Which of the following is not a major step in the capital

Which of the following is not a major step in the capital

Subject: Business    / Finance
Question
Which of the following is not a major step in the capital budgeting process?
A) generating investment project proposals
B) estimating cash flows
C) analyzing the effect of a project on the firm’s financial ratios
D) performing a project post-audit and review
3.
Which of the following items is not considered as a part of the net investment calculation?
A) the first year’s net cash flow
B) increase in net working capital
C) salvage of an old piece of equipment that is being replaced
D) installation and shipping charges
4.
Depreciation:
A) does not affect cash flows.
B) does not affect profits.
C) is not a cash outflow.
D) is a cash inflow.
5.
Capital expenditure projects may be classified in all the following types except:
A) growth opportunities
B) required to meet legal requirements
C) cost reduction opportunities
D) capital rationing
6.
Little Giant is building a manufacturing plant that will require a cash outlay of $300,000 for the initial purchase of a building, $450,000 for remodeling the first year, and $710,000 for new equipment in the second year. If the firm’s cost of capital is 12 %, what is the present value of the net investment at time 0?
A) $1,460,000
B) $1,132,070
C) $1,267,720
D) $300,000
7.
What is the net investment for an extruder that costs $42,000, if shipping costs are $1,500 and installation is $4,800? Assume this efficient machine is replacing an older extruder with a book and market value of zero. The replacement investment will reduce operating costs by $6,600 a year.
A) $48,300
B) $54,900
C) $43,500
D) $51,000
8.
One weakness of the internal rate of return approach is that:
A) it does not directly consider the timing of the cash flows from a project
B) it fails to provide a straightforward decision-making criterion
C) it implicitly assumes that the firm is able to reinvest the interim cash flows from a project at the firm’s cost of capital.
D) none of the above
9.
The relationship between NPV and IRR is such that:
A) both approaches always provide the same ranking of alternative investment projects.
B) the IRR of a project is equal to the firm’s cost of capital if the NPV of a project is $0.
C) if the NPV of a project is negative, the IRR must be greater than the cost of capital.
D) none of the above
10.
The internal rate of return does not take into account the:
A) explicit risk of the net cash flows
B) magnitude of cash flows over the project’s life
C) net investment
D) timing of cash flows over the entire life of a project
11.
Real options in capital budgeting can be classified in all of the following ways except:
A) abandonment option
B) investment option
C) purchasing power option
D) shutdown options
12.
What is the internal rate of return for a project that has a net investment of $14,600 and a single net cash flow of $25,750 in 5 years?
A) 10%
B) 12%
C) 15.3%
D) 13.1%
13.
What is the net present value of a project that has a net investment of $148,000 and net cash flows of $25,000 in the first year, $45,000 in years 2-7 and a negative net cash flow of $27,000 in year 8? Assume the cost of capital is 11%.
A) $34,302
B) $74,847
C) $57,738
D) -$2,238
14.
The basic capital budgeting decision models, that is, NPV and IRR, handle risk by:
A) ignoring it
B) assuming all cash flows are known with certainty
C) assuming all projects are of average risk and evaluating them based on expected values
D) using risk-adjusted discount rates to evaluate projects
15.
The use of sensitivity analysis requires that:
A) a model of a project’s cash flows be developed
B) probability distributions of the determinants of a project’s cash flows be estimated
C) the firms have access to a very large computer
D) the firm is greatly interested in the portfolio risk reduction characteristics of a project
16.
A firm’s leveraged beta will always be ____ its unleveraged beta.
A) less than
B) greater than
C) the same as
D) could be all of the above
17.
The cost of capital is:
A) the rate of return required by investors in the firm’s securities
B) the minimum rate of return required on new investments of high risk undertaken by the firm
C) approximately 10% for most firms
D) concerned with plant and equipment only
18.
The CAPM assumes that the only risk of concern to the investor is ____, which is measured by ____.
A) unsystematic risk, beta
B) systematic risk, the return to the market portfolio
C) systematic risk, beta
D) unsystematic risk, the return to the market portfolio
19.
Calculate the after-tax cost of preferred stock for Ohio Valley Power Company, which is planning to sell $100 million of $3.25 cumulative preferred stock to the public at a price of $25 per share. Flotation costs are $1.00 per share. Ohio Valley has a marginal income tax rate of 40%.
A) 13.0%
B) 7.8%
C) 8.12%
D) 13.54%
20.
According to Value Line, Bestway has a beta of 1.15. If 3-month Treasury bills currently yield 7.9% and the market risk premium is estimated to be 8.3 percent, what is Bestway’s cost of equity capital?
A) 17.45%
B) 8.36%
C) 9.55%
D) 16.2%
21.
With an optimal capital structure:
A) overall capital costs are minimized
B) the net present value of new projects is minimized
C) financial leverage is minimized
D) the weighted cost of capital is maximized
22.
The mix of debt, preferred stock, and common equity that minimizes the weighted cost of capital to the firm is known as the:
A) optimal corporate structure
B) target financial structure
C) optimal capital structure
D) optimal degree of combined leverage
23.
Biotec has estimated the costs of debt and equity capital for various proportions of debt in its capital structure:

% of Debt
Cost of Debt
Cost of Equity
35
5.4%
13.8%
40
5.6
14.0
45
5.9
14.3
50
6.4
14.7
Based on these estimates, determine Biotec’s optimal capital structure.

A) 35% debt
B) 40% debt
C) 45% debt
D) 50% debt
24.
The percentage change in a firm’s EBIT that results in a 1% change in sales or output is known as the
A) degree of combined leverage
B) degree of financial leverage
C) degree of operating leverage
D) degree of business risk
25.
In the analysis of financial leverage, all of the following are referred to as fixed charges except:
A) bond interest
B) common stock dividends
C) bank interest
D) preferred stock dividends
26.
The degree of combined leverage is equal to the ____ multiplied by the ____.
A) degree of operating leverage, variable cost ratio
B) degree of financial leverage, variable cost ratio
C) degree of operating leverage, degree of financial leverage
D) degree of operating leverage, fixed cost ratio
27.
An analytical technique called ____ can be used to help determine when debt financing is advantageous and when equity financing is advantageous.
A) DFL-EPS analysis
B) EBIT-EPS analysis
C) DCL-EPS analysis
D) DOL-EBIT analysis
28.
In EBIT-EPS analysis, the indifference point is found at the point where ____ for the two alternative financing plans are equal.
A) EBIT
B) EPS
C) stock prices
D) DOL
29.
Illinois Tool Company’s (ITC) fixed operating costs are $1,260,000 and its variable cost ratio (i.e., variable costs as a fraction of sales) is 0.70. The firm has $3,000,000 in bonds outstanding at an interest rate of 8%. ITC has 30,000 shares of $5 preferred stock and 150,000 shares of common stock outstanding. ITC is in the 50% corporate income tax bracket. Forecasted sales for next year are $9 million. What is ITC’s degree of operating leverage at a sales level of $9 million?
A) 1.60
B) 1.875
C) 3.0
D) 1.26
30.
Suppose that ITC’s degree of combined leverage (DCL) is 3.00 at a sales volume of $9 million. Determine ITC’s percentage change in earnings per share (EPS) if forecasted sales increase by 20% to $10,800,000.
A) 60%
B) 50%
C) 32%
D) 30%