Chapter 10 1 A taxable gain occurs when an asset is sold for more than its book value For capital budgeting purposes the taxes on the sale are treated as a a Reduction in cash and deducted from the sales price i The term SP BV is our capital gain or loss We multiply this by the tax rate to get the taxes we have to pay this is subtracted from the selling price when calculating the net CFAT from salvage which is part of our terminal cash flow 2 You are advising a friend who is attempting to decide whether or not to drop one of the courses he is currently enrolled in if they do they will forfeit half of the money spent on tuition Which of the following conclusions drawn by your friend is consistent with capital budgeting principles a Remaining in the class incurs opportunity cost because they have to reduce the number of hours they are gainfully employed incremental if he drops he can work more The time and energy the put into the course thus far is a sunk cost 3 A firm moves into a higher tax bracket All else equal the depreciation tax shield will a Be more valuable 4 A retail greeting card shop is considering expanding its operations to include the sale of unique gift items Which of the following should be included in the initial cash outflow of the proposed expansion project Initial cost of gift inventory inventory is included a b Cost to expand the showroom to allow space for displaying the gift items modifications to the building is also part of initial cost 5 Which of the following decreases net income and increases the operating cash flow a Depreciation it s a cost which lowers our ebit and also our net income But we add it back and thus have a higher CFAT due to the tax shield 6 Which of the following best describes an opportunity cost a the current market value of equipment you won that you want to use for a new project i Opportunity costs will arise when the firm uses an asset it already owns The opportunity costs that the firm gives up the opportunity to sell it to someone else since they decided to use it for the new project 7 Your firm is considering the purchase of a new machine that will replace an older model currently owned by the firm Which of the following items should be included in the capital budgeting analysis a Cost savings that result from the purchase of a new machine i incremental cost savings result in CFAT b the net CFAT from salvage that would have been realized in the future if we kept the old machine i It s a replacement issue If you get a new machine then you will sell the old machine now By selling it now you incur an opportunity cost you give up the opportunity to sell it in the future 8 which of the following items would increase the initial cash outlay for a project a An increase in the inventory needed for the project i Increase NWC b A decrease in accounts payable in order to meet guidelines i Decrease in liabilities increase NWC c Additional training needed to prepare employees i Training shipping anything needed to get machine up and 9 Which of the following statements are correct running is included a All other things equal a projects NPV will be higher if the firm uses modified ACRS instead of straight line depreciation b i Better to save money on taxes sooner compounded If the firm is considering a replacement project the firm should include the incremental depreciation that is the difference in depreciation between the old and new machine in capital budgeting analysis 10 Which of the following is true a When calculating the initial cash outlay for a replacement project we should include the Net CFAT from salvage from the sale of the old machine at year 0 b The required return on a projet represents the opportunity cost to the c firm for a project In the capital budgeting process If we were to subtract interest expense when calculating CFAT we would be double counting finance costs and thus underestimate the true project NPV Chapter 12 11 which of the following investments was the least risky over the period 1926 2005 a U S treasury bills efficiency a 12 Which one of the following statements is accurate regarding market In an efficient market prices adjust quickly and correctly to new information 13 Which of the following statements is correct a The frequency distrobution of the returns on large company stocks is wider than the frequency distrobution of the returns on long term corporate bonds for the period 1926 2005 i Stocks are riskier than bonds wider distrobution 14 Which one of the following best describes the information reflected in the market prices if the financial markets are semi strong form efficient 15 Which of the following is the correct formula for capital gains yield a All public information a Pt 1 Pt Pt i change in price divided by starting price 16 Which of the following statements is true regarding risk premiums a U S treasury bills have 0 risk premium 17 No one could benefit from inside information if the financial markets are 18 Which one of the following has the widest frequency distrobution of returns i Wider means higher standard deviation this if for the riskiest 19 Which of the following categories of securities had the most volatile returns a Strong form efficient based on the period 1926 2005 a Small company stocks on the list for the period 1926 2005 a Long term corporate bonds i Highest from the list 20 Which forms of market efficiency supports the idea that market prices reflect all public but not all private information a Semi strong form 21 Which one of the following categories produced the lowest average annual rate of return based on historical record for the period 1926 2005 a Intermediate term government bonds i Lowest risk lowest return Shorter than long term bonds the longer the maturity the riskier the bond is 22 which of the following statements are correct a If an investor invested 1 in an index of small company stocks in 1926 it would be worth 10 000 in 2003 b An investment of 1 in an index of small company stocks in 1926 would be worth over 150 times more than investment in treasury bills over the same period 23 Which of the following statements is correct a Over the period 1926 to 2003 inflation had a higher variability than treasury bills i Higher standard deviation higher return b Over the period 1926 2003 the risk return tradeoff applied across all of the investment types treasury bills long term government bonds large company stocks small company stocks 24 Which of the following
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