bfin final multiple choice

Which of the following is most likely to be a method that equity investors can use to "force" the firm to repay them?

 

 

None of the Above

 

All of the Above

 

Vote on issues concerning the day-to-day running of the company

 

Sue the company for violating the explicit contract governing stock ownership

 

Use the (implicit) threat of voting to replace the company's board of directors and corporate leadership

Use the (implicit) threat of voting to replace the company's board of directors and corporate leadership

Which of the following is NOT a disadvantage of equity financing?

 

Issuing equity is generally seen as a negative sign by investors

 

Issuing equity is relatively costly

 

Dividends paid are not tax deductible

 

If the firm doesn't pay dividends, it will be forced into bankruptcy

 

None of the Above

If the firm doesn't pay dividends, it will be forced into bankruptcy

Tin House BBQ uses only equity financing. The federal government recently announced an increase in the corporate tax rate. What is the most likely impact on the company's weighted average cost of capital (WACC)?

 

Decrease since the effective cost of debt will decrease

 

Increase since taxes are bad

 

No change since the tax shield of debt only matters if the firm uses debt financing

 

Not enough information to decide

No change since the tax shield of debt only matters if the firm uses debt financing

Target is thinking about opening a new line of 10 high end fashion boutiques. These new stores are expected to be more risky than Target's current business line. What WACC should Target use to evaluate these new stores?

 

A WACC of zero since these are a new business for Target

 

A higher WACC since the new stores will be more risky than Target's current businesses

 

Not enough information to decide

 

The same WACC as new projects cannot change a company's WACC

 

A lower WACC since the new boutiques will not be as large as Target's current stores

A higher WACC since the new stores will be more risky than Target's current businesses

Motionfire Films is considering making a drama, a horror, or a comedy film. Due to space limitations at their studio, they will only be able to make one of the three films. Below is the estimates for the NPV, IRR, and the Payback Period of each of the three projects:

Film	NPV	IRR	Payback
Drama	10.5	12%	2.3
Horror	9.4	15%	1.7
Comedy	12.3	11%	3.0

Which film (if any) should Motionfire make?

 

None

 

Drama

 

Horror

 

Comedy

 

Not enough information to decide

Comedy

For which situation is the IRR method most likely to give you the correct investment recommendation?

 

 

Comparing two mutually exclusive projects where one project will have a much shorter duration than the other

 

A single project where we will invest money today, recieve positive cash flows in years 1-5, and then have a large negative cash flow in year 6 as we wind down the project

 

A single project where we invest money today and next year and then recieve positive cash flows starting in year 2

 

Comparing two mutually exclusive projects where one project requires a much bigger initial investment than the other

 

None of the above

A single project where we invest money today and next year and then recieve positive cash flows starting in year 2

What is not a disadvantage of using the Average Accounting Return method?

 

Ignores cash flows

 

Ignores time value of money

 

None of the above

 

Hard to calculate

 

Uses an arbitrary benchmark

Hard to calculate

Suppose a project has an IRR equal to the cost of capital. What can you say about the project's NPV?

 

NPV will be positive

 

Not enough information to say anything about NPV

 

NPV will be negative

 

NPV will be exactly zero

NPV will be exactly zero

Hilton is thinking about building a new hotel in New York City. The IRR of the hotel would be 8%, and the NPV would be -3.2 million dollars. Hilton's cost of capital is 10%. Select the answer that explains what Hilton should do and why:

 

Open the new hotel because the NPV is positive

 

None of the above

 

Do not open the new hotel because the NPV is negative

 

Do not open the new hotel because the cost of capital is greater than the IRR

 

Open the new hotel because the IRR is greater than the cost of capital

Do not open the new hotel because the NPV is negative

The IRR of a project is the discount rate that sets the NPV of the project equal to zero

 

True

 

False

True

Oaken Music wants to launch a new record label. The payback period for the new record label would be 3.7 years and the NPV would be $450,000. Oaken Music has a required payback period of 2.5 years. Select the answer that explains what Oaken Music should do and why:

 

Start the new record label because the payback period is short

 

Do not start the new record label because the NPV is positive

 

Start the new record label because the NPV is positive

 

Not enough information to decide

 

Do not start the new record label because the payback period is too long

Start the new record label because the NPV is positive

Motionfire Films is considering making a drama, a horror, or a comedy film. Due to space limitations at their studio, they will only be able to make one of the three films. Below is the estimates for the NPV, IRR, and the Payback Period of each of the three projects:

Film	NPV	IRR	Payback
Drama	10.2	8%	1.7
Horror	11.1	8%	1.2
Comedy	11.7	8%	4.0

Which film (if any) should Motionfire make?

