Question 1

If the proportion of fixed costs increases:

Accepted Answer

A)  DOL falls. 
B)  DOL rises. 
C)  the NPVbreakeven level of sales declines. 
D)  the NPV of the cash flows declines. 
A)  DOL falls. 
B)  DOL rises. 
C)  the NPVbreakeven level of sales declines. 
D)  the NPV of the cash flows declines.

Question 2

If the firm's degree of operating leverage is 4.5,what percentage change in sales will result in a 3% rise in profits?

Accepted Answer

A)  0.33% 
B)  0.67% 
C)  3.03% 
D)  1.50% 
A)  0.33% 
B)  0.67% 
C)  3.03% 
D)  1.50%

Question 3

A firm has fixed costs of $1.2 million and depreciation of $1 million.Variable costs are 64% of sales.What is the accounting break-even level of sales?

Accepted Answer

A)  $5.23 million 
B)  $3.44 million 
C)  $6.11 million 
D)  $4.87 million 
A)  $5.23 million 
B)  $3.44 million 
C)  $6.11 million 
D)  $4.87 million

Question 4

Which one of the following sets of conditions represents the more suitable investment?

Accepted Answer

A)  Total revenues cover fixed and variable costs. 
B)  An investment breaks even in an accounting sense. 
C)  An investment breaks even in an economic sense. 
D)  Total revenues exceed the costs of goods sold. 
A)  Total revenues cover fixed and variable costs. 
B)  An investment breaks even in an accounting sense. 
C)  An investment breaks even in an economic sense. 
D)  Total revenues exceed the costs of goods sold.

Question 5

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

Accepted Answer

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

Question 6

A firm acquires a patent to produce a new enhanced type of transcripter.What is the real option?

Accepted Answer

A)  abandonment option. 
B)  timing option. 
C)  option to change raw material inputs. 
D)  expansion option. 
A)  abandonment option. 
B)  timing option. 
C)  option to change raw material inputs. 
D)  expansion option.

Question 7

Which one of these projects would you always reject?

Accepted Answer

A)  High operating leverage, sales projected at the accounting break-even level, and no option to abandon or expand. 
B)  High operating leverage, sales projected at the NPV break-even level, and an option to abandon or expand. 
C)  Low operating leverage, sales projected at the accounting break-even level, and an option to abandon or expand. 
D)  Low operating leverage, sales projected at the NPV break-even level, and an option to abandon or expand. 
A)  High operating leverage, sales projected at the accounting break-even level, and no option to abandon or expand. 
B)  High operating leverage, sales projected at the NPV break-even level, and an option to abandon or expand. 
C)  Low operating leverage, sales projected at the accounting break-even level, and an option to abandon or expand. 
D)  Low operating leverage, sales projected at the NPV break-even level, and an option to abandon or expand.

Question 8

Which one of the following variables would you suspect to be least significant in a sensitivity analysis of a fast-food establishment?

Accepted Answer

A)  Sales 
B)  Depreciation 
C)  Labor cost 
D)  Food cost 
A)  Sales 
B)  Depreciation 
C)  Labor cost 
D)  Food cost

Question 9

A firm has a tract of timber.The future growth rate of the trees and the price of lumber are uncertain.The firm:

Accepted Answer

A)  has an expansion option. 
B)  has an option to vary the production technology. 
C)  should harvest the timber immediately if NPV is positive. 
D)  has a timing option. 
A)  has an expansion option. 
B)  has an option to vary the production technology. 
C)  should harvest the timber immediately if NPV is positive. 
D)  has a timing option.

Question 10

When the level of fixed costs is decreased,the break-even level of revenues:

Accepted Answer

A)  will automatically decrease. 
B)  will automatically increase. 
C)  may or may not change, depending on variable costs. 
D)  will remain unchanged as long as depreciation remains constant. 
A)  will automatically decrease. 
B)  will automatically increase. 
C)  may or may not change, depending on variable costs. 
D)  will remain unchanged as long as depreciation remains constant.

Question 11

Scenario analysis allows managers to look at different but consistent combinations of interrelated variables.

Accepted Answer

A) True 
 B)False

Question 12

The opportunity to abandon a project loses some of its value when:

Accepted Answer

A)  fixed costs are high. 
B)  markets are extremely competitive. 
C)  the future is relatively certain. 
D)  secondary markets exist and are active. 
A)  fixed costs are high. 
B)  markets are extremely competitive. 
C)  the future is relatively certain. 
D)  secondary markets exist and are active.

