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Chapter 7:

50. What is the most likely value of the PVGO for a stock with current price of $50, expected

earnings of $6 per share, and a required return of 20%?

A. $10

B. $20

C. $25

D. $30

51. What is the expected constant-growth rate of dividends for a stock with current price of

$100, expected dividend payment of $10 per share, and a required return of 16%?

A. 6.00%

B. 6.25%

C. 8.00%

D. 10.00%

52. Which of the following is least assured for firms that plowback a portion of earnings into

the firm?

A. Growth in earnings per share

B. Growth in dividends per share

C. Growth in book value of equity

D. Growth in stock price

53. What should be the price of a stock that offers a $4 annual dividend with no prospects of

growth, and has a required return of 12.5%?

A. $8.50

B. $25.00

C. $32.00

D. $50.00

54. What should be the stock value one year from today for a stock that currently sells for

$35, has a required return of 15%, an expected dividend of $2.80, and a constant

dividend growth rate of 7%?

A. $37.45

B. $37.80

C. $40.25

D. $43.05

55. What should be the current price of a share of stock if a $5 dividend was just paid, the

stock has a required return of 20%, and a constant dividend growth rate of 6%?

A. $19.23

B. $25.00

C. $35.71

D. $37.86

56. What should be the current price of a stock if the expected dividend is $5, the stock has a

required return of 20%, and a constant dividend growth rate of 6%?

A. $19.23

B. $25.00

C. $35.71

D. $37.86

57. Reinvesting earnings into a firm will not increase the stock price unless:

A. the new paradigm of stock pricing is maintained.

B. true depreciation is less than reported depreciation.

C. the firm's dividends are growing also.

D. the ROE of new investments exceeds the firm's required return.

58. How much of a stock's $30 price is reflected in PVGO if it expects to earn $4 per share,

has an expected dividend of $2.50, and a required return of 20%?

A. $0

B. $6.00

C. $8.00

D. $10.00

59. In a valuation of a nonconstant dividend growth stock, the terminal value represents the:

A. point at which the present value of future dividends equals zero.

B. maturity date of the stock.

C. present value of future dividends from that point on.

D. highest value that the stock will attain.

60. What stock price reaction would you expect from a firm that unexpectedly raises its

dividend permanently and by a substantial amount?

A. Price should rise, given dividend discount models.

B. Price should decline, given discounted cash flow analysis.

C. Price will remain constant, due to market efficiency.

D. Price will remain constant, due to random-walk behavior.

61. In the calculation of rates of return on common stock, dividends are _______ and capital

gains are _____.

A. guaranteed; not guaranteed

B. guaranteed; guaranteed

C. not guaranteed; not guaranteed

D. not guaranteed; guaranteed

62. Which of the following values treats the firm as a going concern?

A. Market value

B. Book value

C. Liquidation value

D. None of these

A. multiplying share price by shares outstanding.

B. multiplying share price at issue by shares outstanding.

C. the difference between book values of assets and liabilities.

D. the difference between market values of assets and liabilities.

64. If the liquidation value of a firm is negative, then:

A. the firm's debt exceeds the market value of assets.

B. the firm's debt exceeds the book value of equity.

C. the book value of assets exceeds the firm's debt.

D. the market value of assets exceeds the firm's debt.

65. A firm's liquidation value is the amount:

A. necessary to repurchase all shares of common stock.

B. realized from selling all assets and paying off its creditors.

C. a purchaser would pay for the firm in bankruptcy.

D. equal to the book value of equity.

66. Which of the following is least likely to account for an excess of market value over book

value of equity?

A. Inaccurate depreciation methods

B. High rate of return on assets

C. The presence of growth opportunities

D. Valuable off-balance sheet assets

67. Firms with valuable intangible assets are more likely to show a(n):

A. excess of book value over market value of equity.

B. high going-concern value.

C. low liquidation value.

D. low P/E ratio.

68. Which of the following is inconsistent with a firm that sells for very near book value?

A. Low current earning power

B. No intangible assets

C. High future earning power

D. Low, unstable dividend payment

69. The main purpose of a market-value balance sheet is to:

A. show an inflated value of the firm.

B. avoid the recording of certain liabilities.

C. value assets and liabilities without GAAP restrictions.

D. improve the credit rating of the firm.

70. A stock paying $5 in annual dividends sells now for $80 and has an expected return of

14%. What might investors expect to pay for the stock 1 year from now?

