Question 1

What percentage change in sales occurs if profits increase by 3% when the firm's degree of operating leverage is 4.5?

Accepted Answer

A)  0.33% 
B)  0.67% 
C)  1.5% 
D)  3.33% 
A)  0.33% 
B)  0.67% 
C)  1.5% 
D)  3.33%

Question 2

A firm with high operating leverage is expected to:

Accepted Answer

A)  have high variable costs. 
B)  have low fixed costs. 
C)  have a high degree of profitability. 
D)  perform better when sales are high. 
A)  have high variable costs. 
B)  have low fixed costs. 
C)  have a high degree of profitability. 
D)  perform better when sales are high.

Question 3

A decision tree shows a 30% probability of $2 million in returns and a 70% chance of $1 million in returns.What is the maximum you would invest today in this project if the cash inflow occurs one year in the future and the discount rate is 10%?

Accepted Answer

A)  $818,182 
B)  $1,181,818 
C)  $1,300,000 
D)  $1,363,636 
A)  $818,182 
B)  $1,181,818 
C)  $1,300,000 
D)  $1,363,636

Question 4

The degree of operating leverage (DOL)shows the relationship between sales and pretax profits.

Accepted Answer

A) True 
 B)False

Question 5

"What-if" questions ask what will happen to a project in various circumstances.

Accepted Answer

A) True 
 B)False

Question 6

Fixed costs:

Accepted Answer

A)  are a constant percentage of sales revenues. 
B)  vary with the level of depreciation expense. 
C)  are constant with changes in the level of output. 
D)  are inversely related to the level of output. 
A)  are a constant percentage of sales revenues. 
B)  vary with the level of depreciation expense. 
C)  are constant with changes in the level of output. 
D)  are inversely related to the level of output.

Question 7

The accounting break-even point is that level of sales where:

Accepted Answer

A)  sales revenue equals variable costs. 
B)  sales revenue equals variable plus fixed costs. 
C)  EBIT equals depreciation expense, thus cash flow equals zero. 
D)  EBIT equals zero. 
A)  sales revenue equals variable costs. 
B)  sales revenue equals variable plus fixed costs. 
C)  EBIT equals depreciation expense, thus cash flow equals zero. 
D)  EBIT equals zero.

Question 8

What effect will a reduction in the cost of capital have on the accounting break-even level of revenues?

Accepted Answer

A)  It raises the break-even level. 
B)  It reduces the break-even level. 
C)  It has no effect on the break-even level. 
D)  This cannot be determined without knowing the length of the investment horizon. 
A)  It raises the break-even level. 
B)  It reduces the break-even level. 
C)  It has no effect on the break-even level. 
D)  This cannot be determined without knowing the length of the investment horizon.

Question 9

A silver mine can yield 10,000 ounces of silver at a variable cost of $8 per ounce.The fixed costs of operating the mine are $10,000 per year.In half the years,silver can be sold for $12 per ounce; in the other years,silver can be sold for only $6 per ounce.Ignoring taxes,what is the average cash flow you will receive from the mine if it is always kept in operation and the silver is always sold in the year it is mined? What happens to the average cash flow from the mine if you can shut down the mine in years of low silver prices?

Accepted Answer

Expenses = ($10,000 * $8)+ $10,000 = $90

Question 10

Income that is measured after deduction of the cost of capital is called:

Accepted Answer

A)  operating income. 
B)  operating profit. 
C)  economic income. 
D)  economic profit. 
A)  operating income. 
B)  operating profit. 
C)  economic income. 
D)  economic profit.

Question 11

If a large proportion of costs is fixed,a shortfall in sales has a magnified effect on profits.From the previous statement we know that the risk of a project is affected by the degree of operating leverage.

Accepted Answer

A) True 
 B)False

Question 12

Break-even revenues on an accounting basis typically indicate a:

Accepted Answer

A)  negative NPV for the firm. 
B)  positive NPV for the firm. 
C)  high degree of operating leverage. 
D)  downturn in the business cycle. 
A)  negative NPV for the firm. 
B)  positive NPV for the firm. 
C)  high degree of operating leverage. 
D)  downturn in the business cycle.

Question 13

What is the level of profits for a firm in which DOL = 5 and fixed costs including depreciation = $300,000?

