FNAN 522 Final Exam Questions and Answers Graded A+
A company is considering a project that has a discount rate of 5%. It will require an initial
investment of $200,000. In the first year, it will have $100,000 in net cash inflows (one year after
the initial investment). In year 2, it will have cash inflows of $100,000 (two years after the initial
investment), and in year 3 the project will generate $200,000 (three years after the initial
investment). What is the project's NPV? Assume all cash flows occur at the end of
the year. - Answers $158,709
A project has an initial investment requirement of $100,000. In year 1, it should earn$25,000; in
year two, $30,000; and in year 3, $50,000. What is the project's internal rate of return? Assume
the cash flows in years one, two, and three happen at the end of the year. - Answers 2.21%
In which of the following situations would it be appropriate to use the IRR method to make an
investment decision? - Answers To compare two projects that have an equal initial investment
and lifespan.
Under the internal rate of return rule in capital budgeting, which of the following statements
CANNOT be true? - Answers The internal rate of return can vary throughout the life of a project.
You have just been offered a contract worth $5.6 million per year for 3 years. However, to take
the contract, you will need to purchase some new equipment. Your discount rate for this project
is 15.3%. You are still negotiating the purchase price of the equipment. What is the most you
can pay for the equipment and still have a positive NPV? - Answers $12.6 million
Which of the following could be a sunk cost? - Answers -A feasibility study that attempted to
determine the economic viability of a project.
-Labor hours spent on planning project.
- Equipment purchased to pursue a project.
Which of the following is an example of an opportunity cost? - Answers - If you watch a game
instead of going for a run, the cost is poorer personal health.
- If you buy a candy bar instead of a soda, the cost is thirst.
- If invest in one of two projects, the cost is the lost revenue from the other project.
Which of the following is the best reason to use the payback method to evaluate investments? -
Answers The payback method is easy to use and understand for most people, regardless of
training.
You are analyzing two different investments and will present your findings to company
executives. Both projects have cash flows that alternate between positive and negative. Which
budgeting method should you use to evaluate the projects? - Answers Modified Internal Rate of
, Return and Net Present Value.
Under the present value concept, a lottery winner would rather receive: - Answers It is not clear
which of these is preferable. The best answer depends on the interest rate that the lottery
winner faces.
The marginal tax rate is: - Answers The tax rate incurred on each additional dollar of income.
A company sells 150,000 units at $60 a unit with a variable cost of $30 a unit. It has $1 million in
fixed costs and $600,000 in interest costs. What is the company's operating leverage? -
Answers 1.29
An individual files for bankruptcy. Through this proceeding, the debtor reorganizes his debt, is
allowed to keep some of his property, but must use some of his future earnings to pay off his
debts. What type of bankruptcy is this? - Answers Chapter 13
If potential creditors and investors sense that a company has a higher risk of going bankrupt,
which of the following will occur? - Answers The company will be charged a higher interest rate
by potential lenders.
Under the Pecking Order Theory, what is the order of funding sources to finance a project from
the most preferred method to least desirable? - Answers Use capital reserves; issue debt; sell
equity.
Which of the following actions would increase a company's operating leverage? - Answers
Reworking a company's production process so it relied more on machinery and less on workers.
Which of the following is a common way for a business to obtain leverage? - Answers -
Purchase fixed assets, such as machinery or land.
- Borrow money from a financial institution.
- Sell commercial paper that it issues on the open market.
Which of the following regarding the possible financial impacts of leverage of a company is
correct? - Answers Involuntary leverage is typically caused by eroding equity value, not
additional debt.
Which of the following statements regarding the cost of capital and its effect on capital
structure and investment choices is correct? - Answers For an investment to be worthwhile, the
expected return must be greater than the cost of capital.
Which of the following statements regarding the use of the pecking order theory is true? -
Answers - The pecking order theory argues that when a company sells its shares, that is a
negative signal.
- In pecking theory, internal financing is superior to debt which is superior to selling more equity.