A. $82.20

B. $86.20

C. $87.20

D. $91.20

71. Which of the following statements is correct about a stock currently selling for $50 per

share that has a 16% expected return and a 10% expected capital appreciation?

A. Its expected dividend exceeds the actual dividend.

B. Its expected return will exceed the actual return.

C. It is expected to pay $3 in annual dividends.

D. It is expected to pay $8 in annual dividends.

72. The expected return on a common stock is composed of:

A. dividend yield.

B. capital appreciation.

C. both dividend yield and capital appreciation.

D. capital appreciation minus the dividend yield.

73. Firms having a higher expected return have a higher:

A. level of expected risk.

B. dividend yield.

C. market value of equity.

D. degree of certainty concerning their returns.

74. What is the expected dividend to be paid in 3 years if yesterday's dividend was $6.00,

dividends are expected to grow at a constant 6% annual rate, and the firm has a 10%

expected return?

A. $6.75

B. $7.15

C. $7.80

D. $9.37

75. Dividing a stock's earnings per share by the expected rate of return will value the share

correctly if no new shares are issued and the dividend yield:

A. exceeds the required return.

B. equals the required return.

C. is zero.

D. is constant.

76. What rate of return is expected from a stock that sells for $30 per share, pays $1.50

annually in dividends, and is expected to sell for $33 per share in one year?

A. 5.00%

B. 10.00%

C. 14.09%

D. 15.00%

77. A company with a return on equity of 15% and a plowback ratio of 60% would expect a

constant-growth rate of:

A. 4%.

B. 9%.

C. 21%.

D. 25%.

78. What is the return on equity for a firm that has a constant dividend growth rate of 7%

and a dividend payout ratio of 60%?

A. 2.80%

B. 4.20%

C. 11.67%

D. 17.50%

79. A positive value for PVGO suggests that the firm has:

A. a positive return on equity.

B. a positive plowback ratio.

C. investment opportunities with superior returns.

D. a high rate of constant growth.

80. Which of the following situations accurately describes a growth stock, assuming that each

firm has a required return of 12%?

A. A firm with PVGO = $0.

B. A firm with investment opportunities yielding 10%.

C. A firm with investment opportunities yielding 15%.

D. All of these firms represent growth stocks.

81. Other things equal, a firm's sustainable growth rate could increase as a result of:

A. increasing the plowback ratio.

B. increasing the payout ratio.

C. decreasing the return on equity.

D. increasing total assets.

82. Which of the following is least likely to contribute to going concern value?

A. High liquidation value

B. Extra earning power

C. Future investment opportunities

D. Intangible assets

83. The terminal value of a share of stock:

A. is similar to the maturity value of a bond.

B. refers to the share value at the end of the investor's holding period.

C. is the value received by investors upon liquidation of the firm.

D. is the price for shares traded through a dealers' market.

84. Which of the following is true for a firm having a stock price of $42, an expected dividend

of $3, and a sustainable growth rate of 8%?

A. It has a required return of 15.14%.

B. It has a dividend payout ratio of 37.5%.

C. It has an ROE of 7.14%.

D. It has a plowback rate of 7.14%.

85. What is the value of the expected dividend per share for a stock that has a required

return of 16%, a price of $45, and a constant-growth rate of 12%?

A. $1.80

B. $3.60

C. $4.50

D. $7.20

86. What is the required return for a stock that has a 6% constant-growth rate, a price of

$25, an expected dividend of $2, and a P/E ratio of 10?

A. 5%

B. 10%

C. 14%

D. 22%

87. What is the minimum amount that shareholders should expect to receive in the event of

a complete corporate liquidation?

A. Market value of equity.

B. Book value of equity.

C. Zero.

D. Shareholders may be required to pay to be liquidated.

88. The required return on an equity security is comprised of a:

A. dividend yield and ROE.

B. current yield and a terminal value.

C. sustainable growth rate and a plowback yield.

D. dividend yield and a capital gains yield.

89. What proportion of earnings is being plowed back into the firm if the sustainable growth

rate is 8% and the firm's ROE is 20%?

A. 8%

B. 12%

C. 20%

D. 40%

90. What is the expected constant-growth rate of dividends for a stock currently priced at

$50, that just paid a dividend of $4, and has a required return of 18%?

