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
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
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
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
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:
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
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
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
The changes in a firm's future cash flows that are a direct consequence of accepting a project
are called _ cash flows.
D. net present value
Ross - Chapter 010 #1
Ross - Chapter 008 #95
TOPIC: PREFERRED STOCK
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
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
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
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
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
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
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
The stand-alone principle advocates that project analysis should focus on _ costs.
Ross - Chapter 010 #12
TOPIC: STAND-ALONE PRINCIPLE
Sunk costs include any cost th
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
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
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
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
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
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
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
TOPIC: PROFITABILITY INDEX
If you want to review a project from a cost-benefit perspective, you should use the _
method of analysis.
A. net present value
C. internal rate of return
D. average accounting return
84. What is the project's cash flow at time zero?
85. What is the amount of the earnings before interest and taxes for the first year of this project?
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
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
AACSB TOPIC: ANALYTIC
TOPIC: SALVAGE VALUE
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.
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
What is the profitability index for an investment with the following cash flows given a 13 percent
AACSB TOPIC: ANALYTIC
Ross - Chapter 009 #70
TOPIC: PROFITABILITY INDEX