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Unformatted text preview: Fidel's Cigars has a variable cost of $17.60 per cigar and its maximum production level is 500,000 units. If the market will only yield a sales price of $20.00 per cigar, then by what amount must Fidel's fixed cost decrease by to break even if its current fixed cost is $2,000,000? a. $800,000 b. $1,200,000 c. $2,000,000 d. none of the above status: not answered () correct: a your answer:  2 Spicely Sprockets has a fixed cost of $400,000 per year. In order to justify being in business, Spicely needs to have earnings before interest and taxes of $300,000. If it costs Spicely $13.00 per sprocket to produce, then what must is the minimum per sprocket charge to justify Spicely's staying in business if it can only produce 500,000 sprockets per year? a. $13.60 b. $13.80 c. $14.40 d. $12.60 status: not answered () correct: c your answer:  3 The value of a real option can increase when: a. the value of the underlying commodity increases. b. the pricerisk of the underlying commodity increases. c. the amount of time involved in the real option increases. d. all of the above. status: not answered () correct: d your answer:  4 If you own a large amount of natural gold reserves then you may choose to mine the gold today or wait until a later date to mine the gold when prices are higher. You therefore hold a: a. decision tree. b. real option. c. call option. d. perpetual option. status: not answered () correct: b your answer:  5 Myron's Shoes is financed with $10 million of preferred shares, $30 million of common shares, and $70 million of debt. The yieldtomaturity on their debt is 8% and the expected return on the preferred and common shares is 12% and 18%, respectively. If the firm is in the 40% marginal tax bracket, what is the firm's weighted average cost of capital? a. 11.09% b. 10.05% c. 9.05% d. 6.00% status: not answered () correct: c your answer:  6 ZBM is financed with $5 million of preferred shares, $70 million of common shares, and $25 million of debt. The yieldtomaturity on their debt is 10% and the expected return on the preferred and common shares is 14% and 20%, respectively. If the firm is in the 34% marginal tax bracket, what is the firm's weighted average cost of capital? a. 16.35% b. 15.05% c. 14.85% d. 14.25% status: not answered () correct: a your answer:  7 You are producing a single product that has fixed costs of $200,000. You are a market taker on price so you can only sell your product for $32 per unit. If the maximum number of units that you can possibly produce is 45,000, then what is the highest variable cost that you can afford without incurring losses? a. $27.56 b. $27.55 c. $23.56 d. $23.55 status: not answered () correct: b your answer:  8 You own a firm that has fixed costs of $100,000 per year. If you sell your only product for $35 per unit while variable costs are $15 per unit, then how many units must you sell in order to break even? a. 20,000 b. 15,000 c. 10,000 d. 5,000 status: not answered () correct: d your answer:  9 Operating leverage is expressed as: a. percentage change in sales divided by the percentage change in EBIT. b. percentage change in EBIT divided by the percentage change in sales. c. change in EBIT divided by the change in sales. d. none of the above. status: not answered () correct: b your answer:  10 Peregrine's Pipes currently has a fixed cost of $400,000 while its variable cost per pipe is $20. If Peregrine can sell each pipe for $25, then what is the breakeven number of pipes for Peregrine if its variable cost decreases by 10% while its fixed cost increases by 10%? Round the units to the nearest whole unit. a. 88,000 b. 80,000 c. 62,857 d. 57,143 status: not answered () correct: c your answer:  11 An increase in the sales price will affect the breakeven unit sales level by: a. increasing the breakeven sales level. b. decreasing the breakeven sales level. c. its effect on the variable cost. d. its negative effect on the contribution margin. status: not answered () correct: b your answer:  12 A visual representation of the sequential choices that managers face over time with regard to a particular investment is called: a. a sensitivity cascade. b. a scenario cascade. c. a decision tree. d. none of the above. status: not answered () correct: c your answer:  13 You are producing a single product that has fixed costs of $300,000. You are a market taker on price so you can only sell your product for $50 per unit. If the maximum number of units that you can possibly produce is 35,000, then what is the highest variable cost that you can afford without incurring losses? a. $41.43 b. $41.42 c. $33.43 d. $33.42 status: not answered () correct: b your answer:  14 You own the right to harvest timber off of a large tract of land. If you were to harvest all of the timber you know that you could generate $3,000,000 of cash flow per year for 5 years. You find that a major lumber producer is willing to pay you $15,000,000 today for your rights. What is the option to postpone harvesting the lumber worth today? Assume the cost of capital is 15%. a. $10,056,465 b. $4,943,535 c. $0 d. none of the above status: not answered () correct: b your answer:  15 You own a firm that has fixed costs of $120,000 per year. If you sell only one product for $30 per unit while variable costs are $25 per unit then how many units must you sell in order to break even? a. 4,000 b. 4,800 c. 12,000 d. 24,000 status: not answered () correct: d your answer:  16 Tiger's Stripes increased its sales last year from $75,000 to $90,000. Meanwhile its EBIT changed from $2,000 to $3,000. What was Barry's operating leverage? a. .20 b. .40 c. .57 d. 2.50 status: not answered () correct: d