A. 3.41%

B. 5.50%

C. 9.26%

D. 12.5%

91. If the liquidation value of a corporation exceeds the market value of the equity, then

the:

A. firm has no value as a going concern.

B. firm's stock will sell for book value.

C. firm is not taking advantage of available growth opportunities.

D. dividend payout ratio has been too high.

92. An investor is faced with the decision of whether to invest in a stock with an expected

return of 14% or a stock in the same industry with an expected 20% return. Which of the

following seems most likely?

A. The 20% stock is a better investment.

B. The 14% stock is overpriced.

C. Both stocks will have approximately the same return.

D. Both stocks are priced correctly given their perceived risk.

93. If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock's

current price?

A. $4.50

B. $18.00

C. $22.22

D. $40.50

94. What is the current price of a share of stock for a firm with $5 million in balance-sheet

equity, 500,000 shares of stock outstanding, and a price/book value ratio of 4?

A. $2.50

B. $10.00

C. $20.00

D. $40.00

95. Assuming all of the following firms have a required return of 14%, which would you

expect to have a positive present value of growth opportunities?

A. A firm with a P/E ratio of 9.

B. A firm with a P/E ratio of 6.

C. A firm with an E/P ratio of 20%.

D. None of these firms are expected to have positive PVGO.

96. Investors are willing to purchase stocks having high P/E ratios because:

A. they expect these shares to sell for a lower price.

B. they expect these shares to offer higher dividend payments.

C. these shares are accompanied by guaranteed earnings.

D. they expect these shares to have greater growth opportunities.

97. BestFirm has a 50-year history of solid growth and ever-increasing profits. It is widely

regarded as the leading firm of its industry. Hence, BestFirm's stock:

A. should be a good buy.

B. cannot be a good buy.

C. should be a safe buy.

D. cannot be a safe buy.

98. LookGood, Inc. has just announced the bad news that its earnings have dropped by 30%.

In fact, its investors had anticipated even worse results (a decrease of 40%). As a result,

LookGood's stock price:

A. increases.

B. remains the same.

C. decreases.

D. follows a random walk as usual.

99. What is the difference between a fundamental analyst and a technical analyst?

A. Only a fundamental analyst believes markets are inefficient.

B. A technical analyst focuses on financial statement analysis.

C. Only a technical analyst helps keep the market efficient.

D. A fundamental analyst analyzes such information as earnings and asset values.

ANSWERS:

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

B

A

D

C

A

D

C

D

D

C

A

C

A

C

A

B

A

B

C

C

B

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

C

C

A

B

C

D

B

D

C

C

A

A

B

A

A

C

C

D

D

C

91

92

93

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98

99

A

D

D

D

A

D

C

A

D

CHAPTER 8

32. What is the approximate maximum amount that a firm should consider paying for a

project that will return $15,000 annually for 5 years if the opportunity cost is 10%?

A. $33,520

B. $56,860

C. $62,540

D. $75,000

33. Which of the following projects would you feel safest in accepting? Assume the

opportunity cost of capital to be 12% for each project.

A. "A" has a small, but negative, NPV.

B. "B" has a positive NPV when discounted at 10%.

C. "C's" cost of capital exceeds its rate of return.

D. "D" has a zero NPV when discounted at 14%.

34. As the discount rate is increased, the NPV of a specific project will:

A. increase.

B. decrease.

C. remain constant.

D. decrease to zero, then remain constant.

35. One method that can be used to increase the NPV of a project is to decrease the:

A. project's payback.

B. profitability index.

C. time until receipt of cash inflows.

D. number of project IRRs.

36. If the IRR for a project is 15%, then the project's NPV would be:

A. negative at a discount rate of 10%.

B. positive at a discount rate of 20%.

C. negative at a discount rate of 20%.

D. positive at a discount rate of 15%.

37. As long as the NPV of a project declines smoothly with increases in the discount rate, the

project is acceptable if its:

A. internal rate of return is positive.

B. payback period is greater than one.

C. rate of return exceeds the cost of capital.

D. cash inflows equals the initial cost.

38. What is the NPV for the following project cash flows at a discount rate of 15%? C0 =

($1,000), C1 = $700, C2 = $700.

A. ($308.70)

B. ($138.00)

C. $138.00

D. $308.70

39. Given a particular set of project cash flows, which of the following statements is correct?

A. There can be only one NPV for the project, even with multiple discount rates.

B. There can be only one IRR for the project.

C. There can be more than one IRR for the project.

D. There can be only one profitability index for the project, even with multiple discount

rates.

