2008 F F3250 E3

2008 F F3250 E3Student: ___________________________________________________________________________1.Net present value:A.should be used when deciding between two mutually exclusive projects.B.is less useful than the internal rate of return when comparing different sized projects.C.is easy to explain to non-financial, low-level managers.D.is less useful than the profitability index when comparing mutually exclusive projects.E.is very similar in its methodology to the average accounting return.2.Office Furniture Makers, Inc. uses machines to produce high quality office chairs for other firms. The initial cost of one customized machine is $750,000. This machine costs $12,000 a year to operate. Each machine has a life of 3 years before it is replaced. What is the equivalent annual cost of this machine if the required return is 10 percent? (Round your answer to whole dollars)A.$259,947B.$285,942C.$301,586D.$313,586E.$326,9473.Wilmington Importers preferred stock pays a $5 annual dividend. What is the maximum price you are willing to pay for one share of this stock if your required return is 15.5 percent?A.$32.26B.$35.48C.$72.68D.$77.50E.$79.814.Which one of the following is a use of cash?A.payment received from a customer on his or her accountB.sale of inventory to a cash customerC.decrease in the cash balanceD.sale of common stockE.payment to a supplier5.All else equal, the internal growth rate increases when the:A.retention ratio decreases.B.dividend payout ratio increases.C.net income decreases.D.total assets decrease.E.plowback ratio decreases.6.On your thirteenth birthday, you received $1,000 which you invested at 6.5 percent interest, compounded annually. Your investment is now worth $5,476. How old are you today?A.age 29B.age 32C.age 35D.age 37E.age 407.Expansion, Inc. purchased a building for $485,000 seven years ago. Five years ago, repairs were made to the building which cost $80,000. The annual taxes on the property are $30,000. The building has a current market value of $424,000 and a current book value of $399,000. The building is totally paid for and solely owned by the firm. If the company decides to assign this building to a new project, what value, if any, should be included in the initial cash flow of the project for this building?A.$0B.$424,000C.$454,000D.$485,000E.$504,0008.Justin's Manufacturing purchased a lot in Lake City ten years ago at a cost of $790,000. Today, that lot has a market value of $1.2 million. At the time of the purchase, the company spent $100,000 to grade the lot and another $20,000 to build a small garage on the lot to house additional equipment. The company now wants to build a new facility on the site. The building cost is estimated at $1.7 million. What amount should be used as the initial cash flow for this project?A.$2,490,000B.$2,610,000C.$2,900,000D.$3,020,000E.$3,690,0009.Which one of the following will reduce the risk of a project by lowering the degree of operating leverage?A.hiring temporary workers from an employment agency rather than hiring part-time employeesB.subcontracting portions of the project rather than purchasing new equipment to do all the work in-houseC.leasing equipment on a long-term basis rather than buying equipmentD.lowering the projected selling price per unitE.changing the proposed production method to a more capital intensive method10.Berber Mills has a capital structure which includes bonds, preferred stock, and common stock. The firm's common stock shareholders are most to apt to have which of the following rights? I. right to all the corporate profitsII. sole right to elect the corporate directorsIII. right to vote on proposed mergersIV. right to the residual assets in a liquidationA.I and II onlyB.II and III onlyC.I and IV onlyD.II, III, and IV onlyE.I, II, III, and IV11.Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:A.method of analysis used to make the decision.B.initial cash outflow.C.ability to recoup any investment in net working capital.D.accuracy of the projected cash flows.E.length of the project.12.You are considering two independent projects with the following cash flows. The required return for both projects is 12 percent. Given this information, which one of the following statements is correct?

