2008 F F3250 E3

Student: ___________________________________________________________________________ 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. . is easy to explain to non!financial" low!level managers. #. is less useful than the profitability index when comparing mutually exclusive projects. $. is very similar in its methodology to the average accounting return.

%. &ffice 'urniture (a)ers" *nc. uses machines to produce high +uality office chairs for other firms. ,he initial cost of one customized machine is -./0"000. ,his machine costs -1%"000 a year to operate. $ach machine has a life of 1 years before it is replaced. 2hat is the e+uivalent annual cost of this machine if the re+uired return is 10 percent3 45ound your answer to whole dollars6 A. -%/7"78. B. -%9/"78% . -101"/9: #. -111"/9: $. -1%:"78.

1. 2ilmington *mporters preferred stoc) pays a -/ annual dividend. 2hat is the maximum price you are willing to pay for one share of this stoc) if your re+uired return is 1/./ percent3 A. -1%.%: B. -1/.89 . -.%.:9 #. -.../0 $. -.7.91

8. 2hich one of the following is a use of cash3 A. payment received from a customer on his or her account B. sale of inventory to a cash customer . decrease in the cash balance #. sale of common stoc) $. payment to a supplier

/. All else e+ual" the internal growth rate increases when the: A. retention ratio decreases. B. dividend payout ratio increases. . net income decreases. #. total assets decrease. $. plowbac) ratio decreases.

:. &n your thirteenth birthday" you received -1"000 which you invested at :./ percent interest" compounded annually. ;our investment is now worth -/"8.:. <ow old are you today3 A. age %7 B. age 1% . age 1/ #. age 1. $. age 80

.. $xpansion" *nc. purchased a building for -89/"000 seven years ago. 'ive years ago" repairs were made to the building which cost -90"000. ,he annual taxes on the property are -10"000. ,he building has a current mar)et value of -8%8"000 and a current boo) value of -177"000. ,he building is totally paid for and solely owned by the firm. *f 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 building3 A. -0 B. -8%8"000 . -8/8"000 #. -89/"000 $. -/08"000

9. =ustin>s (anufacturing purchased a lot in ?a)e ity ten years ago at a cost of -.70"000. ,oday" that lot has a mar)et value of -1.% million. At the time of the purchase" the company spent -100"000 to grade the lot and another -%0"000 to build a small garage on the lot to house additional e+uipment. ,he company now wants to build a new facility on the site. ,he building cost is estimated at -1.. million. 2hat amount should be used as the initial cash flow for this project3 A. -%"870"000 B. -%":10"000 . -%"700"000 #. -1"0%0"000 $. -1":70"000

7. 2hich one of the following will reduce the ris) of a project by lowering the degree of operating leverage3 A. hiring temporary wor)ers from an employment agency rather than hiring part!time employees B. subcontracting portions of the project rather than purchasing new e+uipment to do all the wor) in!house . leasing e+uipment on a long!term basis rather than buying e+uipment #. lowering the projected selling price per unit $. changing the proposed production method to a more capital intensive method

10. Berber (ills has a capital structure which includes bonds" preferred stoc)" and common stoc). ,he firm>s common stoc) shareholders are most to apt to have which of the following rights3 *. right to all the corporate profits **. sole right to elect the corporate directors ***. right to vote on proposed mergers *@. right to the residual assets in a li+uidation A. * and ** only B. ** and *** only . * and *@ only #. **" ***" and *@ only $. *" **" ***" and *@

11. 'orecasting ris) 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 ma)e the decision. B. initial cash outflow. . ability to recoup any investment in net wor)ing capital. #. accuracy of the projected cash flows. $. length of the project.

1%. ;ou are considering two independent projects with the following cash flows. ,he re+uired return for both projects is 1% percent. Aiven this information" which one of the following statements is correct3

A. ;ou should accept project A since it has the higher *55 and reject project B because you cannot accept both projects. B. ;ou should accept project A because it has the higher NB@ and reject project B. . ;ou should accept project B because it has the higher NB@ and reject project A. #. ;ou should accept project B because it has the higher *55 and reject project A. $. ;ou should accept both projects based on both the NB@ and *55 rules.

