(TCO 4) Which of the following is true regarding the evaluation of projects? (Points : 4) sunk costs should be included erosion effects should be considered financing costs need to be included opportunity costs are irrelevant 2. (TCO 4) There are several disadvantages to the payback method, among them: (Points : 4) payback ignores cash flows beyond the cutoff. payback can be used in conjunction with time adjusted methods of evaluation. payback is easy to use and to understand. none of the above is a disadvantage. 3. (TCO 3 and 4) You can ensure that an investment is expected to create value for (Points : 4) have a PI equal to zero. produce negative rates of return. have positive AARs. have positive IRRs. have positive NPVs. 4. (TCO 3 and 4) What is the net present value of a project with the following cash flows, if the discount rate is 10 percent? (Points : 4) $1,085.25 $1,193.77 $3,498.28 $4,102.86 $4,513.15 5. (TCO 4) Howard Company is considering a new project that will require an initial cash investment of $575,000. The project will produce no cash flows for the first three years. The projected cash flows for years 4 through 8 are $73,000, $112,000, $124,000, $136,000, and $145,000, respectively. How long will it take the firm to recover its initial investment in this project? (Points : 4) 5.81 years 6.05 years 6.96 years 7.90 years This project never pays back 6. (TCO 4) The postponement of a project until conditions are more favorable: (Points : 4) is not a valuable option. is referred to as the option to extend. could cause a negative net present value project to become a positive net present value project. will generally cause the internal rate of return for a project to decline. 7. (TCO 4) ____________, refers to the situation a firm faces when it has positive net present value projects, but cannot obtain financing for those projects. (Points : 4) capital planning. soft rationing. capital rationing. hard rationing. a sunk cause. 8. (TCO 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment? (Points : 4) The net present value of the project is approximately $10,000 This project should be accepted because it has a positive net present value This projects payback period is 10 years or more None of the above is true 9. (TCO 4) Assume Company X plans to invest $60,000 in new computers. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the first year depreciation amount under MACRS? (Points : 4) $12,000 $8,575 $19,800 None of the above 10. (TCO 1 and 4) Assume a corporation has earnings before depreciation, and taxes of $100,000, depreciation of $40,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company? (Points : 4) $82,000 $110,000 $42,000 none of these 11. (TCO 8) Which of the following statements is true regarding systematic risk? (Points : 4) is diversifiable is the total risk associated with surprise events it is not project or firm specific it is measured by standard deviation 12. (TCO 8) Which statement is true regarding risk? (Points : 4) the expected return is usually the same as the actual return a key to assess risk is determining how much risk an investment adds to a portfolio risks can always be decreased or mitigated by the financial manager the higher the risk, the lower the return investors require for the investment 13. (TCO 8) The stock of Chocolate Galore is expected to produce the following returns, given the various states of the economy. What is the expected return on this stock? (Points : 4) 7.33 percent 9.82 percent 11.26 percent 11.33 percent 11.50 percent 14. (TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock A? (Points : 4) 14.79 percent 15.91 percent 18.42 percent 19.07 percent 25.72 percent 15. (TCO 8) Stock A has an expected return of 14 percent and a beta of 1.3. Stock B has an expected return of 10 percent and a beta of .9. Both stocks have the same reward-to-risk ratio. What is the risk-free rate? (Points : 4) 1.0 percent 1.8 percent 2.3 percent 2.5 percent 3.1 percent 1. (TCO 8) Company insiders cannot earn excess profits based on the knowledge they have related to their employer if the financial markets are: (Points : 4) weak form efficient. strong form efficient. semistrong form efficient. efficient at any level. aware that the trader is an insider. 2. (TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at a cost of 9 percent (after-tax) and common equity at a cost of 16 percent. Assume debt and common equity each represent 50 percent of the firm's capital structure. What is the weighted average cost of capital? (Points : 4) between 4.5% and 8% more than 13% between 12 and 13% between 13 and 14% none of the above 3. (TCO 5, 6 and 7) An issue of common stock is selling for $57.20. The year end dividend is expected to be $2.32, assuming a constant growth rate of six percent. What is the required rate of return? (Points : 4) 10.3% 10.1% 4.1% 5.8% 4. (TCO 5, 6 and 7) Which of the following is not true regarding the cost of debt? (Points : 4) It is the return that the firms creditors demand on new borrowing. It is the interest rate that the firm pays on current/existing borrowing. An appropriate method to compute the cost of debt is using the YTM of current bonds outstanding. It needs to be converted into an after-tax cost. 5. (TCO 5) Retained earnings has a cost associated with it because: (Points : 4) new funds must be raised. there is an opportunity cost associated with stockholder funds. Ke> g flotation costs increase the cost of funding. 6. (TCO 4) A project has the following cash flows. What is the internal rate of return? (Points : 4) less than 10% approximately 14% more than 16% more than 18% but less than 20% 7. (TCO 5, 6 and 7) Which one of the following is a correct statement? (Points : 4) Current tax laws favor debt financing. A decrease in the dividend growth rate increases the cost of equity. An increase in the systematic risk of a firm will decrease the firm's cost of capital. A decrease in a firm's debt-equity ratio will usually decrease the firm's cost of capital. The cost of preferred stock decreases when the tax rate increases. 8. (TCO 5, 6 and 7) The nine percent preferred stock of Bean Coffee is selling for $39 a share. What is the firm's cost of preferred stock if the tax rate is 35 percent and the par value per share is $100? (Points : 4) 17.97% 19.25% 23.08% 24.67% 25.65% 9. (TCO 2) Which one of the following occurs if a firm files for Chapter 7 bankruptcy, but does not generally occur if the firm files for Chapter 11 bankruptcy? (Points : 4) a petition is filed in federal court administrative fees are incurred a list of creditors is compiled pre-bankruptcy shareholders tend to lose part, if not all, of their investment in the firm a trustee-in-bankruptcy is elected by the creditors 10. (TCO 5) Which of the following statements is true regarding the cost of capital? (Points : 4) All other being equal, it is preferable to use market value weights than book value weights The WACC is the most appropriate discount rate for all projects. Should not include the cost of retained earnings. Depends primarily on the source of the funds, not the use. 11. (TCO 2) Which of the following decreases the cash account? (Points : 4) A payment due is received from a client Dividends are paid to shareholders Raw materials are purchased and paid for with credit A new machine is purchased and paid for with the business line of credit 12. (TCO 2) Which of the following statements is true? (Points : 4) Firms should avoid offering credit at all cost. An increase in a firm's average collection period generally indicates that an increased number of customers are taking advantage of the cash discount. The costs of the credit application process and the costs expended in the collection process are carrying costs of granting credit. Character, refers to the ability of a firm to meet its credit obligations out its operating cash flows. The optimal credit policy, is the policy that produces the largest amount of sales for a firm. 13. (TCO 2) Which one of the following credit terms is most apt to produce the shortest accounts receivable period? (Points : 4) net 25 net 10 1/10, net 30 3/10, net 15 2/20, net 45 14. (TCO 2) Delphinia's has the following estimated quarterly sales for next year. The accounts receivable period is 30 days. What is the expected accounts receivable balance at the end of the second quarter? Assume each month has 30 days. (Points : 4) $567 $600 $821 $1,134 $1,200 15. (TCO 1) Why is maximization of the current value per share a more appropriate financial management goal than profit maximization? (Points : 4) Because by maximizing the current stock value, you also maximize the companys profit for the year. Because this criterion is non-ambiguous. Because financial managers always act in the best interest of shareholders. Because it creates short-term gains in the financial statements