Question 13

If a 20% reduction in a project's forecast sales would still result in a positive NPV,then sensitivity analysis would suggest:

Accepted Answer

A)  that there is little point in further market research. 
B)  that a more detailed sales forecast is required. 
C)  that the initial sales forecasts were inflated. 
D)  that more of the company's overhead costs can be allocated to this product. 
A)  that there is little point in further market research. 
B)  that a more detailed sales forecast is required. 
C)  that the initial sales forecasts were inflated. 
D)  that more of the company's overhead costs can be allocated to this product.

Question 14

Soft capital rationing may be beneficial to a firm if it:

Accepted Answer

A)  reduces a firm's taxes. 
B)  weeds out proposals with NPVs that have been overstated. 
C)  allows managers to select their favorite projects. 
D)  lowers the cost of capital. 
A)  reduces a firm's taxes. 
B)  weeds out proposals with NPVs that have been overstated. 
C)  allows managers to select their favorite projects. 
D)  lowers the cost of capital.

Question 15

A firm with 60% of sales going to variable costs,$1.5 million fixed costs,and $500,000 depreciation and sales of $3 million.How does the current level of sales compare to the accounting break-even sales level?

Accepted Answer

A)  Current sales are $2 million below the break-even level. 
B)  Current sales are $333,333 below the break-even level. 
C)  Current sales are $800,000 below the break-even level. 
D)  Current sales exceed the break-even level by $360,000. 
A)  Current sales are $2 million below the break-even level. 
B)  Current sales are $333,333 below the break-even level. 
C)  Current sales are $800,000 below the break-even level. 
D)  Current sales exceed the break-even level by $360,000.

Question 16

The inputs that are most worth refining before you commit to a project are the ones that have the greatest potential to alter project NPV.

Accepted Answer

A) True 
 B)False

Question 17

The greater the DOL,the greater the protection against operating losses during economic downturns.

Accepted Answer

A) True 
 B)False

Question 18

The option for a firm to expand future production has most value when:

Accepted Answer

A)  future production will be profitable. 
B)  the outlook for the business is very assured. 
C)  the future is very uncertain. 
D)  today's production costs are lower than in the future. 
A)  future production will be profitable. 
B)  the outlook for the business is very assured. 
C)  the future is very uncertain. 
D)  today's production costs are lower than in the future.

Question 19

If the firm's degree of operating leverage is 3.8,what percentage change in sales will result in a 13.8% fall in profits?

Accepted Answer

A)  0.28% 
B)  −2.75% 
C)  −3.63% 
D)  10.00% 
A)  0.28% 
B)  −2.75% 
C)  −3.63% 
D)  10.00%

Question 20

Calculate the accounting break-even level of sales assuming $865,000 of fixed costs,$400,000 depreciation expense,and a variable costs-to-sales ratio of 65%.

Accepted Answer

A)  $2,769,230.77 
B)  $3,614,285.71 
C)  $4,237,769.23 
D)  $1,946.153.85 
A)  $2,769,230.77 
B)  $3,614,285.71 
C)  $4,237,769.23 
D)  $1,946.153.85

Exam 10: Project Analysis

If the proportion of fixed costs increases:

If the firm's degree of operating leverage is 4.5,what percentage change in sales will result in a 3% rise in profits?

A firm has fixed costs of $1.2 million and depreciation of $1 million.Variable costs are 64% of sales.What is the accounting break-even level of sales?

Which one of the following sets of conditions represents the more suitable investment?

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

A firm acquires a patent to produce a new enhanced type of transcripter.What is the real option?

Which one of these projects would you always reject?

Which one of the following variables would you suspect to be least significant in a sensitivity analysis of a fast-food establishment?

A firm has a tract of timber.The future growth rate of the trees and the price of lumber are uncertain.The firm:

When the level of fixed costs is decreased,the break-even level of revenues:

Scenario analysis allows managers to look at different but consistent combinations of interrelated variables.

The opportunity to abandon a project loses some of its value when:

If a 20% reduction in a project's forecast sales would still result in a positive NPV,then sensitivity analysis would suggest:

Soft capital rationing may be beneficial to a firm if it:

A firm with 60% of sales going to variable costs,$1.5 million fixed costs,and $500,000 depreciation and sales of $3 million.How does the current level of sales compare to the accounting break-even sales level?

The inputs that are most worth refining before you commit to a project are the ones that have the greatest potential to alter project NPV.

The greater the DOL,the greater the protection against operating losses during economic downturns.

The option for a firm to expand future production has most value when:

If the firm's degree of operating leverage is 3.8,what percentage change in sales will result in a 13.8% fall in profits?

Calculate the accounting break-even level of sales assuming $865,000 of fixed costs,$400,000 depreciation expense,and a variable costs-to-sales ratio of 65%.

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

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