Question 1
The __________ is the value that could be provided to a firm by the selection of a project other than the project that was actually selected.
• overhead expense
• sunk cost
• free cash flow
• opportunity cost
Question 2
___________ are the amounts by which a firm's earnings are expected to change as the result of a specific investment decision.
• Depreciation tax shields
• Terminal values
• Incremental earnings
• Opportunity costs
Question 3
The __________ can be used to the select the optimal combinations of projects to undertake when multiple projects and resources have to be considered.
• incremental IRR approach
• profitability index
• stand-alone project approach
• NPV Rule
Question 4
Asset purchase price minus the accumulated depreciation on that asset equals:
• free cash flow.
• unlevered net income.
• sunk costs.
• the book value of that asset.
Question 5
__________ are costs that have already been expended and that should not be considered when making an investment decision.
• Opportunity costs
• Overhead expenses
• Sunk costs
• Trade credits
Question 6
The NPV Rule says that a firm should:
• select the project with the highest NPV or IRR.
• reject any project with an NPV less than one.
• select the project with the highest NPV.
• reject any project with a negative NPV.
Question 7
The non-cash expense that firms can deduct to account for the decline in value experienced by assets used in the firm's business is called:
• depreciation.
• opportunity cost.
• unlevered equity.
• overhead expense.
Question 8
When a corporation uses excess cash to buy back its own shares of stock, the result is:
• an increase in the overall value of the corporation.
• an increase in dividends paid and an increase in share price.
• a decrease in share price and an increase in dividends paid.
• a reduction of dividends paid by the corporation and a reduction in the number of shares outstanding.
Question 9
The indirect effects of a project undertaken by a firm that may increase or decrease the success of other activities of a firm are called:
• project externalities.
• scenario analysis.
• sunk costs.
• break-even.
Question 10
The __________ is the most accurate and reliable of the decision rules.
• NPV Rule
• IRR Rule
• Payback Method
• Hybrid Approach
Question 11
Tabletop Ranches, Inc. is considering the purchase of a new helicopter for $350,000. The firm's old helicopter has a book value of $85,000, but it can only be sold for $60,000. It was being depreciated at the rate of $13,500 per year for four more years under an old depreciation method.
The new helicopter will be depreciated using the 5-year MACRS schedule. It is expected to save $62,000 after taxes through reduced fuel and maintenance expenses. Tabletop Ranch is in the 34% tax bracket and has a 12% cost of capital.
a. Calculate the cash inflows from selling the old helicopter.
b. Calculate the net cost of the new helicopter.
c. Calculate the incremental depreciation for the new helicopter.
d. Calculate the net cash flows for the purchase.
Question 12
Gray House is issuing bonds paying $105 annually that will mature fifteen years from today. The bond is currently selling for $980.
Calculate:
a. Coupon Rate
b. Current Yield
c. Yield To Maturity