A company is considering a project that has a discount rate of 5%. It will require an initial
investment of $200,000. In the first year, it will have $100,000 in net cash inflows (one year after
the initial investment). In year 2, it will have cash inflows of $100,000 (two years after the initial
investment), and in year 3 the project will generate $200,000 (three years after the initial
investment). What is the project's NPV? Assume all cash flows occur at the end of
the year. - Answers $158,709
A project has an initial investment requirement of $100,000. In year 1, it should earn$25,000; in
year two, $30,000; and in year 3, $50,000. What is the project's internal rate of return? Assume
the cash flows in years one, two, and three happen at the end of the year. - Answers 2.21%
In which of the following situations would it be appropriate to use the IRR method to make an
investment decision? - Answers To compare two projects that have an equal initial investment
and lifespan.
Under the internal rate of return rule in capital budgeting, which of the following statements
CANNOT be true? - Answers The internal rate of return can vary throughout the life of a project.
You have just been offered a contract worth $5.6 million per year for 3 years. However, to take
the contract, you will need to purchase some new equipment. Your discount rate for this project
is 15.3%. You are still negotiating the purchase price of the equipment. What is the most you
can pay for the equipment and still have a positive NPV? - Answers $12.6 million
Which of the following could be a sunk cost? - Answers -A feasibility study that attempted to
determine the economic viability of a project.
-Labor hours spent on planning project.
- Equipment purchased to pursue a project.
Which of the following is an example of an opportunity cost? - Answers - If you watch a game
instead of going for a run, the cost is poorer personal health.
- If you buy a candy bar instead of a soda, the cost is thirst.
- If invest in one of two projects, the cost is the lost revenue from the other project.
Which of the following is the best reason to use the payback method to evaluate investments? -
Answers The payback method is easy to use and understand for most people, regardless of
training.
You are analyzing two different investments and will present your findings to company
executives. Both projects have cash flows that alternate between positive and negative. Which
budgeting method should you use to evaluate the projects? - Answers Modified Internal Rate of
, Return and Net Present Value.
Under the present value concept, a lottery winner would rather receive: - Answers It is not clear
which of these is preferable. The best answer depends on the interest rate that the lottery
winner faces.
The marginal tax rate is: - Answers The tax rate incurred on each additional dollar of income.
A company sells 150,000 units at $60 a unit with a variable cost of $30 a unit. It has $1 million in
fixed costs and $600,000 in interest costs. What is the company's operating leverage? -
Answers 1.29
An individual files for bankruptcy. Through this proceeding, the debtor reorganizes his debt, is
allowed to keep some of his property, but must use some of his future earnings to pay off his
debts. What type of bankruptcy is this? - Answers Chapter 13
If potential creditors and investors sense that a company has a higher risk of going bankrupt,
which of the following will occur? - Answers The company will be charged a higher interest rate
by potential lenders.
Under the Pecking Order Theory, what is the order of funding sources to finance a project from
the most preferred method to least desirable? - Answers Use capital reserves; issue debt; sell
equity.
Which of the following actions would increase a company's operating leverage? - Answers
Reworking a company's production process so it relied more on machinery and less on workers.
Which of the following is a common way for a business to obtain leverage? - Answers -
Purchase fixed assets, such as machinery or land.
- Borrow money from a financial institution.
- Sell commercial paper that it issues on the open market.
Which of the following regarding the possible financial impacts of leverage of a company is
correct? - Answers Involuntary leverage is typically caused by eroding equity value, not
additional debt.
Which of the following statements regarding the cost of capital and its effect on capital
structure and investment choices is correct? - Answers For an investment to be worthwhile, the
expected return must be greater than the cost of capital.
Which of the following statements regarding the use of the pecking order theory is true? -
Answers - The pecking order theory argues that when a company sells its shares, that is a
negative signal.
- In pecking theory, internal financing is superior to debt which is superior to selling more equity.