A.You should accept project A since it has the higher IRR and reject project B because you cannot accept both projects.B.You should accept project A because it has the higher NPV and reject project B.C.You should accept project B because it has the higher NPV and reject project A.D.You should accept project B because it has the higher IRR and reject project A.E.You should accept both projects based on both the NPV and IRR rules.13.Which one of the following statements concerning net working capital is correct?A.The lower the net working capital the greater the ability of a firm to meet its current obligations.B.The change in net working capital is equal to current assets minus current liabilities.C.A decrease in accounts payable increases net working capital, all else constant.D.Net working capital is equal to long-term assets minus long-term liabilities.E.Net working capital is a part of the operating cash flow.14.The internal rate of return for a project will increase if:A.the initial cost of a project is increased.B.the total amount of the cash inflows is reduced.C.each cash inflow is moved such that it occurs one year later than originally projected.D.the required rate of return is increased.E.the salvage value of the assets utilized by the project is increased.15.Which one of the following statements concerning interest rates is correct?A.The stated rate is the same as the effective annual rate.B.The effective annual rate is the rate that applies if interest is compounded annually.C.The annual percentage rate increases as the number of compounding periods per year increases.D.Borrowers prefer more frequent compounding on their loan accounts given a stated annual percentage rate.E.For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.16.A stock pays a constant annual dividend and sells for $28.80 a share. If the market rate of return on this stock is 7.2 percent, what is the dividend amount?A.$1.93B.$2.02C.$2.07D.$2.22E.$2.4017.The total rate of return on a stock can be positive even when the price of the stock depreciates because of the:A.capital appreciation.B.interest yield.C.dividend yield.D.supernormal growth.E.real rate of return.18.A conflict of interest between the stockholders and company management is called:A.stockholders' liability.B.corporate breakdown.C.the agency problem.D.corporate activism.E.legal liability.19.Which one of the following statements is correct concerning bond classifications?A.A debenture is a long-term bond secured by the issuer's inventory.B.A mortgage security is a bond issued solely by a home builder.C.A note is a bond which has an original maturity date of 10 years or more.D.A subordinated bond receives preferential treatment over all other bonds in a bankruptcy.E.A callable bond can be repurchased by the issuer prior to the initial maturity date.20.Which of the following statements are correct concerning the financial break-even point of a project? I. The present value of the cash inflows exactly offsets the initial cash outflow.II. The payback period is equal to the life of the project.III. The NPV is zero.IV. The discounted payback period equals the life of the project.A.I and II onlyB.I and III onlyC.II and IV onlyD.III and IV onlyE.I, III, and IV only

2008 F F3250 E3 Key1.Net present value:A.should be used when deciding between two mutually exclusive projects.b.is less useful than the internal rate of return when comparing different sized projects.c.is easy to explain to non-financial, low-level managers.d.is less useful than the profitability index when comparing mutually exclusive projects.e.is very similar in its methodology to the average accounting return.

Ross - Chapter 009 #17SECTION: 9.1TOPIC: NET PRESENT VALUETYPE: CONCEPTS2.Office Furniture Makers, Inc. uses machines to produce high quality office chairs for other firms. The initial cost of one customized machine is $750,000. This machine costs $12,000 a year to operate. Each machine has a life of 3 years before it is replaced. What is the equivalent annual cost of this machine if the required return is 10 percent? (Round your answer to whole dollars)a.$259,947b.$285,942c.$301,586D.$313,586e.$326,947

AACSB TOPIC: ANALYTICRoss - Chapter 010 #78SECTION: 10.6TOPIC: EQUIVALENT ANNUAL COSTTYPE: PROBLEMS3.Wilmington Importers preferred stock pays a $5 annual dividend. What is the maximum price you are willing to pay for one share of this stock if your required return is 15.5 percent?A.$32.26b.$35.48c.$72.68d.$77.50e.$79.81P0 = $5.00 / .155 = $32.26

AACSB TOPIC: ANALYTICRoss - Chapter 008 #98SECTION: 8.1TOPIC: PREFERRED STOCKTYPE: PROBLEMS4.Which one of the following is a use of cash?a.payment received from a customer on his or her accountb.sale of inventory to a cash customerc.decrease in the cash balanced.sale of common stockE.payment to a supplier

Ross - Chapter 003 #39SECTION: 3.1TOPIC: USES OF CASHTYPE: CONCEPTS5.All else equal, the internal growth rate increases when the:a.retention ratio decreases.b.dividend payout ratio increases.c.net income decreases.D.total assets decrease.e.plowback ratio decreases.

Ross - Chapter 004 #33SECTION: 4.4TOPIC: INTERNAL GROWTH RATETYPE: CONCEPTS6.On your thirteenth birthday, you received $1,000 which you invested at 6.5 percent interest, compounded annually. Your investment is now worth $5,476. How old are you today?a.age 29b.age 32c.age 35d.age 37E.age 40$5,476 = $1,000 (1 + .065)t; t = 27 years; Age today = 13 + 27 = 40

Note: You received the money when you were 13 years old. Thus, you will be 40 (13 + 27) years old when the value reaches $5,476.

