Which capital budgeting method ignores the time value of money

Question

Question 1.1.Which of the following capital budgeting techniques ignores the time value of money? (Points : 2.5)

payback period approach

net present value

internal rate of return

profitability index

Question 2.2.

The ________ is the rate of return that a firm must earn on its investments in order to maintain the market value of its stock. (Points : 2.5)

yield to maturity

cost of capital

internal rate of return

modified internal rate of return

Question 3.3.

The cost of common stock equity is ________. (Points : 2.5)

the cost of the guaranteed stated dividend expected by the stockholders

the rate at which investors discount the expected dividends of the firm to determine its share value

the after-tax cost of the interest obligations

the historical cost of floating the stock issue

Question 4.4.

A firm has an average age of inventory of 90 days, an average collection period of 40 days, and an average payment period of 30 days. The firm's operating cycle is ________ days.

(Points : 2.5)

110

130

120

70

Question 5.5.

Which of the following is true of current assets?

(Points : 2.5)

The time of conversion of current assets to more liquid form is relatively unpredictable.

They are used to fund long-term operations and pay long-term expenses.

They are more profitable because they add more value to the product than that provided by fixed assets.

They are sources of short-term financing for a firm

Question 6.6.At a firm's quarterly dividend meeting held April 9, the directors declared a $0.50 per share cash dividend for the holders of record on Monday, May 1. The firm's stock will sell ex dividends on ________.(Points : 2.5)

April 28

May 5

April 29

April 27

Question 7.7.

Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is ________.

(Points : 2.5)

new common stock, retained earnings, preferred stock, long-term debt

common stock, preferred stock, long-term debt, short-term debt

preferred stock, new common stocks, common stock, retained earnings

long-term debt, preferred stock, retained earnings, new common stock

Question 8.8.

Cash flows that could be realized from the best alternative use of an owned asset are called ________.

(Points : 2.5)

incremental costs

lost resale opportunities

opportunity costs

sunk costs

Question 9.9.

The clientele effect refers to ________.

(Points : 2.5)

the relevance of dividend policy on a firm's share value

a firm's ability to attract stockholders whose dividend preferences are similar to the firm's dividend policy

the informational content of dividends that helps in predicting the future earnings and growth of a firm

the "bird-in-the-hand" argument

Question 10.10.An increase in fixed operating costs will result in ________.(Points : 2.5)

a decrease in the degree of operating leverage

an increase in the degree of operating leverage

a decrease in the degree of financial leverage

an increase in the degree of financial leverage

Question 11.11.

A firm has an average age of inventory of 60 days, an average collection period of 45 days, and an average payment period of 30 days. The firm's cash conversion cycle is ________ days.

(Points : 2.5)

15

45

75

135

Question 12.12.

What is the NPV for a project whose cost of capital is 15 percent and initial after-tax cost is $5,000,000 and is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?

(Points : 2.5)

$1,700,000

$371,764

-$137,053

-$4,862,947

Question 13.13.

Breakeven analysis is used by a firm ________.

(Points : 2.5)

to determine the level of operations necessary to cover all fixed operating costs

to determine the least cost of producing goods and services

to evaluate the profitability associated with various levels of sales

to determine the demand of a product

Question 14.14.

Cash outlays that had been previously made and have no effect on the cash flows relevant to a current decision are called ________.

(Points : 2.5)

incremental historical costs

incremental past expenses

opportunity costs foregone

sunk costs

Question 15.15.

Which of the following is true of a dividend payout?

(Points : 2.5)

When a firm announces that it will increase its dividend, the share price usually decreases on that news.

Dividend payments send a positive signal to investors in the marketplace that management believes that the stock is overvalued.

When a firm pays out dividends the share price will fall.

Dividend payouts have no impact on the share price of a stock in an efficient market

Question 16.16.If a firm's fixed operating costs decrease, the firm's ________.(Points : 2.5)

operating breakeven point will decrease

operating breakeven point will increase

sale price per unit will decrease

sale price per unit will increase

Question 17.17.

________ projects do not compete with each other; the acceptance of one ________ the others from consideration.

(Points : 2.5)

Capital; eliminates

Independent; does not eliminate

Mutually exclusive; eliminates

Replacement; eliminates

Question 18.18.

Generally the least expensive source of long-term capital is ________.

(Points : 2.5)

retained earnings

preferred stock

long-term debt

common stock

Question 19.19.

The book value of an asset is equal to the ________.

