Question 1

The main idea behind EVA is a new concept recently introduced into finance.

Accepted Answer

A) True 
 B)False

Question 2

Boards of directors outside the United States have traditionally been friendlier towards their own managers.

Accepted Answer

A) True 
 B)False

Question 3

A factory manager can improve EVA by

Accepted Answer

A) increasing earnings and increasing capital employed. 
B) increasing capital employed and reducing earnings. 
C) reducing earnings and reducing capital employed. 
D) increasing earnings and reducing capital employed. 
A) increasing earnings and increasing capital employed. 
B) increasing capital employed and reducing earnings. 
C) reducing earnings and reducing capital employed. 
D) increasing earnings and reducing capital employed.

Question 4

The economic rate of return on an asset is defined as

Accepted Answer

A) [(C1 + PV1 - PV0)]/(PV0). 
B) [(C1 - (PV1 - PV0)]/(PV0). 
C) [(C1 + PV1)]/(PV0). 
D) [(C1 + PV0)]/(PV1). 
A) [(C1 + PV1 - PV0)]/(PV0). 
B) [(C1 - (PV1 - PV0)]/(PV0). 
C) [(C1 + PV1)]/(PV0). 
D) [(C1 + PV0)]/(PV1).

Question 5

Define the term economic value added (EVA).

Accepted Answer

Economic value added is define

Question 6

A firm has an average investment of $10,000 during the year. During the same period, the firm generates after-tax income of $1,000. If the cost of capital is 15 percent, what is the net return on the investment?

Accepted Answer

A) 15 percent 
B) −5 percent 
C) 10 percent 
D) 5 percent 
A) 15 percent 
B) −5 percent 
C) 10 percent 
D) 5 percent

Question 7

Accounting income takes no account of the cost of the capital employed by a firm.

Accepted Answer

A) True 
 B)False

Question 8

Managers on a fixed salary often fall victim to the following temptations:

Accepted Answer

A) reduced effort, needless spending on perks or private benefits, and avoiding risks. 
B) reduced effort, needless spending on perks or private benefits, and entrenching investments. 
C) reduced effort, needless spending on perks or private benefits, empire building, and entrenching investments. 
D) reduced effort, needless spending on perks or private benefits, empire building, entrenching investments, and avoiding risks. 
A) reduced effort, needless spending on perks or private benefits, and avoiding risks. 
B) reduced effort, needless spending on perks or private benefits, and entrenching investments. 
C) reduced effort, needless spending on perks or private benefits, empire building, and entrenching investments. 
D) reduced effort, needless spending on perks or private benefits, empire building, entrenching investments, and avoiding risks.

Question 9

When firms award stock options to managers as incentives, they typically set the exercise price of these options equal to the firm's

Accepted Answer

A) stock price on the day the options are granted. 
B) expected stock price one year from the day the options are granted. 
C) expected stock price on the expiration date of the options. 
D) stock price on the day the manager was hired. 
A) stock price on the day the options are granted. 
B) expected stock price one year from the day the options are granted. 
C) expected stock price on the expiration date of the options. 
D) stock price on the day the manager was hired.

Question 10

Which of the following actions-all else equal-will increase a firm's EVA?

Accepted Answer

A) The firm raises its prices but ships the same amount of product. 
B) The firm increases its inventory. 
C) The firm increases its borrowing to repurchase some of its shares. 
D) The firm increases its accounts receivable. 
A) The firm raises its prices but ships the same amount of product. 
B) The firm increases its inventory. 
C) The firm increases its borrowing to repurchase some of its shares. 
D) The firm increases its accounts receivable.

Question 11

A firm has an average investment of $10,000 during the year. During the same period, the firm generates after-tax income of $1,000.
Calculate the economic value added (EVA)for the firm. (The cost of capital is 15 percent.)

Accepted Answer

A) −$500 
B) $1,500 
C) $1,200 
D) $1,000 
A) −$500 
B) $1,500 
C) $1,200 
D) $1,000

Question 12

EVA is used for

Accepted Answer

A) measuring performance within the firm. 
B) rewarding performance within the firm. 
C) measuring performance and rewarding performance within the firm. 
D) measuring performance within the firm, rewarding performance within the firm, and improving performance within the firm. 
A) measuring performance within the firm. 
B) rewarding performance within the firm. 
C) measuring performance and rewarding performance within the firm. 
D) measuring performance within the firm, rewarding performance within the firm, and improving performance within the firm.

Question 13

The following capital expenditures are typically included in a firm's capital budget:

Accepted Answer

A) investments in information technology software. 
B) investments in research and development. 
C) investments in training and personnel development. 
D) investments in a new office building. 
A) investments in information technology software. 
B) investments in research and development. 
C) investments in training and personnel development. 
D) investments in a new office building.