11. 2hich one of the following statements concerning net wor)ing capital is correct3 A. ,he lower the net wor)ing capital the greater the ability of a firm to meet its current obligations. B. ,he change in net wor)ing capital is e+ual to current assets minus current liabilities. . A decrease in accounts payable increases net wor)ing capital" all else constant. #. Net wor)ing capital is e+ual to long!term assets minus long!term liabilities. $. Net wor)ing capital is a part of the operating cash flow.

18. ,he 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. . each cash inflow is moved such that it occurs one year later than originally projected. #. the re+uired rate of return is increased. $. the salvage value of the assets utilized by the project is increased.

1/. 2hich one of the following statements concerning interest rates is correct3 A. ,he stated rate is the same as the effective annual rate. B. ,he effective annual rate is the rate that applies if interest is compounded annually. . ,he annual percentage rate increases as the number of compounding periods per year increases. #. Borrowers prefer more fre+uent compounding on their loan accounts given a stated annual percentage rate. $. 'or any positive rate of interest" the effective annual rate will always exceed the annual percentage rate.

1:. A stoc) pays a constant annual dividend and sells for -%9.90 a share. *f the mar)et rate of return on this stoc) is ..% percent" what is the dividend amount3 A. -1.71 B. -%.0% . -%.0. #. -%.%% $. -%.80

1.. ,he total rate of return on a stoc) can be positive even when the price of the stoc) depreciates because of the: A. capital appreciation. B. interest yield. . dividend yield. #. supernormal growth. $. real rate of return.

19. A conflict of interest between the stoc)holders and company management is called: A. stoc)holders> liability. B. corporate brea)down. . the agency problem. #. corporate activism. $. legal liability.

17. 2hich one of the following statements is correct concerning bond classifications3 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. . A note is a bond which has an original maturity date of 10 years or more. #. A subordinated bond receives preferential treatment over all other bonds in a ban)ruptcy. $. A callable bond can be repurchased by the issuer prior to the initial maturity date.

%0. 2hich of the following statements are correct concerning the financial brea)!even point of a project3 *. ,he present value of the cash inflows exactly offsets the initial cash outflow. **. ,he paybac) period is e+ual to the life of the project. ***. ,he NB@ is zero. *@. ,he discounted paybac) period e+uals the life of the project. A. * and ** only B. * and *** only . ** and *@ only #. *** and *@ only $. *" ***" and *@ only

%009 ' '1%/0 $1 Cey

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.

Ross - Chapter 009 #17 SECTION: 9.1 TOPIC: NET PRESENT V !"E T#PE: CONCEPTS

%. &ffice 'urniture (a)ers" *nc. uses machines to produce high +uality office chairs for other firms. ,he initial cost of one customized machine is -./0"000. ,his machine costs -1%"000 a year to operate. $ach machine has a life of 1 years before it is replaced. 2hat is the e+uivalent annual cost of this machine if the re+uired return is 10 percent3 45ound your answer to whole dollars6 a. -%/7"78. b. -%9/"78% c. -101"/9: D. -111"/9: e. -1%:"78.

CS$ TOPIC: N !#TIC Ross - Chapter 010 #7% SECTION: 10.& TOPIC: E'"IV !ENT NN" ! COST T#PE: PRO$!E(S

1. 2ilmington *mporters preferred stoc) pays a -/ annual dividend. 2hat is the maximum price you are willing to pay for one share of this stoc) if your re+uired return is 1/./ percent3 A. -1%.%: b. -1/.89 c. -.%.:9 d. -.../0 e. -.7.91 B0 D -/.00 E .1// D -1%.%:

CS$ TOPIC: N !#TIC Ross - Chapter 00% #9% SECTION: %.1 TOPIC: PRE)ERRE* STOC+ T#PE: PRO$!E(S

8. 2hich one of the following is a use of cash3 a. payment received from a customer on his or her account b. sale of inventory to a cash customer c. decrease in the cash balance d. sale of common stoc) E. payment to a supplier

Ross - Chapter 00, #,9 SECTION: ,.1 TOPIC: "SES O) C ST#PE: CONCEPTS

/. All else e+ual" 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. plowbac) ratio decreases.

