uestion 1All of the following are incremental costs of commuting to college in your hometown except:AnswerCosts of booksTuitionStudent feesRoom and boardQuestion 2Tanya believes noncash expenses should be ignored when making capital budgeting decisions because they have no impact on cash flows. She is mistaken because:Answernoncash expenses increase net income and must be added back to appropriately calculate cash flowsnoncash expenses decrease the cost of goods sold and therefore increase cash flowsnoncash expenses reduce taxable income, decrease tax payments, and increase cash flowsnoncash expenses (such as depreciation) allow a firm to spread the cost of fixed assets over many years and therefore balance cash outflowsnoncash expenses increase net working capital and therefore are cash outflowsQuestion 3Which of the following should not be included as a cash flow in evaluating a new piece of equipment for manufacturing?AnswerPortion of current fixed administrative costsSalvage valueCost reductionsReduction in production from other equipment if new equipment is put in placeQuestion 4A(n) __________ in working capital represents a(n) __________.Answerincrease; cash inflowdecrease; cash inflowdecrease; cash outflowincrease; equivalent annual cost (EAC)decrease; equivalent annual cost (EAC)Question 5Why is accelerated depreciation (MACRs) useful for a firm?AnswerSince 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 ratiosMACRs is consistently applied in other countriesMACRS reduces taxes and increases cash flowQuestion 6The acronym MACRS stands for:AnswerModified Accelerated Curve Residual SystemModified Accelerated Curve Resource SourceMost Accelerated Cost Residual SystemModified Accelerated Cost Recovery SystemQuestion 7Everafter, 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:Answerthe 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 costsQuestion 8When evaluating a firm with excess capacity, which of the following statements is false?AnswerExcess 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 9Which statement concerning cash flows included in the capital budgeting process is accurate?AnswerAn 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 10When a U.S. firm uses accelerated depreciation for tax purposes and straight-line depreciation for financial reporting:Answeronly accelerated depreciation should be used when determining project cash flowsonly straight-line depreciation should be used when determining project cash flowsNPV analysis of a given project must consider cash flows under both depreciation methodspotential tax benefits are not being maximized someone might go to jailQuestion 11Ideally, weights in the WACC formula should be determined usingAnswermarket value of equity and market value of debtbook value of equity and market value of debtmarket value of equity and book value of debtbook value of equity and book value of debt 4 pointsQuestion 12Identifying a(n) __________ is tantamount to identifying future points at which it may be possible for managers to create and sustain competitive advantage. Answerasset betareal optiondebt betapure playprojectbetaQuestion 13A 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?AnswerIt decreases the value of the land as the timber price is more uncertainIt decreases the value of the land because increased volatility increases the discount rateIt decreases the value of the land because the value of the timber option decreasesIt increases the value of the land because the value of the timber option increasesQuestion 14Which of the following would explain a positive NPV calculation?AnswerPerfect competitionPerfect capital marketsCapital market frictionsBarriers to entryQuestion 15Operating and financial leverage may exist for firms. Which of the following statements is accurate concerning leverage?AnswerThe 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 16All of the following are examples of real options facing corporations EXCEPT:AnswerExpansion optionsAbandonment optionsFollow-on investment optionsExecutive stock optionsFlexibility optionsQuestion 17If the firm applies its WACC to all projects, it will tend to accept some negative-NPV projects that areAnswerof shorter lifetime than the firmâs existing operationsof longer lifetime than the firmâs existing operationsriskier than the firmâs existing operationsSafer than the firmâs existing operationsQuestion 18Requiring 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.AnswerOperational efficiencyCost of debtCost of equityWACCQuestion 19Two firms have the same asset beta but different equity betas. The direct cause is likely:AnswerThe importance of variable costs varies across these firmsThe firms have different proportions of debt relative to equityOne firmâs sales are more cyclical than the otherThe importance of variable costs is the same across these firmsQuestion 20Which of the following is not a competitive advantage for a firm?Answersuperior engineeringsuperior R & Dlow-cost manufacturing processunique marketing programssuperior executivecompensation
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