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1. ESOPs were originally designed to help improve worker pro
1. ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
2. Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
a. To increase worker productivity.
b. To enable the firm to borrow at a below-market interest rate.
c. To make it easier to grant stock options to employees.
d. To help prevent a hostile takeover.
e. To help retain valued employees.
3. Suppose Yon Sun Corporation's free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm's value of operations, in millions?
4. Zhdanov Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be –$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm's value of operations, in millions?
5. Leak Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments).
Free cash flow:–$50 $100
6. Based on the corporate valuation model, the value of a company's operations is $1,200 million. The company's balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity. If the company has 30 million shares of stock outstanding, what is the best estimate of the stock's price per share?
7. Different borrowers have different risks of bankruptcy, and bankruptcy is costly to lenders. Therefore, lenders charge higher rates to borrowers judged to be more at risk of going bankrupt.
8. A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.
9. Financial risk refers to the extra risk stockholders bear as a result of using debt as compared with the risk they would bear if no debt were used.
10. If Miller and Modigliani had incorporated the costs of bankruptcy into their model, it is unlikely that they would have concluded that 100% debt financing is optimal.
11. If debt financing is used, which of the following is CORRECT?
a. The percentage change in net operating income will be greater than a given percentage change in net income.
b. The percentage change in net operating income will be equal to a given percentage change in net income.
c. The percentage change in net income relative to the percentage change in net operating income will depend on the interest rate charged on debt.
d. The percentage change in net income will be greater than the percentage change in net operating income.
e. The percentage change in sales will be greater than the percentage change in EBIT, which in turn will be greater than the percentage change in net income.
12. Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?
a.Its sales become less stable over time.
b. The costs that would be incurred in the event of bankruptcy increase.
c. Management believes that the firm's stock has become overvalued.
d. Its degree of operating leverage increases.
e. The corporate tax rate increases.
13.Which of the following statements is CORRECT?
a. The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC).
b. The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.
c. The capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (TIE) ratio.
d. Increasing a company's debt ratio will typically reduce the marginal costs of both debt and equity financing; however, this still may raise the company's WACC.
e. If Congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate, this would encourage companies to increase their debt ratios.
14. Senbet Ventures is considering starting a new company to produce stereos. The sales price would be set at 1.5 times the variable cost per unit; the VC/unit is estimated to be $2.50; and fixed costs are estimated at $120,000. What sales volume would be required in order to break even, i.e., to have an EBIT of zero for the stereo business?
15. Michaely Inc. is an all-equity firm with 200,000 shares outstanding. It has $2,000,000 of EBIT, which is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per shares (DPS). Its tax rate is 40%.
The company is considering issuing $5,000,000 of 10.0% bonds and using the proceeds to repurchase stock. The risk-free rate is 6.5%, the market risk premium is 5.0%, and the beta is currently 0.90, but the CFO believes beta would rise to 1.10 if the recapitalization occurs.
Assuming that the shares can be repurchased at the price that existed prior to the recapitalization, what would the price be following the recapitalization?
17. MM showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.
18.The Miller model begins with the MM model with taxes and then adds personal taxes.
19.Firm L has debt with a market value of $200,000 and a yield of 9%. The firm's equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is Firm L's cost of equity?
In the real world, dividends
a. are usually more stable than earnings.
b. fluctuate more widely than earnings.
c. tend to be a lower percentage of earnings for mature firms.
d. are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased.
e. are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80. Once the percentage is set, then dividend policy is on "automatic pilot" and the actual dividend depends strictly on earnings.
21. Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that
a. investors are indifferent between dividends and capital gains.
b. investors require that the dividend yield and capital gains yield equal a constant.
c. capital gains are taxed at a higher rate than dividends.
d. investors view dividends as being less risky than potential future capital gains.
e. investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains.
22.Which of the following statements about dividend policies is correct?
a. Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the "bird-in-the hand" effect.
b. One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases.
c. One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.
d. One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.
e. The clientele effect suggests that companies should follow a stable dividend policy.
23. Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?
a.Its earnings become more stable.
b. Its access to the capital markets increases.
c. Its R&D efforts pay off, and it now has more high-return investment opportunities.
d. Its accounts receivable decrease due to a change in its credit policy.
e. Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages.
