78.
Office Furniture Makers, Inc. uses machines to produce high quality office chairs for other
firms. The initial cost of one customized machine is $750,000. This machine costs $12,000 a
year to operate. Each machine has a life of 3 years before it is re
68.
The Furniture Makers purchased some fixed assets three years ago for $52,000. The assets
are classified as 5-year property for MACRS. The company is considering selling these assets
now so they can buy some newer fixed assets which utilize the latest
82.
The Blue Moon is considering a project which will produce sales of $120,000 a year for the next
five years. The profit margin is estimated at 5.5 percent. The project will cost $140,000 and will
be depreciated straight-line to a book value of zero ove
76.
The Herb Garden common stock sells for $43.70 a share and has a market rate of return of
11.6 percent. The company just paid an annual dividend of $1.42 per share. What is the
dividend growth rate?
A. 5.32 percent
B. 5.73 percent
C. 7.82 percent
D. 8.
45.
Frederick is comparing machines to determine which one to purchase. The machines sell for
differing prices, have differing operating costs, differing machine lives, and will be replaced
when worn out. These machines should be compared using:
A. their
56.
The Clothing Co. is looking at a project that will require $40,000 in net working capital and
$100,000 in fixed assets. The project is expected to produce annual sales of $90,000 with
associated costs of $60,000. The project has a 10-year life. The co
83.
Nu-Tek, Inc. is preparing to pay their first dividend. They are going to pay $0.60, $1.20, and
$1.50 a share over the next three years, respectively. After that, the company has stated that
the annual dividend will be $2 per share indefinitely. What i
58.
Gerold's Travel Service just paid $1.79 to its shareholders as the annual dividend.
Simultaneously, the company announced that future dividends will be increasing by 3.2
percent. If you require a 10.5 percent rate of return, how much are you willing t
Chapter 10 Key
1.
The changes in a firm's future cash flows that are a direct consequence of accepting a project
are called _ cash flows.
A. incremental
B. stand-alone
C. after-tax
D. net present value
E. erosion
Ross - Chapter 010 #1
SECTION: 10.1
TOPIC:
Ross - Chapter 008 #95
SECTION: 8.1
TOPIC: PREFERRED STOCK
TYPE: PROBLEMS
96.
The preferred stock of West Coast Limited pays an annual dividend of $5.50 and sells for $52 a
share. What is the rate of return on this security?
A. 9.45 percent
B. 9.83 percen
65.
You are considering an investment with the following cash flows. If the required rate of return
for this investment is 15.25 percent, should you accept the investment based solely on the
internal rate of return rule? Why or why not?
A. Yes; The IRR ex
Johnson, Inc. is considering a new project. The project will require $350,000 for new fixed
assets, $140,000 for additional inventory, and $45,000 for additional accounts receivable.
Short-term debt is expected to increase by $110,000 and long-term debt i
18.
A project is acceptable when the net present value:
A. is negative.
B. is positive.
C. is negative provided the only cash outflow occurs at time zero.
D. is positive provided the internal rate of return is less than the required return.
E. is positive
73.
Stall Enterprises is considering the installation of a new wireless computer network that will cut
annual operating costs by $15,000. The system will cost $66,000 to purchase and install. This
system is expected to have a 6-year life and will be depre
60.
You are considering the following two mutually exclusive projects. The required rate of return is
10.75 percent for project A and 12 percent for project B. Which project should you accept and
why?
A. project A; because it has the lower required rate o
26. Which one of the following statements is correct?
A. Project analysis should only include the cash flows which affect the income statement.
B. A project can create a positive operating cash flow without affecting sales.
C. For the majority of projects
51.
Expansion, Inc. purchased a building for $485,000 seven years ago. Five years ago, repairs
were made to the building which cost $80,000. The annual taxes on the property are $30,000.
The building has a current market value of $424,000 and a current bo
12.
The stand-alone principle advocates that project analysis should focus on _ costs.