AACSB TOPIC: ANALYTICRoss - Chapter 005 #34SECTION: 5.3TOPIC: NUMBER OF TIME PERIODSTYPE: PROBLEMS7.Expansion, Inc. purchased a building for $485,000 seven years ago. Five years ago, repairs were made to the building which cost $80,000. The annual taxes on the property are $30,000. The building has a current market value of $424,000 and a current book value of $399,000. The building is totally paid for and solely owned by the firm. If the company decides to assign this building to a new project, what value, if any, should be included in the initial cash flow of the project for this building?a.$0B.$424,000c.$454,000d.$485,000e.$504,000Opportunity cost = $424,000

AACSB TOPIC: ANALYTICRoss - Chapter 010 #51SECTION: 10.2TOPIC: OPPORTUNITY COSTTYPE: PROBLEMS8.Justin's Manufacturing purchased a lot in Lake City ten years ago at a cost of $790,000. Today, that lot has a market value of $1.2 million. At the time of the purchase, the company spent $100,000 to grade the lot and another $20,000 to build a small garage on the lot to house additional equipment. The company now wants to build a new facility on the site. The building cost is estimated at $1.7 million. What amount should be used as the initial cash flow for this project?a.$2,490,000b.$2,610,000C.$2,900,000d.$3,020,000e.$3,690,000CF0 = $1,200,000 + ($1,700,000) = $2,900,000

AACSB TOPIC: ANALYTICRoss - Chapter 010 #47SECTION: 10.2TOPIC: RELEVANT CASH FLOWSTYPE: PROBLEMS9.Which one of the following will reduce the risk of a project by lowering the degree of operating leverage?a.hiring temporary workers from an employment agency rather than hiring part-time employeesB.subcontracting portions of the project rather than purchasing new equipment to do all the work in-housec.leasing equipment on a long-term basis rather than buying equipmentd.lowering the projected selling price per unite.changing the proposed production method to a more capital intensive method

Ross - Chapter 011 #53SECTION: 11.5TOPIC: OPERATING LEVERAGETYPE: CONCEPTS10.Berber Mills has a capital structure which includes bonds, preferred stock, and common stock. The firm's common stock shareholders are most to apt to have which of the following rights? I. right to all the corporate profitsII. sole right to elect the corporate directorsIII. right to vote on proposed mergersIV. right to the residual assets in a liquidationa.I and II onlyb.II and III onlyc.I and IV onlyD.II, III, and IV onlye.I, II, III, and IV

Ross - Chapter 008 #42SECTION: 8.2TOPIC: SHAREHOLDER RIGHTSTYPE: CONCEPTS11.Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:a.method of analysis used to make the decision.b.initial cash outflow.c.ability to recoup any investment in net working capital.D.accuracy of the projected cash flows.e.length of the project.

Ross - Chapter 011 #15SECTION: 11.1TOPIC: FORECASTING RISKTYPE: CONCEPTS12.You are considering two independent projects with the following cash flows. The required return for both projects is 12 percent. Given this information, which one of the following statements is correct?

a.You should accept project A since it has the higher IRR and reject project B because you cannot accept both projects.b.You should accept project A because it has the higher NPV and reject project B.c.You should accept project B because it has the higher NPV and reject project A.d.You should accept project B because it has the higher IRR and reject project A.E.You should accept both projects based on both the NPV and IRR rules.

Since these are independent projects and both the IRR and NPV rules indicate acceptance, you should accept both projects.

AACSB TOPIC: ANALYTICRoss - Chapter 009 #64SECTION: 9.1 AND 9.5TOPIC: INTERNAL RATE OF RETURN AND NET PRESENT VALUETYPE: PROBLEMS13.Which one of the following statements concerning net working capital is correct?a.The lower the net working capital the greater the ability of a firm to meet its current obligations.b.The change in net working capital is equal to current assets minus current liabilities.C.A decrease in accounts payable increases net working capital, all else constant.d.Net working capital is equal to long-term assets minus long-term liabilities.e.Net working capital is a part of the operating cash flow.

Ross - Chapter 002 #25SECTION: 2.1TOPIC: NET WORKING CAPITALTYPE: CONCEPTS14.The internal rate of return for a project will increase if:a.the initial cost of a project is increased.b.the total amount of the cash inflows is reduced.c.each cash inflow is moved such that it occurs one year later than originally projected.d.the required rate of return is increased.E.the salvage value of the assets utilized by the project is increased.

Ross - Chapter 009 #33SECTION: 9.5TOPIC: INTERNAL RATE OF RETURNTYPE: CONCEPTS15.Which one of the following statements concerning interest rates is correct?a.The stated rate is the same as the effective annual rate.B.The effective annual rate is the rate that applies if interest is compounded annually.c.The annual percentage rate increases as the number of compounding periods per year increases.d.Borrowers prefer more frequent compounding on their loan accounts given a stated annual percentage rate.e.For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.

Ross - Chapter 006 #18SECTION: 6.3TOPIC: INTEREST RATESTYPE: CONCEPTS16.A stock pays a constant annual dividend and sells for $28.80 a share. If the market rate of return on this stock is 7.2 percent, what is the dividend amount?a.$1.93b.$2.02C.$2.07d.$2.22e.$2.40