24. If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay
a. no dividends except out of past retained earnings.
b. no dividends to common stockholders.
c. dividends only out of funds raised by the sale of new common stock.
d. dividends only out of funds raised by borrowing money (i.e., issue debt).
e. dividends only out of funds raised by selling off fixed assets.
25. Which of the following statements is correct?
a. The tax code encourages companies to pay dividends rather than retain earnings.
b. If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase.
c. The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
d. Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm's financial risk.
e. A dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in dividends. Thus, both companies and investors are indifferent between distributing cash through dividends and stock repurchase programs.
26.Which of the following statements is correct?
a. Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.
b. One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
c. An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM.
d. If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price.
e. Stock repurchases make the most sense at times when a company believes its stock is undervalued.
27. Which of the following statements is NOT correct?
a. Stock repurchases can be used by a firm as part of a plan to change its capital structure.
b. After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise.
c. Investors can interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued.
d. Companies can repurchase shares to distribute large inflows of cash, say from the sale of a division, to stockholders without paying cash dividends.
e. Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.
28. Which of the following statements is correct?
a. If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm's dividend payout.
b. The clientele effect can explain why so many firms change their dividend policies so often.
c. One advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele.
d. New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don't change the firm's total amount of book equity.
e. Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received.
29. Pate & Co. has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85% equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment?
30. Becker Financial recently completed a 7-for-2 stock split. Prior to the split, its stock sold for $90 per share. If the total market value was unchanged by the split, what was the price of the stock following the split?
31. Ross Financial has suffered losses in recent years, and its stock currently sells for only $0.50 per share. Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $25 per share. How many of the old shares must be given up for one new share to achieve the $25 price, assuming this transaction has no effect on total market value?
32. Keys Financial has done extremely well in recent years, and its stock now sells for $175 per share. Management wants to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be required to get to this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares should be given per one old share?
33. Which of the following is generally NOT true and an advantage of going public?
a.Facilitates stockholder diversification.
b.Increases the liquidity of the firm's stock.
c.Makes it easier to obtain new equity capital.
d.Establishes a market value for the firm.
e.Makes it easier for owner-managers to engage in profitable self-dealings.
34.Which of the following statements about listing on a stock exchange is most CORRECT?
a.Listing is a decision of more significance to a firm than going public.
b.Any firm can be listed on the NYSE as long as it pays the listing fee.
c.Listing provides a company with some "free" advertising, and it may enhance the firm's prestige and help it do more business.
d.Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the SEC.
e.The OTC is the second largest market for listed stock, and it is exceeded only by the NYSE.
35.Which of the following statements is most CORRECT?
a.In a private placement, securities are sold to private (individual) investors rather than to institutions.
b.Private placements occur most frequently with stocks, but bonds can also be sold in a private placement.
c.Private placements are convenient for issuers, but the convenience is offset by higher flotation costs.
d.The SEC requires that all private placements be handled by a registered investment banker.
e.Private placements can generally bring in funds faster than is the case with public offerings.
36.Which of the following statements is most CORRECT?
a.If new debt is used to refund old debt, the correct discount rate to use in the refunding analysis is the before-tax cost of new debt.
b.The key benefits associated with refunding debt are the reduction in the firm's debt ratio and the creation of more reserve borrowing capacity.
c.The mechanics of finding the NPV of a refunding decision are fairly straightforward. However, the decision of when to refund is not always clear because it requires a forecast of future interest rates.
d.If a firm with a positive NPV refunding project delays refunding and interest rates rise, the firm can still obtain the entire NPV by locking in a low coupon rate when the rates are low, even though it actually refunds the debt after rates have risen.
e.Suppose a firm is considering refunding and interest rates rise during time when the analysis is being done. The rise in rates would tend to lower the expected price of the new bonds, which would make them cheaper to the firm and thus increase the expected interest savings.
37 Which of the following factors would increase the likelihood that a company would call its outstanding bonds at this time?
a.The yield to maturity on the company's outstanding bonds increases due to a weakening of the firm's financial situation.
b.A provision in the bond indenture lowers the call price on specific dates, and yesterday was one of those dates.
c.The flotation costs associated with issuing new bonds rise.
d.The firm's CFO believes that interest rates are likely to decline in the future.
e.The firm's CFO believes that corporate tax rates are likely to be increased in the future.
