Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

What is the maximum percentage of variable costs to sales that a firm could have and still break even with $5 million in revenues,$1 million in fixed costs,and $500,000 of depreciation?

Accepted Answer

A)  30% 
B)  70% 
C)  80% 
D)  90% 
A)  30% 
B)  70% 
C)  80% 
D)  90%

Question 3

A project that simply breaks even on an accounting basis gives you your money back but does not cover the opportunity cost of the capital tied up in the project.

Accepted Answer

A) True 
 B)False

Question 4

Analysis indicates that a project's level of success is primarily dependent upon the firm controlling the variable costs.What type of analysis was conducted?

Accepted Answer

A)  Sensitivity analysis 
B)  Break-even analysis 
C)  Ratio analysis 
D)  Real option analysis 
A)  Sensitivity analysis 
B)  Break-even analysis 
C)  Ratio analysis 
D)  Real option analysis

Question 5

One of the problems inherent in sensitivity analysis is that:

Accepted Answer

A)  it suggests when it may be useful to spend money to get a better estimate of sales or costs. 
B)  most projects are equally sensitive to all variables. 
C)  it ignores any interrelationships between variables. 
D)  the cost of conducting the analysis is excessive. 
A)  it suggests when it may be useful to spend money to get a better estimate of sales or costs. 
B)  most projects are equally sensitive to all variables. 
C)  it ignores any interrelationships between variables. 
D)  the cost of conducting the analysis is excessive.

Question 6

If a large proportion of a firm's costs is fixed,a shortfall in sales will have a magnified effect on the firm's profits.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A)  sales revenue equals variable costs. 
B)  sales revenue equals variable plus fixed costs. 
C)  the operating cash flow equals zero. 
D)  profit equals zero. 
A)  sales revenue equals variable costs. 
B)  sales revenue equals variable plus fixed costs. 
C)  the operating cash flow equals zero. 
D)  profit equals zero.

Question 8

Fixed costs:

Accepted Answer

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

Question 9

Which one of the following descriptions is representative of scenario analysis?

Accepted Answer

A)  One variable at a time is allowed to change. 
B)  It isolates the unknowns that belong in the model. 
C)  Different combinations of variables are analyzed. 
D)  It represents the "top-down" approach. 
A)  One variable at a time is allowed to change. 
B)  It isolates the unknowns that belong in the model. 
C)  Different combinations of variables are analyzed. 
D)  It represents the "top-down" approach.

Question 10

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

Accepted Answer

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

Question 11

A 6-year project has a zero NPV with sales of $5 million and a discount rate of 8%.The annual cash inflows are equal to 10% of sales minus $300,000.What was the initial investment in the project assuming that none of the investment is recoverable when the project ends?

Accepted Answer

A)  $416,667 
B)  $924,576 
C)  $1,016,678 
D)  $2,311,450 
A)  $416,667 
B)  $924,576 
C)  $1,016,678 
D)  $2,311,450

Question 12

Decision trees:

Accepted Answer

A)  are an alternative to NPV analysis. 
B)  recognize that managers may need to react to unexpected future events. 
C)  are a way to adjust the discount rate to allow for uncertainty. 
D)  lay out the different steps in preparing the capital budget. 
A)  are an alternative to NPV analysis. 
B)  recognize that managers may need to react to unexpected future events. 
C)  are a way to adjust the discount rate to allow for uncertainty. 
D)  lay out the different steps in preparing the capital budget.

Question 13

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 the 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 the proper incentives. 
D)  testing for interrelated variables.

Question 14

What level of management is responsible for originating capital budgeting proposals?

Accepted Answer

A)  Senior management 
B)  Divisional management 
C)  Lower management 
D)  All levels of management 
A)  Senior management 
B)  Divisional management 
C)  Lower management 
D)  All levels of management

Question 15

Sensitivity analysis:

Accepted Answer

A)  makes most sense when variables are interrelated. 
B)  gives an idea of the combined effect of pessimistic outcomes. 
C)  allows the manager to weight the various outcomes to provide a better estimate of NPV. 
D)  forces the manager to identify the underlying factors. 
A)  makes most sense when variables are interrelated. 
B)  gives an idea of the combined effect of pessimistic outcomes. 
C)  allows the manager to weight the various outcomes to provide a better estimate of NPV. 
D)  forces the manager to identify the underlying factors.

Question 16

Which one of the following statements is correct concerning sensitivity analysis?

Accepted Answer

A)  It ignores interrelationships between variables. 
B)  Several variables are allowed to change concurrently. 
C)  It considers all feasible variable combinations. 
D)  It can guarantee a project's success. 
A)  It ignores interrelationships between variables. 
B)  Several variables are allowed to change concurrently. 
C)  It considers all feasible variable combinations. 
D)  It can guarantee a project's success.

Question 17

Which one of the following techniques may be more appropriate to analyze projects with interrelated variables?

Accepted Answer

A)  Sensitivity analysis 
B)  Scenario analysis 
C)  Break-even analysis 
D)  DOL analysis 
A)  Sensitivity analysis 
B)  Scenario analysis 
C)  Break-even analysis 
D)  DOL analysis

Question 18

The accounting break-even level of sales represents the point where:

Accepted Answer

A)  fixed costs are covered. 
B)  variable costs are covered. 
C)  fixed costs and variable costs are covered. 
D)  sales are equal to the sum of fixed costs, variable costs, and depreciation. 
A)  fixed costs are covered. 
B)  variable costs are covered. 
C)  fixed costs and variable costs are covered. 
D)  sales are equal to the sum of fixed costs, variable costs, and depreciation.

Question 19

Operating leverage increases with fixed cost.

Accepted Answer

A) True 
 B)False

Question 20

Which one of the following would not be included as a traditional capital budgeting project?

Accepted Answer

A)  Machine replacement proposals 
B)  Salary adjustment proposals 
C)  New product proposals 
D)  Plant expansion proposals 
A)  Machine replacement proposals 
B)  Salary adjustment proposals 
C)  New product proposals 
D)  Plant expansion proposals

Exam 10: Project Analysis

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

What is the maximum percentage of variable costs to sales that a firm could have and still break even with $5 million in revenues,$1 million in fixed costs,and $500,000 of depreciation?

A project that simply breaks even on an accounting basis gives you your money back but does not cover the opportunity cost of the capital tied up in the project.

Analysis indicates that a project's level of success is primarily dependent upon the firm controlling the variable costs.What type of analysis was conducted?

One of the problems inherent in sensitivity analysis is that:

If a large proportion of a firm's costs is fixed,a shortfall in sales will have a magnified effect on the firm's profits.

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

Fixed costs:

Which one of the following descriptions is representative of scenario analysis?

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

A 6-year project has a zero NPV with sales of $5 million and a discount rate of 8%.The annual cash inflows are equal to 10% of sales minus $300,000.What was the initial investment in the project assuming that none of the investment is recoverable when the project ends?

Decision trees:

Sensitivity analysis evaluates projects by:

What level of management is responsible for originating capital budgeting proposals?

Sensitivity analysis:

Which one of the following statements is correct concerning sensitivity analysis?

Which one of the following techniques may be more appropriate to analyze projects with interrelated variables?

The accounting break-even level of sales represents the point where:

Operating leverage increases with fixed cost.

Which one of the following would not be included as a traditional capital budgeting project?

Goals and Governance of the Firm

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 and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers,Acquisitions,and Corporate Control

International Financial Management

Options

Risk Management

Filters