40. When projects are mutually exclusive, selection should be made according to the project

with the:

A. longer life.

B. larger initial size.

C. highest IRR.

D. highest NPV.

41. When managers select correctly from among mutually exclusive projects, they:

A. may give up rate of return for NPV.

B. may give up NPV for rate of return.

C. have a tendency to select the largest project.

D. focus on payback method to avoid conflicting signals.

42. When graphing NPV at different discount rates for mutually exclusive projects, the

project with the lower IRR should be selected whenever:

A. the rate corresponding to the crossover NPV exceeds the opportunity cost of capital.

B. the rate corresponding to the crossover NPV is less than the opportunity cost of

capital.

C. that IRR exceeds the opportunity cost of capital.

D. the NPV is negative when discounted at the IRR.

43. Which of the following is incorrect for a borrowing project?

A. Its NPV graph rises as discount rates increase.

B. Its cash flow at time zero is typically an inflow.

C. Its NPV is positive.

D. It's acceptable if IRR exceeds cost of capital.

44. Which mutually exclusive project would you select, if both are priced at $1,000 and your

discount rate is 15%: Project A with three annual cash flows of $1,000; or project B, with

3 years of zero cash flow followed by 3 years of $1,500 annually?

A. Project A.

B. Project B.

C. You are indifferent since the NPVs are equal.

D. Neither project should be selected.

45. Which of the following investment criteria takes the time value of money into

consideration?

A. Net present value

B. Profitability index

C. Internal rate of return for borrowing projects

D. All of these

A. net present value.

B. internal rate of return.

C. payback period.

D. profitability index.

47. For mutually exclusive projects, the IRR can be used to select the best project:

A. by calculating the modified internal rate of return.

B. by calculating the IRR based on incremental cash flows.

C. by using the discount rate to calculate the IRR.

D. never. IRR cannot be utilized for mutually exclusive projects.

48. The opportunity cost of capital is equal to:

A. the discount rate that makes project NPV equal zero.

B. the return offered by other projects of equal risk.

C. a project's internal rate of return.

D. the average rate of return for a firm's projects.

49. Borrowing and lending projects usually can be distinguished by whether:

A. they have positive or negative IRRs.

B. the time-zero cash flow is positive or negative.

C. their IRR increases as the discount rate increases.

D. their rate of return is high or low.

50. Which of the following should be assumed about a project that requires a $100,000

investment at time-period zero, then returns $20,000 annually for 5 years?

A. The NPV is negative.

B. The NPV is zero.

C. The profitability index is 1.0.

D. The IRR is negative.

51. If two projects offer the same positive NPV, then:

A. they also have the same IRR.

B. they have the same payback period.

C. they are mutually exclusive projects.

D. they add the same amount to the value of the firm.

52. What is the minimum cash flow that could be received at the end of year 3 to make the

following project "acceptable"? Initial cost = $100,000; cash flows at end of years 1 and 2

= $35,000; opportunity cost of capital = 10%.

A. $29,494

B. $30,000

C. $39,256

D. $52,250

53. According to the NPV rule, all projects should be accepted if NPV is positive when

discounted at the:

A. internal rate of return.

B. opportunity cost of capital.

C. risk-free interest rate.

D. accounting rate of return.

54. A polisher costs $10,000 and will cost $20,000 a year to operate and maintain. If the

discount rate is 10% and the polisher will last for 5 years, what is the equivalent annual

cost of the tool?

A. $17,163

B. $22,000

C. $22,638

D. $85,816

55. NPV fails as a decision rule when:

A. the firm faces capital rationing.

B. the firm faces mutually exclusive projects.

C. the firm faces long-lived projects.

D. none of these.

56. If the opportunity cost of capital for a project exceeds the project's IRR, then the project

has a(n):

A. positive NPV.

B. negative NPV.

C. acceptable payback period.

D. positive profitability index.

57. The modified internal rate of return can be used to correct for:

A. negative NPV calculations.

B. multiple internal rates of return.

C. undefined payback periods.

D. borrowing projects.

58. When a project's internal rate of return equals its opportunity cost of capital, then:

A. the project should be rejected.

B. the project has no cash inflows.

C. the net present value will be positive.

D. the net present value will be zero.

59. What is the approximate IRR for a project that costs $100,000 and provides cash inflows

of $30,000 for 6 years?

A. 19.9%

B. 30.0%

C. 32.3%

D. 80.0%

60. What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000

annually for 6 years?

A. 0.57%

B. 2.00%

C. 5.69%

D. 56.87%

61. Which of the following statements is most likely correct for a project costing $50,000 and

returning $14,000 per year for 5 years?