Ross - Chapter 00. #,, SECTION: ... TOPIC: INTERN ! /RO0T- R TE T#PE: CONCEPTS

:. &n your thirteenth birthday" you received -1"000 which you invested at :./ percent interest" compounded annually. ;our investment is now worth -/"8.:. <ow old are you today3 a. age %7 b. age 1% c. age 1/ d. age 1. E. age 80 -/"8.: D -1"000 41 F .0:/6tG t D %. yearsG Age today D 11 F %. D 80

Note: ;ou received the money when you were 11 years old. ,hus" you will be 80 411 F %.6 years old when the value reaches -/"8.:.

CS$ TOPIC: N !#TIC Ross - Chapter 001 #,. SECTION: 1., TOPIC: N"($ER O) TI(E PERIO*S T#PE: PRO$!E(S

.. $xpansion" *nc. purchased a building for -89/"000 seven years ago. 'ive years ago" repairs were made to the building which cost -90"000. ,he annual taxes on the property are -10"000. ,he building has a current mar)et value of -8%8"000 and a current boo) value of -177"000. ,he building is totally paid for and solely owned by the firm. *f 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 building3 a. -0 B. -8%8"000 c. -8/8"000 d. -89/"000 e. -/08"000 &pportunity cost D -8%8"000

CS$ TOPIC: N !#TIC Ross - Chapter 010 #11 SECTION: 10.2 TOPIC: OPPORT"NIT# COST T#PE: PRO$!E(S

9. =ustin>s (anufacturing purchased a lot in ?a)e ity ten years ago at a cost of -.70"000. ,oday" that lot has a mar)et value of -1.% million. At the time of the purchase" the company spent -100"000 to grade the lot and another -%0"000 to build a small garage on the lot to house additional e+uipment. ,he company now wants to build a new facility on the site. ,he building cost is estimated at -1.. million. 2hat amount should be used as the initial cash flow for this project3 a. -%"870"000 b. -%":10"000 C. -%"700"000 d. -1"0%0"000 e. -1":70"000 '0 D -1"%00"000 F 4 -1".00"0006 D -%"700"000

CS$ TOPIC: N !#TIC Ross - Chapter 010 #.7 SECTION: 10.2 TOPIC: RE!EV NT C S- )!O0S T#PE: PRO$!E(S

7. 2hich one of the following will reduce the ris) of a project by lowering the degree of operating leverage3 a. hiring temporary wor)ers from an employment agency rather than hiring part!time employees B. subcontracting portions of the project rather than purchasing new e+uipment to do all the wor) in!house c. leasing e+uipment on a long!term basis rather than buying e+uipment d. lowering the projected selling price per unit e. changing the proposed production method to a more capital intensive method

Ross - Chapter 011 #1, SECTION: 11.1 TOPIC: OPER TIN/ !EVER /E T#PE: CONCEPTS

10. Berber (ills has a capital structure which includes bonds" preferred stoc)" and common stoc). ,he firm>s common stoc) shareholders are most to apt to have which of the following rights3 *. right to all the corporate profits **. sole right to elect the corporate directors ***. right to vote on proposed mergers *@. right to the residual assets in a li+uidation a. * and ** only b. ** and *** only c. * and *@ only D. **" ***" and *@ only e. *" **" ***" and *@

Ross - Chapter 00% #.2 SECTION: %.2 TOPIC: S- RE-O!*ER RI/-TS T#PE: CONCEPTS

11. 'orecasting ris) 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 ma)e the decision. b. initial cash outflow. c. ability to recoup any investment in net wor)ing capital. D. accuracy of the projected cash flows. e. length of the project.

Ross - Chapter 011 #11 SECTION: 11.1 TOPIC: )OREC STIN/ RIS+ T#PE: CONCEPTS

1%. ;ou are considering two independent projects with the following cash flows. ,he re+uired return for both projects is 1% percent. Aiven this information" which one of the following statements is correct3

a. ;ou should accept project A since it has the higher *55 and reject project B because you cannot accept both projects. b. ;ou should accept project A because it has the higher NB@ and reject project B. c. ;ou should accept project B because it has the higher NB@ and reject project A. d. ;ou should accept project B because it has the higher *55 and reject project A. E. ;ou should accept both projects based on both the NB@ and *55 rules.

