells a share of its stock is a “fair” price.

6.  Year two in each of the MACRS depreciation schedules

a.Is the year in which MACRS depreciation is greater than straight line depreciation.

b.Is the year in which taxes are saved by the company.

c.Is the point at which tax savings can be invested to earn income.

d.Is important because of the time value of money.

e.All of the above.

7. When computing after tax salvage value, if book value is less than market value,

a.There will be a gain.

b.There will be a loss.

c.The tax adjustment will add to market value.

d.The tax adjustment will subtract from book value.

e.None of the above.

8. The Equivalent Annual Cost computation is important when

a.The useful lives are different on the two choices.

b.The initial costs of the two choices are the same.

c.There is no annual maintenance cost to be considered.

d.This is one time purchase and the machine will not be replaced when it wears out.

e.Both machines could be purchased if it is cost effective to do so.

9. One of the most important reasons why companies try to grow over time is

a.  So that they can have more influence politically in their local elections.

b.  So that their officers can have higher salaries and bonuses.

c.  To increase the prestige and status of employees and officers.

d.  To increase the profits of the firm.

e.  To reduce the degree of operating leverage and thereby forecasting risk.

10.  Which of the following is TRUE about what if analysis?

a.  Scenario analysis is used to analyze the impact of one variable on the bottom line.

b.  Sensitivity analysis is a combination of scenario and simulation and uses a computer modeling program.

c.  Simulation analysis tests the limits by computing plus or minus ten percent, for example.

d.  The base case scenario is our best guess of what the numbers will be.

e.  None of the above is true.

11.  If you found an investment with a 23% total return (in today’s economy), what would be your best course of action?

a.  Buy it quickly before others discover this lucrative investment and the price goes down.

b.  Do not buy it because there has to be something wrong with that return number.

c.  Investigate further to see why the return on this stock is so much greater than elsewhere in the marketplace.

d.  Buy it because they could not advertise 23% if it was not really getting that.

e.  Report the stock to the Securities and Exchange Commission.

12.  In computing current and capital gains yields, which of the following isTRUE?

a.  You always divide by the initial price.

b.  You always divide by the ending price.

c.  Dividend yield can be positive or negative.

d.  Capital gains yield is the total of dividend (current) yield and total yield.

e.  Capital gains yield will always be negative.

13. In capital budgeting analysis,

a.  we are looking for projects that add value to the firm’s owner’s equity.

b.  we are looking for projects that have a large payoff several years down the line.

c.  we are looking for projects that won’t cost the firm too much up front.

d.  we are looking for projects with large incomes in the early years.

e.  we are looking for projects that do not have any additional investments after the initial one.

14. A disadvantage of the Internal Rate of Return method of evaluating projects is

a.It does not take into account the time value of money.

b.It is difficult to compute, even with level cash flows.

c.It sometimes results in more than one answer.

d.Managers do not understand the concept of Internal Rate of Return.

e.It is biased toward short term projects

16.  Which of the following are characteristics associated with positive NPV projects?

I.   Access to distribution channels

II.  Economies of scale

III. Favorable government policies

a.I and II only

b.I and III only

c.II and III only

d.I, II, and III.

e.II only

Answer 1

4. If a company expects to sell 4,500 units, has a DOL of 2 and a % change in Operating Cash Flow of 22% (positive), how many units did they actually sell?

d.  4,995

[4500*100%+22%/2 = 4500*1.11 = 4995]

5.  Which of the following is FALSE about the efficient markets hypothesis?

b.  EMH is the idea that actual capital markets, such as the NYSE, are efficient.

6.  Year two in each of the MACRS depreciation schedules

c.Is the point at which tax savings can be invested to earn income.

7. When computing after tax salvage value, if book value is less than market value,

a.There will be a gain.

8. The Equivalent Annual Cost computation is important when

a.The useful lives are different on the two choices.

9. One of the most important reasons why companies try to grow over time is

e.  To reduce the degree of operating leverage and thereby forecasting risk.

10.  Which of the following is TRUE about what if analysis?

d.  The base case scenario is our best guess of what the numbers will be.

11.  If you found an investment with a 23% total return (in today’s economy), what would be your best course of action?

c.  Investigate further to see why the return on this stock is so much greater than elsewhere in the marketplace.

12.  In computing current and capital gains yields, which of the following isTRUE?

a.  You always divide by the initial price.

13. In capital budgeting analysis,

a.  we are looking for projects that add value to the firm’s owner’s equity.

14. A disadvantage of the Internal Rate of Return method of evaluating projects is

b.It is difficult to compute, even with level cash flows.

16.  Which of the following are characteristics associated with positive NPV projects?

I.   Access to distribution channels

II.  Economies of scale

III. Favorable government policies

e.II only