(Points : 2.5)

fair market value minus the accounting value

original purchase price plus annual depreciation expense

original purchase price minus accumulated depreciation

depreciated value plus recaptured depreciation

Question 20.20.

Which of the following is true of leverage?

(Points : 2.5)

It refers to the effects that operating and financial fixed costs have on the returns that shareholders earn.

It is associated with risks which are out of the control of managers.

It includes the effect of operating fixed costs on the returns of shareholders and not the financial fixed costs.

It is used to evaluate the profitability associated with various levels of sales

Question 21.21.

The tax treatment regarding the sale of existing assets that are sold for more than the original purchase price results in ________.

(Points : 2.5)

an ordinary tax benefit

no tax benefit or liability

a recaptured depreciation taxed as ordinary income

a capital gain tax liability

Question 22.22.

The cost of common stock equity may be estimated by using the ________.

(Points : 2.5)

yield curve

capital asset pricing model

break-even analysis

DuPont analysis

Question 23.23.A firm with limited dollars available for capital expenditures is subject to ________.(Points : 2.5)

capital dependency

capital gains

working capital constraints

capital rationing

Question 24.24.

A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is ________.

(Points : 2.5)

12.4 percent

7.2 percent

12 percent

15 percent

Question 25.25.

Which of the following is a fixed cost?

(Points : 2.5)

inventory

rent

delivery costs

direct labor

Question 26.26.

________ projects have the same function; the acceptance of one ________ the others from consideration.

(Points : 2.5)

Capital; eliminates

Independent; does not eliminate

Mutually exclusive; eliminates

Replacement; eliminates

Question 27.27.

A firm has fixed operating costs of $525,000. The sales price per unit is $35 and its variable costs per unit is $22.50. The firm's operating breakeven point in units is ________.

(Points : 2.5)

23,330

32,000

42,000

52,000

Question 28.28.

________ is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on a firm's earnings per share.

(Points : 2.5)

Financial leverage

Operating leverage

Total leverage

Degree of operating leverage

Question 29.29.

What is the IRR for the following project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?

(Points : 2.5)

15.57%

0.00%

13.57%

12.25%

Question 30.30. What is the profitability index of a project that has an initial cash outflow of $600, an inflow of $250 for the next 3 years and a cost of capital of 10 percent?(Points : 2.5)

0.66

2.036

1.036

2.739

Question 31.31.The payment of cash dividends to corporate stockholders is decided by the ________.(Points : 2.5)

creditors

stockholders

SEC

board of directors

Question 32.32.

________ is the process of evaluating and selecting long-term investments that are consistent with a firm's goal of maximizing owners' wealth.

(Points : 2.5)

Recapitalizing assets

Capital budgeting

Ratio analysis

Securitization

Question 33.33.

A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5 percent. The cost of the firm's common stock equity is ________.

(Points : 2.5)

5 percent

8 percent

10 percent

13 percent

Question 34.34.

Which of the following would be used in the computation of an initial investment?

(Points : 2.5)

the annual after-tax inflow expected from the investment

the initial purchase price of the investment

the historic cost of the existing investment

the profits from the new investment

Question 35.35.

According to the residual theory of dividends, if a firm's equity need exceeds the amount of retained earnings, the firm would ________.

(Points : 2.5)

borrow to pay the cash dividend

sell additional stock to pay the cash dividend

pay no cash dividends

pay less dividends

Question 36.36. Tangshan Mining has common stock at par of $200,000, paid-in capital in excess of par of $400,000, and retained earnings of $280,000. In states where the firm's legal capital is defined as the par value of common stock, the firm could pay out ________ in cash dividends without impairing its capital(Points : 2.5)

$200,000

$680,000

$600,000

$880,000

Question 37.37. A tax adjustment must be made in determining the cost of ________.(Points : 2.5)

long-term debt

common stock

preferred stock

retained earnings

Question 38.38.

The change in net working capital when evaluating a capital budgeting decision is ________.

(Points : 2.5)

the change in fixed liabilities minus the change in fixed assets

the increase in current assets

the increase in current liabilities

the change in current assets minus the change in current liabilities

Question 39.39.

The ________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions.

(Points : 2.5)

internal rate of return

sunk cost

cost of capital

risk-free rate

Question 40.40.

A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions:

                                                                        Target Market

Source of Capital Proportions After-Tax Cost

Long-Term Debt 40% 6%

Preferred Stock 10% 11%

Common Stock 50% 15%

The weighted average cost of capital is ________.

(Points : 2.5)

6 percent

10.7 percent

11 percent

15 percent