 

Horror

 

Drama

 

Comedy

 

None

 

Not enough information to decide

Comedy

General Motors is considering creating a new hybrid pickup truck. Which of the following items should be considered in a free cash flow analysis of this new model? (Select all that apply)

 

The cost of the marketing study that was already completed that showed demand for a hybrid pickup truck

 

The cost of retooling a factory to build the new trucks

 

Decrease in sales of other GM trucks as customers switch to the new model

 

Sales of the new truck

 

Interest paid to bondholders from bonds issued to finance the new truck model

 

The cost of retooling a factory to build the new trucks

 

Decrease in sales of other GM trucks as customers switch to the new model

 

Sales of the new truck

Which financial statement would be most useful for determining the accounting profit the firm made last year?

 

Statement of Retained Earnings

 

Statement of Cash Flows

 

Income Statement

 

None of them

 

Balance Sheet

Income Statement

Since free cash flow analysis is ad hoc and not based on uniform rules, it is not a useful way to evaluate a potential corporate investment

 

True

 

False

False

Which profit measure would be most useful if you want to determine the amount of cash a project will generate for the firm's investors?

 

Free Cash Flows

 

Net Income

 

Operating Income

 

Operating Cash Flows

 

None of them

Free Cash Flows

Studies have shown that low income residents of New Jersey spend a higher proportion of their income on NJ's gas tax. Thus, New Jersey's gas tax is an example of a:

 

Flat Tax

 

Optional Tax

 

Progressive Tax

 

Regressive Tax

 

None of the above

Regressive Tax

Under the federal income tax, high income earners pay a larger proportion of their income in federal income taxes. Thus, the federal income tax is an example of a:

 

Flat Tax

 

Progressive Tax

 

None of the above

 

Optional Tax

 

Regressive Tax

Progressive Tax

Riley Technology is considering the introduction of a recently developed app. You are an equity analyst and you are trying to estimate the value of this app to the company. You are aware of the following information. Which of the following pieces of information are NOT relevant to determining whether to take the project?

Riley Tech expects the sales of the new product to generate $150 thousand worth of revenue in 2016.

Sales of the new app will reduce sales of an existing app by $25 thousand.

The cost to produce the app is only 10% of the sales price.

The cost of developing the app was $30 thousand

Riley Tech’s cost of capital for this project is assumed to be 18%.

The cost of developing the app was $30 thousand

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows

A project’s NPV is generally found by compounding the cash inflows at the WACC to find the terminal value, then discounting the terminal value at the IRR.

The higher the WACC used to calculate the NPV, the lower the NPV will be.

c. If a project’s NPV is greater than zero, the IRR must be less than the WACC.

d. If the project’s NPV is greater than zero, the IRR must be negative.

e. The NPV of risk projects should be found using low WACCs.

The higher the WACC used to calculate the NPV, the lower the NPV will be.

A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?

a. The firm’s operating income (EBIT) would increase.

b. The firm’s taxable income would increase.

c. The firm’s cash flow would increase.

d. The firm’s tax payments would increase.

e. The firm’s reported net income would increase.

c. The firm’s cash flow would increase.

For a certain project, the IRR is greater than the company’s hurdle rate. What can you say about the project’s NPV?

a. The NPV will be positive

b. The NPV will be zero

c. The NPV will be negative

d. Not enough information to decide

a. The NPV will be positive

Location	IRR	Payback Period (years)	NPV(millions)
South Orange	15%	2.5	2.5
Maplewood	12%	3	1.5
Newark	8%	4	5
a. South Orange
b. Maplewood
c. Newark
d. It doesn’t matter
e. Not enough information to decide

Target is considering opening a new location near Seton Hall. Assume that it would only make sense to open one of the locations. Based on the information below, where (if anywhere) should Target build the new location?

c. Newark