Hince these are independent projects and both the *55 and NB@ rules indicate acceptance" you should accept both projects.

CS$ TOPIC: N !#TIC Ross - Chapter 009 #&. SECTION: 9.1 N* 9.1 TOPIC: INTERN ! R TE O) RET"RN N* NET PRESENT V !"E T#PE: PRO$!E(S

11. 2hich one of the following statements concerning net wor)ing capital is correct3 a. ,he lower the net wor)ing capital the greater the ability of a firm to meet its current obligations. b. ,he change in net wor)ing capital is e+ual to current assets minus current liabilities. C. A decrease in accounts payable increases net wor)ing capital" all else constant. d. Net wor)ing capital is e+ual to long!term assets minus long!term liabilities. e. Net wor)ing capital is a part of the operating cash flow.

Ross - Chapter 002 #21 SECTION: 2.1 TOPIC: NET 0OR+IN/ C PIT ! T#PE: CONCEPTS

18. ,he 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 re+uired rate of return is increased. E. the salvage value of the assets utilized by the project is increased.

Ross - Chapter 009 #,, SECTION: 9.1 TOPIC: INTERN ! R TE O) RET"RN T#PE: CONCEPTS

1/. 2hich one of the following statements concerning interest rates is correct3 a. ,he stated rate is the same as the effective annual rate. B. ,he effective annual rate is the rate that applies if interest is compounded annually. c. ,he annual percentage rate increases as the number of compounding periods per year increases. d. Borrowers prefer more fre+uent compounding on their loan accounts given a stated annual percentage rate. e. 'or any positive rate of interest" the effective annual rate will always exceed the annual percentage rate.

Ross - Chapter 00& #1% SECTION: &., TOPIC: INTEREST R TES T#PE: CONCEPTS

1:. A stoc) pays a constant annual dividend and sells for -%9.90 a share. *f the mar)et rate of return on this stoc) is ..% percent" what is the dividend amount3 a. -1.71 b. -%.0% C. -%.0. d. -%.%% e. -%.80

CS$ TOPIC: N !#TIC Ross - Chapter 00% #7. SECTION: %.1 TOPIC: CONST NT *IVI*EN* T#PE: PRO$!E(S

1.. ,he total rate of return on a stoc) can be positive even when the price of the stoc) depreciates because of the: a. capital appreciation. b. interest yield. C. dividend yield. d. supernormal growth. e. real rate of return.

Ross - Chapter 00% #,1 SECTION: %.1 TOPIC: *IVI*EN* #IE!* T#PE: CONCEPTS

19. A conflict of interest between the stoc)holders and company management is called: a. stoc)holders> liability. b. corporate brea)down. C. the agency problem. d. corporate activism. e. legal liability.

CS$ TOPIC: ET-ICS Ross - Chapter 001 #1. SECTION: 1.. TOPIC: /ENC# PRO$!E( T#PE: *E)INITIONS

17. 2hich one of the following statements is correct concerning bond classifications3 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 ban)ruptcy. E. A callable bond can be repurchased by the issuer prior to the initial maturity date.

Ross - Chapter 007 #11 SECTION: 7.2 TOPIC: $ON* C! SSI)IC TIONS T#PE: CONCEPTS

%0. 2hich of the following statements are correct concerning the financial brea)!even point of a project3 *. ,he present value of the cash inflows exactly offsets the initial cash outflow. **. ,he paybac) period is e+ual to the life of the project. ***. ,he NB@ is zero. *@. ,he discounted paybac) period e+uals the life of the project. a. * and ** only b. * and *** only c. ** and *@ only d. *** and *@ only E. *" ***" and *@ only

Ross - Chapter 011 #.9 SECTION: 11.. TOPIC: )IN NCI ! $RE +-EVEN T#PE: CONCEPTS

%009 ' '1%/0 $1 Hummary

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