A. NPV = $3,071.01.

B. NPV = $20,000.

C. IRR = 2.8%.

D. IRR is greater than 10%.

62. A project can have as many different internal rates of return as it has:

A. cash inflows.

B. cash outflows.

C. periods of cash flow.

D. changes in the sign of the cash flows.

63. Evaluate the following project using an IRR criterion, based on an opportunity cost of

10%: C0= -6,000, C1= +3,300, C2= +3,300.

A. Accept, since IRR exceeds opportunity cost.

B. Reject, since opportunity cost exceeds IRR.

C. Accept, since opportunity cost exceeds IRR.

D. Reject, since IRR exceeds opportunity cost.

64. A project costing $20,000 generates cash inflows of $9,000 annually for the first 3 years,

followed by cash outflows of $1,000 annually for 2 years. At most, this project has

______ different IRR(s).

A. one

B. two

C. three

D. five

65. How many IRRs are possible for the following set of cash flows? CF0= 1,000, C1= +500, C2=

-300, C3= +1,000, C4= +200.

A. 1

B. 2

C. 3

D. 4

66. The reason why the IRR criterion can give conflicting signals with mutually exclusive

projects is:

A. the NPVs of these projects cross over at some discount rate.

B. discounted cash flow is not considered with mutually exclusive projects.

C. IRR performs better with accounting returns than with cash flows.

D. mutually exclusive projects have multiple IRRs.

67. A project with an IRR that is less than the opportunity cost of capital should be:

A. accepted for all project types.

B. accepted for all lending projects.

C. accepted for all borrowing projects.

D. rejected for all projects.

68. If a project's expected rate of return exceeds its opportunity cost of capital, one would

expect:

A. the profitability index to exceed 1.0.

B. the opportunity cost of capital to be too low.

C. the IRR to exceed the opportunity cost of capital.

D. the NPV to be zero.

69. If a project's IRR is 13% and the project provides annual cash flows of $15,000 for 4 years,

how much did the project cost?

A. $44,617

B. $52,200

C. $60,000

D. $72,747

70. Project A has an IRR of 20% while Project B has an IRR of 30%. Under which of the

following situations might you be inclined to select Project A, assuming the projects to be

mutually exclusive, lending projects?

A. Project A is riskier.

B. Project A requires a smaller initial investment.

C. Project A requires a larger initial investment.

D. Project A requires cash outflows in the final period.

71. What is the decision rule in the case of sign changes that produce multiple IRRs for a

project?

A. Select the lowest IRR to be conservative.

B. Select the highest IRR to maximize the benefits.

C. Any or all of the IRRs are justified to use.

D. Evaluate the project according to NPV.

72. A firm considers a project with the following cash flows: time-zero = +20,000, years 1-5 =

-4,500. Should the project be accepted if the cost of capital is 10%?

A. Yes, the IRR of the project is 4.06%.

B. Yes, the IRR of the project is 12.5%.

C. No, the IRR of the project is 4.06%.

D. No, the IRR of the project is 12.5%.

ANSWERS

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33

34

35

36

37

38

39

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42

43

44

45

46

47

48

49

50

51

52

B

D

B

C

C

C

C

C

D

A

A

C

A

D

A

B

B

B

A

D

D

53

54

55

56

57

58

59

60

61

62

63

64

65

66

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B

C

A

B

B

D

A

A

D

D

B

B

C

A

C

C

A

C

D

A

CHAPTER 9

55. A project anticipates net cash flows of $10,000 at the end of year 1, with such amount

growing at the expected 5% rate of inflation over the subsequent 4 years. Calculate the

real present value of this 5-year cash stream if the firm employs a nominal discount rate

of 15%.

A. $33,522

B. $38,377

C. $43,294

D. $55,000

56. An investment today of $25,000 promises to return $10,000 annually for the next 3

years. What is the approximate real rate of return on this investment if inflation averages

6% annually during the period?

A. 3.5%

B. 9.7%

C. 14.0%

D. 20.0%

57. What nominal annual return is required on an investment for an investor to experience a

12% gain in purchasing power? Assume inflation to be 4%.

A. 7.69%

B. 9.29%

C. 12.00%

D. 16.48%

58. Which of the following costs probably should not be allocated to the investment needed

for a new project?