your answer:  17 Two firms with identical sales levels differ in their purchase of assets. Company A buys as few assets as possible but relies on manual labor to produce its products. Company B invests heavily in assets in order to rely very little on manual labor. Which of the following statements is true? a. Company A utilizes more financial leverage than Company B. b. Company B utilizes more financial leverage than Company A. c. Company A utilizes more operating leverage than Company B. d. Company B utilizes more operating leverage than Company A. status: not answered () correct: d your answer:  18 Carswell Cogs has a fixed cost of $1,200,000 and its maximum production level is 500,000 units. If the market will only yield a sales price of $20.00 per cog, then what is the maximum variable cost that Carswell can sustain per unit and remain in business? a. $22.40 b. $20.00 c. $17.60 d. none of the above status: not answered () correct: c your answer:  19 The Barney Company finances all of its projects with 100% equity. The firm invests in projects in the same industry which has a beta of 2. If the expected return on the market is 7% and the riskfree rate is 5%, what is the correct discount rate for Barney's projects? a. 7% b. 9% c. 14% d. 19% status: not answered () correct: b your answer:  20 Gandalf's Robes currently has a fixed cost of $400,000 while its variable cost per robe is $20. If Gandalf can sell each robe for $25, then what is the breakeven number of robes for Gandalf if its variable cost increases by 10% while its fixed cost decreases by 10%? Round the units to the nearest whole unit. a. 133,333 b. 120,000 c. 80,000 d. 62,857 status: not answered () correct: b your answer:  21 You own a firm that has fixed costs of $100,000 per year. If you sell your only product for $35 per unit while variable costs are $15 per unit, then what level of sales must you have in order to break even? a. $700,000 b. $525,000 c. $350,000 d. $175,000 status: not answered () correct: d your answer:  22 The key point concerning sensitivity analysis is that it attempts to: a. change one variable while holding all others constant in order to ascertain the effect of that one variable change. b. change many variables in order to ascertain the effect of that multivariable change. c. quantify the effect of many different scenario changes at a time. d. none of the above. status: not answered () correct: a your answer:  23 You own the right to ship all Elvis CDs to the Far East. If you were to sell as many CDs as possible you know that you could generate $8,000,000 of cash flow per year for 5 years. You find a CD exporter that is willing to pay you $40,000,000 today for your rights. What is the option to postpone exporting Elvis CDs worth today? Assume that the cost of capital for such a project is 18%. a. $25,017,368 b. $14,982,632 c. $0 d. none of the above status: not answered () correct: b your answer:  24 At a basic level, operating leverage is really a function of: a. how much debt the firm utilizes in its capital structure. b. the degree to which the firm utilizes fixed costs versus variable costs. c. the degree to which the firm is research and development based. d. none of the above. status: not answered () correct: b your answer:  25 You own the right to produce all of the wizard's crooks in the world. If you were to sell as many wizard's crooks as possible you know that you could generate $8,000 of cash flow per year for 10 years. You find that white wizard is willing to pay you $80,000 today for your rights. What is the option to postpone selling maximum wizard crooks worth today? Assume that the cost of capital for such a project is 15%. a. $40,150 b. $39,850 c. $0 d. none of the above status: not answered () correct: b your answer:  26 A project's discount rate must be: a. low enough to accept a set number of projects. b. high enough to compensate investors for the project's risk. c. low enough to keep the firm from having idle capital capacity. d. none of the above. status: not answered () correct: b your answer:  27 Barry's Shoe Store increased its sales last year from $50,000 to $60,000. Meanwhile its EBIT changed from $10,000 to $13,000. What was Barry's operating leverage? a. .20 b. .30 c. .67 d. 1.50 status: not answered () correct: d your answer:  28 If the level of systematic risk inherent in a firm's projects is unique for each project then: a. each project can be analyzed using the firm's weighted average cost of capital. b. each project will have a different discount rate required to analyze each project. c. each project can be analyzed using the market risk premium. d. none of the above status: not answered () correct: b your answer:  29 The Barney Company finances all of its projects with 100% equity. The firm invests in projects in the same industry which has a beta of 2. If the market risk premium is 7% and the riskfree rate is 5%, what is the correct discount rate for Barney's projects? a. 7% b. 9% c. 14% d. 19% status: not answered () correct: d your answer:  30 Wally's Widgets has a fixed cost of $300,000 per year. In order to justify being in business, Wally's needs to have earnings before interest and taxes of $200,000. If it costs Wally's $10.00 per widget to produce, then what must is the minimum per widget charge to justify Wally's staying in business if it can only produce 100,000 widgets per year? a. $12.00 b. $13.00 c. $15.00 d. $16.00 status: not answered () correct: c ...
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This note was uploaded on 08/26/2011 for the course ECON 515 taught by Professor John during the Spring '11 term at American University of Kuwait.
 Spring '11
 John

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