1. A pro forma financial statement is a financial statement that:
a. expresses all values as a percentage of either total assets or total sales. b. compares actual results to the budgeted amounts. c. projects future years' operating results. d. values all assets based on their current market values.
2. The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:
a. tax shield. b. tax credit. c. tax return. d. IRS cost.
3. Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?
a. Opportunity cost b. Erosion c. Offset flows d. Pirated flows
4. The analysis of a new project should exclude:
a. tax effects. b. erosion effects. c. sunk costs. d. opportunity costs.
5. Custom Tailored Shirts is a specialty retailer offering T-shirts, sweatshirts, and caps. Its most recent annual sales consisted of $21,000 of T-shirts, $18,000 of sweatshirts, and $2,900 of caps. The company is adding polo shirts to the lineup and projects that this addition will result in sales next year of $18,000 of T-shirts, $16,000 of sweatshirts, $11,500 of Polo shirts, and $2,100 of caps. What sales amount should be used when evaluating the Polo shirt project?
a. $11,500 b. $5,700 c. $4,900 d. $5,800
6. Floral Shoppes has a new project in mind that will increase accounts receivable by $19,000, decrease accounts payable by $4,000, increase fixed assets by $27,000, and decrease inventory by $2,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project?
a. -$6,000 b. -$17,000 c. -$21,000 d. -$40,000
7. A nine-year project is expected to generate annual revenues of $137,800, variable costs of $82,600, and fixed costs of $11,000. The annual depreciation is $23,500 and the tax rate is 34 percent. What is the annual operating cash flow?
a. $14,301 b. $13,662 c. $35,052 d. $37,162
8. Your local athletic center is planning a $1.08 million expansion to its current facility. This cost will be depreciated on a straight-line basis over a 20-year period. The expanded area is expected to generate $489,000 in additional annual sales. Variable costs are 46 percent of sales, the annual fixed costs are $129,400, and the tax rate is 34 percent. What is the operating cash flow for the first year of this project?
a. $118,336.82 b. $92,509.15 c. $107,235.60 d. $106,666.67
9. Better Chocolates has a new project that requires $838,000 of equipment. What is the depreciation in Year 6 of this project if the equipment is classified as seven-year property for MACRS purposes? The MACRS allowance percentages are as follows, commencing with year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.
a. $74,749.60 b. $74,833.40 c. $89,108.00 d. $89,327.08
10. Western Steer purchased some three-year MACRS property three years ago. What is the current book value of this equipment if the original cost was $94,250? The MACRS allowance percentages are as follows, commencing with Year 1: 33.33, 44.45, 14.81, and 7.41 percent.
a. $11,506.15 b. $6,983.93 c. $20,842.35 d. $8,868.20
11. Unsystematic risk can be defined by all of the following except:
a. diversifiable risk. b. market risk. c. unique risk. d. asset-specific risk.
12. The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the:
a. squared deviation. b. beta coefficient. c. standard deviation. d. variance.
13. Portfolio diversification eliminates:
a. all investment risk. b. the portfolio risk premium. c. market risk. d. unsystematic risk.
14. The security market line is a linear function that is graphed by plotting data points based on the relationship between the:
a. risk-free rate and beta. b. market rate of return and beta. c. expected return and beta. d. market rate of return and the risk-free rate.
15. PL Lumber stock is expected to return 22 percent in a booming economy, 15 percent in a normal economy, and lose 2 percent in a recession. The probabilities of an economic boom, normal state, or recession are 5 percent, 92 percent, and 3 percent, respectively. What is the expected rate of return on this stock?
a. 14.84 percent b. 14.23 percent c. 14.51 percent d. 15.47 percent
16. Bruno’s stock should return 14 percent in a boom, 11 percent in a normal economy, and 4 percent in a recession. The probabilities of a boom, normal economy, and recession are 8 percent, 90 percent, and 2 percent, respectively. What is the variance of the returns on this stock?
a. .011387 b. .000169 c. .001506 d. .001538
17. Westover stock is expected to return 36 percent in a boom, 14 percent in a normal economy, and lose 75 percent in a recession. The probabilities of a boom, normal economy, and a recession are 2 percent, 93 percent, and 5 percent, respectively. What is the standard deviation of the returns on this stock?
a. 19.90 percent b. 20.52 percent c. 20.41 percent d. 19.74 percent
18. You would like to invest $24,000 and have a portfolio expected return of 11.5 percent. You are considering two securities, A and B. Stock A has an expected return of 18.6 percent and B has an expected return of 7.4 percent. Approximately how much should you invest in Stock A if you invest the balance in Stock B?
a. $7,807 b. $8,786 c. $7,411 d. $8,626
19. A stock has a beta of 1.32, the expected return on the market is 12.72, and the risk-free rate is 4.05. What must the expected return on this stock be?
a. 16.67 percent b. 14.75 percent
c. 17.10 percent d. 15.49 percent