A. Increase in accounts receivable

B. New warehouse, built for this project

C. 25% of the Vice President's salary

D. Labor expense for employees in new warehouse

59. A parcel of corporate land was recently dedicated as the new plant site. What cost

allocation should the land receive, based on the following: original cost of $200,000,

market value of $300,000, net book value of $200,000, a recent offer to purchase for

$250,000.

A. $200,000

B. $250,000

C. $275,000

D. $300,000

60. New projects or products can have an indirect effect on the firm as well as a direct effect.

Which of the following appears to be an indirect effect of launching a new product?

A. Additional working capital is required.

B. Sales force will need to be increased.

C. Sales of a similar product of your firm's will decline.

D. Additional machinery must be purchased.

61. New projects or products can provide positive indirect effects as well as negative effects.

Which of the following appears to be a positive indirect effect?

A. The new, efficient machine uses less electricity.

B. Orders of your complementary products increase.

C. The project has a positive NPV.

D. Accelerated methods of depreciation can be used.

62. Opportunity costs for organizational resources:

A. are limited to the explicit cash flows involved.

B. are determined according to the marginal tax rate.

C. can involve no cash flows.

D. should not be determined for existing products.

63. The additional inventory investment that is often required for new projects can be

partially funded by:

A. switching to accelerated depreciation methods.

B. reducing accounts receivable.

C. decreasing equipment purchases.

D. increasing accounts payable.

64. What rate of nominal growth is expected in sales if they are currently $1,000,000 and

expected to reach $1,600,000 in 5 years?

A. 3.20%

B. 9.86%

C. 12.00%

D. 26.49%

65. Why is it fairly easy to fall into the trap of discounting real cash flows with nominal

rates?

A. It is difficult to determine real discount rates.

B. Increases in nominal cash flows are often not forecast.

C. Inflation does not impact cash flows, but it does impact discount rates.

D. Increases in revenues are offset by increases in costs.

66. Capital budgeting projects typically assume that all cash flows transpire at the end of the

year. The reason for this is that:

A. less tax liability results from this practice.

B. balance sheets are prepared at the end of the year.

C. it is easier for the analyst in this manner.

D. most corporations collect their cash at the end of the year.

67. Which of the following is not accurate in depicting cash flows from operations?

A. (revenues - expenses)(1 - tax rate) + (depreciation tax rate)

B. (revenues - expenses - taxes paid)

C. (net profit + depreciation)

D. (revenues - cash expenses - taxes paid)

68. The following are all important items to look out for when you perform capital budgeting

for a company except

A. be aware of allocated overhead costs.

B. include all indirect effects.

C. include sunk costs.

D. include opportunity costs.

69. Which of the following statements is incorrect?

A. Real cash flows must be discounted at a real discount rate.

B. (1 + real rate of interest) = (1 + nominal rate of interest )/(1 + inflation rate).

C. Real rate of interest almost equals "nominal rate of interest - inflation rate."

D. None of these.

70. Corporate income statements are designed primarily to show:

A. cash flows during a period.

B. account balances at the end of a period.

C. performance during a period.

D. market values of assets and liabilities.

71. What is the undiscounted cash flow in the final year of an investment, assuming $10,000

after-tax cash flows from operations, $1,000 from the sale of a fully depreciated

machine, $2,000 required in additional working capital, and a 35% tax rate?

A. $8,450

B. $12,600

C. $12,650

D. $14,000

72. In what manner does depreciation expense affect investment projects?

A. It reduces cash flows by the amount of the depreciation expense.

B. It increases cash flows by the amount of the depreciation expense.

C. It reduces taxable income by the amount of the depreciation expense.

D. It reduces taxes by the amount of the depreciation expense.

73. For a profitable firm in the 30% marginal tax bracket with $100,000 of annual

depreciation expense, the depreciation tax shield would be:

A. $10,500

B. $30,000

C. $35,000

D. $65,000

74. What is the amount of the annual depreciation tax shield for a firm with $200,000 in net

income, $75,000 in depreciation expense, and a 35% marginal tax rate?

A. $26,250

B. $43,750

C. $70,000

D. $75,000

75. A tax shield is equal to the reduction in:

A. tax liability resulting from a deductible expense.

B. taxable income resulting from a deductible expense.

C. cash flow from an expense.

D. net income.

ANSWERS:

55

56

57

58

59

60

61

62

63

64

B

A

D

C

D

C

B

C

D

B

65

66

67

68

69

70

71

72

73

74

75

B

C

B

C

D

C

C

C

B

A

A

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