Question 1

Conducting scenario analysis helps managers see the:

Accepted Answer

A)  impact of an individual variable on the outcome of a project. 
B)  potential range of outcomes from a proposed project. 
C)  changes in long-term debt over the course of a proposed project. 
D)  possible range of market prices for their firm's stock over the life of a project. 
E)  allocation distribution of funds for capital projects under conditions of hard rationing. 
A)  impact of an individual variable on the outcome of a project. 
B)  potential range of outcomes from a proposed project. 
C)  changes in long-term debt over the course of a proposed project. 
D)  possible range of market prices for their firm's stock over the life of a project. 
E)  allocation distribution of funds for capital projects under conditions of hard rationing.

Question 2

Wilson's Antiques is considering a project that has an initial cost today of $10,000. The project has a two-year life with cash inflows of $6,500 a year. Should Wilson's decide to wait one year to commence this project,the initial cost will increase by 5% and the cash inflows will increase to $7,500 a year. What is the value of the option to wait if the applicable discount rate is 10%?

Accepted Answer

A)  $1,006.76 
B)  $1,235.54 
C)  $1,509.28 
D)  $1,606.76 
E)  $1,735.54 
A)  $1,006.76 
B)  $1,235.54 
C)  $1,509.28 
D)  $1,606.76 
E)  $1,735.54

Question 3

Which of the following statements are correct concerning the accounting break-even point?
I. The net income is equal to zero at the accounting break-even point.
II. The net present value is equal to zero at the accounting break-even point.
III. The quantity sold at the accounting break-even point is equal to the total fixed costs plus depreciation divided by the contribution margin.
IV. The quantity sold at the accounting break-even point is equal to the total fixed costs divided by the contribution margin.

Accepted Answer

A)  I and III only 
B)  I and IV only 
C)  II and III only 
D)  II and IV only 
E)  I, II, and IV only 
A)  I and III only 
B)  I and IV only 
C)  II and III only 
D)  II and IV only 
E)  I, II, and IV only

Question 4

To ascertain whether the accuracy of the variable cost estimate for a project will have much effect on the final outcome of the project,you should probably conduct _____ analysis.

Accepted Answer

A)  leverage 
B)  scenario 
C)  break-even 
D)  sensitivity 
E)  cash flow 
A)  leverage 
B)  scenario 
C)  break-even 
D)  sensitivity 
E)  cash flow

Question 5

From the information below,calculate the accounting break-even point.
Initial investment: $2,000
Fixed costs are $2,000 per year
Variable costs: $6 per unit
Depreciation: $250 per year
Price: $20 per unit
Discount rate: 10%
Project life: 4 years
Tax rate: 34%

Accepted Answer

A)  88 units per year 
B)  100 units per year 
C)  143 units per year 
D)  161 units per year 
E)  None of these. 
A)  88 units per year 
B)  100 units per year 
C)  143 units per year 
D)  161 units per year 
E)  None of these.

Question 6

You are considering a project which has been assigned a discount rate of 8%. If you start the project today,you will incur an initial cost of $480 and will receive cash inflows of $350 a year for three years. If you wait one year to start the project,the initial cost will rise to $520 and the cash flows will increase to $385 a year for three years. What is the value of the option to wait?

Accepted Answer

A)  $15.23 
B)  $17.08 
C)  $18.67 
D)  $20.20 
E)  $50.20 
A)  $15.23 
B)  $17.08 
C)  $18.67 
D)  $20.20 
E)  $50.20

Question 7

The investment timing decision relates to:

Accepted Answer

A)  how long the cash flows last once a project is implemented. 
B)  the decision as to when a project should be started. 
C)  how frequently the cash flows of a project occur. 
D)  how frequently the interest on the debt incurred to finance a project is compounded. 
E)  the decision to either finance a project over time or pay out the initial cost in cash. 
A)  how long the cash flows last once a project is implemented. 
B)  the decision as to when a project should be started. 
C)  how frequently the cash flows of a project occur. 
D)  how frequently the interest on the debt incurred to finance a project is compounded. 
E)  the decision to either finance a project over time or pay out the initial cost in cash.

Question 8

The point where a project produces a rate of return equal to the required return is known as the:

Accepted Answer

A)  point of zero operating leverage. 
B)  internal break-even point. 
C)  accounting break-even point. 
D)  present value break-even point. 
E)  income break-even point. 
A)  point of zero operating leverage. 
B)  internal break-even point. 
C)  accounting break-even point. 
D)  present value break-even point. 
E)  income break-even point.

Question 9

All else constant,as the variable cost per unit increases,the:

Accepted Answer

A)  contribution margin decreases. 
B)  sensitivity to fixed costs decreases. 
C)  degree of operating leverage decreases. 
D)  operating cash flow increases. 
E)  net profit increases. 
A)  contribution margin decreases. 
B)  sensitivity to fixed costs decreases. 
C)  degree of operating leverage decreases. 
D)  operating cash flow increases. 
E)  net profit increases.

Question 10

In order to make a decision with a decision tree:

Accepted Answer

A)  one starts farthest out in time to make the first decision. 
B)  one must begin at time 0. 
C)  any path can be taken to get to the end. 
D)  any path can be taken to get back to the beginning. 
E)  None of these. 
A)  one starts farthest out in time to make the first decision. 
B)  one must begin at time 0. 
C)  any path can be taken to get to the end. 
D)  any path can be taken to get back to the beginning. 
E)  None of these.

Question 11

In the present-value break-even the EAC is used to:

Accepted Answer

A)  determine the opportunity cost of investment. 
B)  allocate depreciation over the life of the project. 
C)  allocate the initial investment at its opportunity cost over the life of the project. 
D)  determine the contribution margin to fixed costs. 
E)  None of these. 
A)  determine the opportunity cost of investment. 
B)  allocate depreciation over the life of the project. 
C)  allocate the initial investment at its opportunity cost over the life of the project. 
D)  determine the contribution margin to fixed costs. 
E)  None of these.

