Question 1All of the following are incremental costs of commuting to college in your hometownexcept:AnswerCosts of booksTuitionStudent feesRoom andboard4 pointsQuestion 2Tanya believes noncash expenses should be ignored when making capital budgetingdecisions because they have no impact on cash flows. She is mistaken because:Answernoncash expenses increase net income and must be added back toappropriately calculate cash flowsnoncash expenses decrease the cost of goods sold and therefore increasecash flowsnoncash expenses reduce taxable income, decrease tax payments, andincrease cash flowsnoncash expenses (such as depreciation) allow a firm to spread the cost offixed assets over many years and therefore balance cash outflowsnoncash expenses increase net working capital and therefore are cashoutflows4 pointsQuestion 3Which of the following should not be included as a cash flow in evaluating a new piece ofequipment for manufacturing?AnswerPortion of current fixed administrative costsSalvage valueCost reductionsReduction in production from other equipment if new equipment is put inplace4 pointsQuestion 4A(n) __________ in working capital represents a(n) __________.Answerincrease; cash inflowdecrease; cash inflowdecrease; cash outflowincrease; equivalent annual cost(EAC)decrease; equivalent annual cost(EAC)4 pointsQuestion 5Why is accelerated depreciation (MACRs) useful for a firm?AnswerSince depreciation is not a cash flow, it is not useful, merely required by thetax codeAccelerating the depreciation reduces book value; increasing book-valuebased return ratiosMACRs is consistently applied in other countriesMACRS reduces taxes and increases cash flow4 pointsQuestion 6The acronym MACRS stands for:AnswerModified Accelerated Curve ResidualSystemModified Accelerated Curve ResourceSourceMost Accelerated Cost Residual SystemModified Accelerated Cost RecoverySystem4 pointsQuestion 7Everafter, Inc. is considering two substitutable devices to replace aging, low-techequipment. The first device costs less initially, will last 7 years, and has highermaintenance costs than the second device. The second device will last 8 years. Whenevaluating 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 costs4 pointsQuestion 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 ofusing excess capacity.The cost of using an asset with excess capacity is zero because there is noshort run marginal cost associated with using the asset.The cost of using the asset must consider the fact that more capacity may beneeded more quickly in the future.4 pointsQuestion 9Which statement concerning cash flows included in the capital budgeting process isaccurate?AnswerAn increase in the cash account would represent a cash inflow whenconsidering 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 theproject’s life.Only incremental cash flows are considered.4 pointsQuestion 10When a U.S. firm uses accelerated depreciation for tax purposes and straight-linedepreciation for financial reporting:Answeronly accelerated depreciation should be used when determining project cashflowsonly straight-line depreciation should be used when determining project cashflowsNPV analysis of a given project must consider cash flows under bothdepreciation methodspotential tax benefits are not being maximizedsomeone might go to jail4 pointsQuestion 11Ideally, weights in the WACC formula should be determined usingAnswermarket value of equity and market value ofdebtbook value of equity and market value ofdebtmarket value of equity and book value ofdebtbook value of equity and book value of debt4 pointsQuestion 12Identifying a(n) __________ is tantamount to identifying future points at which it may bepossible for managers to create and sustain competitive advantage.Answerasset betareal optiondebt betapure playprojectbeta4 pointsQuestion 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 issomewhat flexible, but when it does, the pine trees will be harvested. The developerdetermines 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 valueof 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 thediscount rateIt decreases the value of the land because the value of the timber optiondecreasesIt increases the value of the land because the value of the timber optionincreases4 pointsQuestion 14Which of the following would explain a positive NPV calculation?AnswerPerfect competitionPerfect capitalmarketsCapital marketfrictionsBarriers to entry4 pointsQuestion 15Operating and financial leverage may exist for firms. Which of the following statements isaccurate concerning leverage?AnswerThe presence of common equity creates financial leverage.The presence of high levels of variable costs creates operatingleverage.The presence of higher sales prices creates financial leverage.The presence of debt creates financial leverage.4 pointsQuestion 16All of the following are examples of real options facing corporations EXCEPT:AnswerExpansion optionsAbandonment optionsFollow-on investmentoptionsExecutive stock optionsFlexibility options4 pointsQuestion 17If the firm applies its WACC to all projects, it will tend to accept some negative-NPVprojects that areAnswerof shorter lifetime than the firm’s existingoperationsof longer lifetime than the firm’s existingoperationsriskier than the firm’s existing operationsSafer than the firm’s existing operations4 pointsQuestion 18Requiring that all projects with risk comparable to that of the firm as a whole earn at leastthe __________ means that firms will only invest in projects that have positive NPVs.AnswerOperationalefficiencyCost of debtCost of equityWACC4 pointsQuestion 19Two firms have the same asset beta but different equity betas. The direct cause is likely:AnswerThe importance of variable costs varies across thesefirmsThe firms have different proportions of debt relative toequityOne firm’s sales are more cyclical than the otherThe importance of variable costs is the same acrossthese firms4 pointsQuestion 20Which of the following is not a competitive advantage for a firm?Answersuperior engineeringsuperior R & Dlow-cost manufacturingprocessunique marketing programssuperior executivecompensation
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