Question 14

According to the survey of senior managers by Graham, Harvey, and Rajgopal, senior managers admitted to the following:

Accepted Answer

A) adjusting their firms' operations and investments in order to manage earnings. 
B) decreasing discretionary spending in R&D, advertising, or maintenance to meet earnings targets. 
C) adjusting their firms' operations and investments in order to manage earnings and decreasing discretionary spending in R&D, advertising, or maintenance to meet earnings targets. 
D) adjusting their firms' operations and investments in order to manage earnings; decreasing discretionary spending in R&D, advertising, or maintenance to meet earnings target; and deferring or rejecting investment projects with positive NPVs in order to meet earnings targets. 
A) adjusting their firms' operations and investments in order to manage earnings. 
B) decreasing discretionary spending in R&D, advertising, or maintenance to meet earnings targets. 
C) adjusting their firms' operations and investments in order to manage earnings and decreasing discretionary spending in R&D, advertising, or maintenance to meet earnings targets. 
D) adjusting their firms' operations and investments in order to manage earnings; decreasing discretionary spending in R&D, advertising, or maintenance to meet earnings target; and deferring or rejecting investment projects with positive NPVs in order to meet earnings targets.

Question 15

Which of the following statements is not true?

Accepted Answer

A) EVA is inconsistent with DCF. 
B) EVA can be used deep down in the organization and is therefore a substitute for explicit monitoring by top management. 
C) Since accounting depreciation often overstates economic depreciation in a project's early years, EVA favors quick-payback projects. 
D) None of the options. 
A) EVA is inconsistent with DCF. 
B) EVA can be used deep down in the organization and is therefore a substitute for explicit monitoring by top management. 
C) Since accounting depreciation often overstates economic depreciation in a project's early years, EVA favors quick-payback projects. 
D) None of the options.

Question 16

A firm has an average investment of $1,000 during the year. During the same time, the firm generates after-tax earnings of $150.
If the cost of capital is 10 percent, what is the net return on investment?

Accepted Answer

A) 10 percent 
B) 5 percent 
C) 12 percent 
D) 15 percent 
A) 10 percent 
B) 5 percent 
C) 12 percent 
D) 15 percent

Question 17

One calculates EVA as follows:

Accepted Answer

A) EVA = (ROI − r)× (capital invested), where r = cost of capital. 
B) EVA = (ROI + r)× (capital invested), where r = cost of capital. 
C) EVA = (ROI)× (capital invested). 
D) EVA = (ROI)/(capital invested). 
A) EVA = (ROI − r)× (capital invested), where r = cost of capital. 
B) EVA = (ROI + r)× (capital invested), where r = cost of capital. 
C) EVA = (ROI)× (capital invested). 
D) EVA = (ROI)/(capital invested).

Question 18

Which type of situation best represents "gambling for redemption"?

Accepted Answer

A) A manager decides to invest in a single new product instead of three different products. 
B) A firm risks its reputation on the introduction of a revolutionary product. 
C) The firm's treasurer invests all of its cash in a single money market mutual fund. 
D) A firm on the verge of bankruptcy invests all available funds in a high-risk, low-NPV project in order to attempt to save itself. 
A) A manager decides to invest in a single new product instead of three different products. 
B) A firm risks its reputation on the introduction of a revolutionary product. 
C) The firm's treasurer invests all of its cash in a single money market mutual fund. 
D) A firm on the verge of bankruptcy invests all available funds in a high-risk, low-NPV project in order to attempt to save itself.

Question 19

Top management generally use spreadsheet programs to analyze all capital budgeting projects before deciding on them.

Accepted Answer

A) True 
 B)False

Question 20

Agency costs can be reduced by

Accepted Answer

A) monitoring managers' efforts only. 
B) monitoring managers' efforts and managers' actions. 
C) monitoring managers' efforts, monitoring managers' actions, and intervening when managers veer off-course. 
D) intervening when managers veer off-course. 
A) monitoring managers' efforts only. 
B) monitoring managers' efforts and managers' actions. 
C) monitoring managers' efforts, monitoring managers' actions, and intervening when managers veer off-course. 
D) intervening when managers veer off-course.

Exam 12: Agency Problems and Investment

The main idea behind EVA is a new concept recently introduced into finance.

Boards of directors outside the United States have traditionally been friendlier towards their own managers.

A factory manager can improve EVA by

The economic rate of return on an asset is defined as

Define the term economic value added (EVA).

A firm has an average investment of $10,000 during the year. During the same period, the firm generates after-tax income of $1,000. If the cost of capital is 15 percent, what is the net return on the investment?

Accounting income takes no account of the cost of the capital employed by a firm.

Managers on a fixed salary often fall victim to the following temptations:

When firms award stock options to managers as incentives, they typically set the exercise price of these options equal to the firm's

Which of the following actions-all else equal-will increase a firm's EVA?

A firm has an average investment of $10,000 during the year. During the same period, the firm generates after-tax income of $1,000. Calculate the economic value added (EVA)for the firm. (The cost of capital is 15 percent.)

EVA is used for

The following capital expenditures are typically included in a firm's capital budget:

According to the survey of senior managers by Graham, Harvey, and Rajgopal, senior managers admitted to the following:

Which of the following statements is not true?

A firm has an average investment of $1,000 during the year. During the same time, the firm generates after-tax earnings of $150. If the cost of capital is 10 percent, what is the net return on investment?

One calculates EVA as follows:

Which type of situation best represents "gambling for redemption"?

Top management generally use spreadsheet programs to analyze all capital budgeting projects before deciding on them.

Agency costs can be reduced by

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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