A. sunk
B. total
C. variable
D. incremental
E. fixed
Ross - Chapter 010 #12
SECTION: 10.1
TOPIC: STAND-ALONE PRINCIPLE
TYPE: CONCEPTS
13.
Sunk costs include any cost th
63.
The Barber Shop just purchased some fixed assets classified as 5-year property for MACRS.
The assets cost $26,000. How much depreciation has accumulated by the end of the third
year?
A. $4,992
B. $6,656
C. $13,520
D. $14,572
E. $18,512
Depreciation =
22.
Which one of the following is a cash inflow? Ignore any tax effects.
A. a decrease in accounts payable
B. an increase in inventory
C. a decrease in accounts receivable
D. depreciation expense
E. an increase in fixed assets
Ross - Chapter 010 #22
SECTI
66.
The current yield on Martin's Mills common stock is 3.6 percent. The company just paid a $1.80
dividend and plans to pay $1.86 next year. The dividend growth rate is expected to remain
constant at the current level. What is the required rate of return
27.
Billings Enterprises currently pays an annual dividend of $1.64 and plans on increasing that
amount by 4 percent each year. Chester's Fried Chicken currently pays an annual dividend of
$1.75 and plans on increasing their dividend by 3 percent annually
93.
What should you do based on NPV analysis?
A. accept project B and reject project A
B. reject both project A and project B
C. accept both project A and project B
D. accept project A and reject project B
E. It does not matter which project you accept as
47.
Preferred shareholders are granted:
A. the right to dividends prior to common shareholders.
B. a guarantee of dividends of a set amount every quarter.
C. annual dividends equal to a set percentage of the firm's annual net income.
D. annual dividends e
98. What can you state with certainty about NPV, IRR, and PI when a project has a zero NPV?
99. What are the key advantages and disadvantages of the internal rate of return method of analysis?
100.Explain the differences and similarities between net prese
7.
The possibility that more than one discount rate will make the NPV of an investment equal to
zero is called the _ problem.
A. net present value profiling
B. operational ambiguity
C. mutually exclusive investment decision
D. economies of scale
E. multip
SECTION: 9.6
TOPIC: PROFITABILITY INDEX
TYPE: CONCEPTS
42.
If you want to review a project from a cost-benefit perspective, you should use the _
method of analysis.
A. net present value
B. payback
C. internal rate of return
D. average accounting return
E.
84. What is the project's cash flow at time zero?
A. $195,000
B. $350,000
C. $425,000
D. $490,000
E. $535,000
85. What is the amount of the earnings before interest and taxes for the first year of this project?
A. $97,500
B. $130,000
C. $150,000
D. $200,0
37.
Which one of the following sets of dividend payments best meets the definition of two-stage
growth as it applies to the two-stage growth dividend model?
A. no dividends for three years, then increasing dividends forever
B. $1 per share annual dividend
76.
A project has an initial cost of $2,400. The cash inflows are $0, $1,600, $1,100, and $700 over
the next four years, respectively. What is the payback period?
A. 1.73 years
B. 2.50 years
C. 2.73 years
D. 3.11 years
E. never
AACSB TOPIC: ANALYTIC
Ross
TOPIC: SALVAGE VALUE
TYPE: CONCEPTS
34.
A project's operating cash flow will increase when:
A. the tax rate increases.
B. sales decrease.
C. interest expense decreases.
D. depreciation expense increases.
E. earnings before interest and taxes decreases.
Ro
89.
Simplicity is a relatively new firm that appears to be on the road to great success. The
company paid their first annual dividend yesterday in the amount of $0.15 a share. The
company plans to double each annual dividend payment for the next four year
70.
What is the profitability index for an investment with the following cash flows given a 13 percent
required return?
A. .82
B. .96
C. 1.04
D. 1.22
E. 1.81
AACSB TOPIC: ANALYTIC
Ross - Chapter 009 #70
SECTION: 9.6
TOPIC: PROFITABILITY INDEX
TYPE: PROBLE