Accepted Answer

A)  $60,000 
B)  $75,000 
C)  $1,200,000 
D)  $1,500,000 
A)  $60,000 
B)  $75,000 
C)  $1,200,000 
D)  $1,500,000

Question 14

Sensitivity analysis evaluates projects by:

Accepted Answer

A)  forecasting changes in interest rates that would increase financing costs. 
B)  recording profitability changes while changing one variable at a time. 
C)  ensuring that the project sponsor has proper incentives. 
D)  testing for interrelated variables. 
A)  forecasting changes in interest rates that would increase financing costs. 
B)  recording profitability changes while changing one variable at a time. 
C)  ensuring that the project sponsor has proper incentives. 
D)  testing for interrelated variables.

Question 15

How are sensitivity,scenario,and break-even analysis used to see the effect of an error in forecasts on project profitability? Why is an overestimate of sales more serious for projects with high operating leverage?

Accepted Answer

Good managers realize that the forecasts

Question 16

The capital budget should be consistent with the firm's:

Accepted Answer

A)  growth in sales. 
B)  strategic plans. 
C)  current level of debt. 
D)  dividend policy. 
A)  growth in sales. 
B)  strategic plans. 
C)  current level of debt. 
D)  dividend policy.

Question 17

In a graphic depiction of accounting break-even analysis,the larger the slope of the total cost line,the:

Accepted Answer

A)  higher the level of fixed costs. 
B)  higher the level of total revenue. 
C)  higher the number of units sold. 
D)  higher the percentage of variable costs. 
A)  higher the level of fixed costs. 
B)  higher the level of total revenue. 
C)  higher the number of units sold. 
D)  higher the percentage of variable costs.

Question 18

If forecasted sales exceed the break-even level but are less than the economic break-even level,the project has a:

Accepted Answer

A)  positive NPV but earns less than the discount rate. 
B)  negative NPV but earns more than the discount rate. 
C)  net loss on the income statement. 
D)  net profit on the income statement. 
A)  positive NPV but earns less than the discount rate. 
B)  negative NPV but earns more than the discount rate. 
C)  net loss on the income statement. 
D)  net profit on the income statement.

Question 19

The DOL measures the percentage change in _____,given a percentage change in ____.

Accepted Answer

A)  fixed costs; sales 
B)  profits; fixed costs 
C)  profits, sales 
D)  operating leverage; fixed costs 
A)  fixed costs; sales 
B)  profits; fixed costs 
C)  profits, sales 
D)  operating leverage; fixed costs

Question 20

Firms that lack competitive advantages will:

Accepted Answer

A)  have difficulty finding positive NPV projects for investment. 
B)  be forced to capture larger market shares to be profitable. 
C)  avoid the need to conduct sensitivity analyses. 
D)  be forced to operate with a high degree of operating leverage. 
A)  have difficulty finding positive NPV projects for investment. 
B)  be forced to capture larger market shares to be profitable. 
C)  avoid the need to conduct sensitivity analyses. 
D)  be forced to operate with a high degree of operating leverage.

Exam 10: Project Analysis

What percentage change in sales occurs if profits increase by 3% when the firm's degree of operating leverage is 4.5?

A firm with high operating leverage is expected to:

A decision tree shows a 30% probability of $2 million in returns and a 70% chance of $1 million in returns.What is the maximum you would invest today in this project if the cash inflow occurs one year in the future and the discount rate is 10%?

The degree of operating leverage (DOL)shows the relationship between sales and pretax profits.

"What-if" questions ask what will happen to a project in various circumstances.

Fixed costs:

The accounting break-even point is that level of sales where:

What effect will a reduction in the cost of capital have on the accounting break-even level of revenues?

Income that is measured after deduction of the cost of capital is called:

If a large proportion of costs is fixed,a shortfall in sales has a magnified effect on profits.From the previous statement we know that the risk of a project is affected by the degree of operating leverage.

Break-even revenues on an accounting basis typically indicate a:

What is the level of profits for a firm in which DOL = 5 and fixed costs including depreciation = $300,000?

Sensitivity analysis evaluates projects by:

How are sensitivity,scenario,and break-even analysis used to see the effect of an error in forecasts on project profitability? Why is an overestimate of sales more serious for projects with high operating leverage?

The capital budget should be consistent with the firm's:

In a graphic depiction of accounting break-even analysis,the larger the slope of the total cost line,the:

If forecasted sales exceed the break-even level but are less than the economic break-even level,the project has a:

The DOL measures the percentage change in _____,given a percentage change in ____.

Firms that lack competitive advantages will:

Goals and Governance of the Corporation

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Introduction to Risk,Return,and the Opportunity Cost of Capital

Risk,Return,and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters

The DOL measures the percentage change in _,given a percentage change in .