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FRL 301 Midterm 1 Exam Questions And Correct
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The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's:
- external cash flows.
- internal cash flows.
- erosion effects.
- financing cash flows.
- incremental cash flows. - ANSWER incremental cash flows
What is the net present value of a project with the following cash flows and a required return of 12 percent?
Year Cash Flow 0 -$35, 1 12, 2 22, 3 2,600 - ANSWER -$4,672.
Based on the profitability index rule, should a project with the following cash flows be accepted if the discount rate is 14 percent? Why or why not?
Year Cash Flow 0 -$32, 1 $11, 2 $
3 $22,600 - ANSWER No, the PI is 0.
A proposed new project has projected sales of $125,000, costs of $59,000, and depreciation of $12,800. The tax rate is 35 percent. Calculate operating cash flow using the four different approaches.
Approaches- -EBIT + Dep - Taxes -Top Down -Tax Shield -Bottom Up - ANSWER $47,
When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: -rejected because the net present value is negative. -accepted because the profitability index is greater than 1. -rejected because the internal rate of return is negative. -accepted because the profitability index is negative. -accepted because the internal rate of return is positive. - ANSWER -accepted because the profitability index is greater than 1.
Which one of the following costs was incurred in the past and cannot be recouped? opportunity incremental side erosion sunk - ANSWER Sunk
Which one of the following best illustrates erosion as it relates to a hot dog stand
Year Cash Flow 0 -$ 28, 1 12, 2 15, 3 11,
If the required return is 14 percent, what is the IRR for this project? (Round your answer to 2 decimal places. (e.g., 32.16)) Should the firm accept the following project? - ANSWER 17.18%; Yes
Which one of the following statements is correct? The lower the average return, the greater the risk premium. The greater the volatility of returns, the greater the risk premium. The risk premium is not affected by the volatility of returns. The risk premium is unrelated to the average rate of return. The lower the volatility of returns, the greater the risk premium. - ANSWER The greater the volatility of returns, the greater the risk premium.
The return earned in an average year over a multi-year period is called the _____ average return. standard geometric arithmetic variant real - ANSWER aritmetic
Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an
estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year. The tax rate is 35 percent. The project will require $45,000 of inventory which will be recouped when the project ends. Should this project be implemented if the firm requires a 14 percent rate of return? Why or why not? No; The NPV is -$172,937.49. No; The NPV is -$87,820.48. Yes; The NPV is $251,860.34. Yes; The NPV is $466,940.57. Yes; The NPV is $387,516.67. - ANSWER Yes; The NPV is $466,940.57.
An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $13,320,000 and will be sold for $2,960,000 at the end of the project.
Required: If the tax rate is 33 percent, what is the aftertax salvage value of the asset?
$2,742, $1,983, $3,177, $2,879, $2,605,622 - ANSWER $2,742,
Consider an asset that costs $640,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $175,000. If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset? - ANSWER Aftertax salvage value= $197,
Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010?
$4,560 - ANSWER $4,
Last year, you purchased 500 shares of Analog Devices, Inc. stock for $11.16 a share. You have received a total of $120 in dividends and $7,190 from selling the shares. What is your capital gains yield on this stock? 29.13 percent 31.02 percent 26.73 percent 28.85 percent 26.70 percent - ANSWER 28.85%
Which two of the following are the most likely reasons why a stock price might not react at all on the day that new information related to the stock issuer is released?
I. insiders knew the information prior to the announcement II. investors need time to digest the information prior to reacting III. the information has no bearing on the value of the firm IV. the information was anticipated II and III only III and IV only I and II only I and III only II and IV only - ANSWER III and IV only
Which one of the following is a correct ranking of securities based on their volatility over the period of 1926-2010? Rank from highest to lowest.
-small company stocks, long-term corporate bonds, large company stocks -small company stocks, long-term corporate bonds, intermediate-term government bonds -large company stocks, U.S. Treasury bills, long-term government bonds -intermediate-term government bonds, long-term corporate bonds, U.S. Treasury bills -large company stocks, small company stocks, long-term government bonds - ANSWER small company stocks, long-term corporate bonds, intermediate-term government bonds
If you excel in analyzing the future outlook of firms, you would prefer the financial markets be ____ form efficient so that you can have an advantage in the marketplace. semiweak strong weak perfect semistrong - ANSWER weak
The returns on the common stock of New Image Products are quite cyclical. In a boom economy, the stock is expected to return 32 percent in comparison to 14 percent in a normal economy and a negative 28 percent in a recessionary period. The probability of a recession is 25 percent while the probability of a boom is 20 percent. What is the standard deviation of the returns on this stock? 39.77 percent 32.08 percent 21.56 percent 21.41 percent 25.83 percent - ANSWER 21.41%
If the economy is normal, Charleston Freight stock is expected to return 16.5 percent. If the economy falls into a recession, the stock's return is projected at a negative 11. percent. The probability of a normal economy is 80 percent while the probability of a
-Over time, the average unexpected return will be zero. -Over time, the average return is equal to the unexpected return. -The expected return minus the unexpected return is equal to the total return. -The unexpected return is always negative. -The expected return includes the surprise portion of news announcements. - ANSWER Over time, the average unexpected return will be zero.
You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 6 percent, -10 percent, 30 percent, 18 percent, and 16 percent.
Requirement 1: What was the arithmetic average return on Crash-n-Burn's stock over this five year period? Requirement 2: (a) What was the variance of Crash-n-Burn's returns over this period? (Do not round intermediate calculations.) (b) What was the standard deviation of Crash-n-Burn's returns over this period? (Do not round intermediate calculations.) - ANSWER arithmetic average- 12%, variance- 0.02240, standard deviation- 14.97%