Question 12

An investigation of the degree to which NPV depends on assumptions made about any singular critical variable is called a(n):

Accepted Answer

A)  operating analysis. 
B)  sensitivity analysis. 
C)  marginal benefit analysis. 
D)  decision tree analysis. 
E)  None of these. 
A)  operating analysis. 
B)  sensitivity analysis. 
C)  marginal benefit analysis. 
D)  decision tree analysis. 
E)  None of these.

Question 13

The Mini-Max Company has the following cost information on its new prospective project. Calculate the present value break-even point.
Initial investment: $700
Fixed costs are $200 per year
Variable costs: $3 per unit
Depreciation: $140 per year
Price: $8 per unit
Discount rate: 12%
Project life: 3 years
Tax rate: 34%

Accepted Answer

A)  68 units per year 
B)  75 units per year 
C)  84 units per year 
D)  114 units per year 
E)  None of these. 
A)  68 units per year 
B)  75 units per year 
C)  84 units per year 
D)  114 units per year 
E)  None of these.

Question 14

The Adept Co. is analyzing a proposed project. The company expects to sell 2,500 units,give or take 10%. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5% range. The depreciation expense is $4,000. The sale price is estimated at $16 a unit,give or take 2%. The company bases its sensitivity analysis on the expected case scenario. The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $17. Using this value,the earnings before interest and taxes will be:

Accepted Answer

A)  $4,000 
B)  $6,000 
C)  $8,500 
D)  $10,000 
E)  $18,500 
A)  $4,000 
B)  $6,000 
C)  $8,500 
D)  $10,000 
E)  $18,500

Question 15

The Meldrum Co. is analyzing a proposed project. The company expects to sell 3,000 units,give or take 15%. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5% range. The depreciation expense is $4,000. The sale price is estimated at $18 a unit,give or take 2%. The company bases its sensitivity analysis on the expected case scenario. What is the sales revenue under the optimistic case scenario?

Accepted Answer

A)  $54,400 
B)  $55,080 
C)  $62,100 
D)  $63,342 
E)  $65,030 
A)  $54,400 
B)  $55,080 
C)  $62,100 
D)  $63,342 
E)  $65,030

Question 16

Variable costs:

Accepted Answer

A)  change as the quantity of output changes. 
B)  are zero when production is zero. 
C)  are exemplified by direct labor and raw materials. 
D)  All of these. 
E)  None of these. 
A)  change as the quantity of output changes. 
B)  are zero when production is zero. 
C)  are exemplified by direct labor and raw materials. 
D)  All of these. 
E)  None of these.

Question 17

The market value of an investment project should be viewed as the sum of the standard NPV and the value of managerial options. Explain three different real or managerial options that management may have,what they are,and how they would influence market value.

Accepted Answer

There are three commonly used real optio

Question 18

An analysis of what happens to the estimate of net present value when only one variable is changed is called _____ analysis.

Accepted Answer

A)  forecasting 
B)  scenario 
C)  sensitivity 
D)  simulation 
E)  break-even 
A)  forecasting 
B)  scenario 
C)  sensitivity 
D)  simulation 
E)  break-even

Question 19

Given the following information,calculate the present value break-even point.
Initial investment: $2,000
Fixed costs: $2,000 per year
Variable costs: $6 per unit
Depreciation: $250 per year
Price: $20 per unit
Discount rate: 10%
Project life: 4 years
Tax rate: 34%

Accepted Answer

A)  100 units per year 
B)  143 units per year 
C)  202 units per year 
D)  286 units per year 
E)  None of these. 
A)  100 units per year 
B)  143 units per year 
C)  202 units per year 
D)  286 units per year 
E)  None of these.

Question 20

The Meldrum Co. is analyzing a proposed project. The company expects to sell 3,000 units,give or take 15%. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5% range. The depreciation expense is $4,000. The sale price is estimated at $18 a unit,give or take 2%. The company bases its sensitivity analysis on the expected case scenario. What is the contribution margin under the expected case scenario?

Accepted Answer

A)  $8 
B)  $8.32 
C)  $10 
D)  $16 
E)  $18 
A)  $8 
B)  $8.32 
C)  $10 
D)  $16 
E)  $18

Exam 7: Risk Analysis, Real Options, and Capital Budgeting

Conducting scenario analysis helps managers see the:

To ascertain whether the accuracy of the variable cost estimate for a project will have much effect on the final outcome of the project,you should probably conduct _____ analysis.

From the information below,calculate the accounting break-even point. Initial investment: $2,000 Fixed costs are $2,000 per year Variable costs: $6 per unit Depreciation: $250 per year Price: $20 per unit Discount rate: 10% Project life: 4 years Tax rate: 34%

The investment timing decision relates to:

The point where a project produces a rate of return equal to the required return is known as the:

All else constant,as the variable cost per unit increases,the:

In order to make a decision with a decision tree:

In the present-value break-even the EAC is used to:

An investigation of the degree to which NPV depends on assumptions made about any singular critical variable is called a(n):

Variable costs:

The market value of an investment project should be viewed as the sum of the standard NPV and the value of managerial options. Explain three different real or managerial options that management may have,what they are,and how they would influence market value.

An analysis of what happens to the estimate of net present value when only one variable is changed is called _____ analysis.

Given the following information,calculate the present value break-even point. Initial investment: $2,000 Fixed costs: $2,000 per year Variable costs: $6 per unit Depreciation: $250 per year Price: $20 per unit Discount rate: 10% Project life: 4 years Tax rate: 34%

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

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