38 Which of the following statements concerning common stock and the investment banking process is NOT CORRECT?
a.The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue.
b.If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the primary market.
c.Listing a large firm's stock is often considered to be beneficial to stockholders because the increases in liquidity and reputation probably outweigh the additional costs to the firm.
d.Stockholders have the right to elect the firm's directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management's performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a tender offer.
e.The announcement of a large issue of new stock could cause the stock price to fall. This loss is called "market pressure," and it is treated as a flotation cost because it is a cost to stockholders that is associated with the new issue.
39. Which of the following statements is NOT CORRECT?
a.When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held."
b."Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.
c.Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC.
d.When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market.
e.It is possible for a firm to go public and yet not raise any additional new capital.
40. A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?
a.Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
b.Use cash to repurchase some of the company's own stock.
c.Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
d.Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
e.Use cash to increase inventory holdings.
41. Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company's total assets or operating income. Which of the following effects would occur as a result of this action?
a.The company's current ratio increased.
b.The company's times interest earned ratio decreased.
c.The company's basic earning power ratio increased.
d.The company's equity multiplier increased.
e.The company's debt ratio increased.
42. If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be CORRECT?
a.The lower the company's EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm.
b.Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.
c.Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.
d.The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.
e.Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.
43. You observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT?
a.Its total assets turnover must be above the industry average.
b.Its return on assets must equal the industry average.
c.Its TIE ratio must be below the industry average.
d.Its total assets turnover must be below the industry average.
e.Its total assets turnover must equal the industry average.
44. Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?
a.Company HD pays less in taxes.
b.Company HD has a lower equity multiplier.
c.Company HD has a higher ROA.
d.Company HD has a higher times interest earned (TIE) ratio.
e.Company HD has more net income.
45.Orono Corp.'s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times interest earned (TIE) ratio?
46. Rappaport Corp.'s sales last year were $320,000, and its net income after taxes was $23,000. What was its profit margin on sales?
47. Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750. What was its return on total assets?
SHAPE \* MERGEFORMAT Question 48
Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500. What was its basic earning power (BEP)?
49. Nikko Corp.'s total common equity at the end of last year was $305,000 and its net income after taxes was $60,000. What was its ROE?
50. Vang Corp.'s stock price at the end of last year was $33.50 and its earnings per share for the year were $2.30. What was its P/E ratio?
51. Lindley Corp.'s stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its market/book ratio?
52. Pace Corp.'s assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to employ a debt ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio?
53. Helmuth Inc.'s latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?
54. Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $425,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO – Credit period = days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments.
55. Which of the following is NOT a key element in strategic planning as it is described in the text?
a.The mission statement.
b.The statement of the corporation's scope.
c.The statement of cash flows.
d.The statement of corporate objectives.
e.The operating plan.
56 Jefferson City Computers has developed a forecasting model to estimate its AFN for the upcoming year. All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)?
a.A sharp increase in its forecasted sales.
b.A sharp reduction in its forecasted sales.
c.The company reduces its dividend payout ratio.
d.The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35.
e.The company discovers that it has excess capacity in its fixed assets.
57 Which of the following is NOT one of the steps taken in the financial planning process?
a.Forecast financial statements and use these projections to analyze the likely effects of the operating plan on profits and various financial ratios.
b.Forecast the funds that will be needed to support the 5-year plan.
c.Develop a cash budget for use in determining when funds will be needed or when surplus funds will be available for investment.
d.Forecast sales over the planning horizon.
e.Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.
58 Spontaneously generated funds are generally defined as follows:
a.The amount of assets required per dollar of sales.
b.A forecasting approach in which the forecasted percentage of sales for each item is held constant.
c.Funds that a firm must raise externally through borrowing or by selling new common or preferred stock.
d.Funds that are obtained automatically from normal operations, and they include spontaneous increases in accounts payable and accruals, plus additions to retained earnings.
e.The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm's growth.
59 Which of the following statements is CORRECT?
a.Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income.
b.The AFN equation method for forecasting funds requirements requires only a forecast of the firm's balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet.
c.Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast.
d.Financing feedbacks reflect the fact that interest and/or dividends must be paid on new securities issued to help finance the AFN, and these payments lower the initially forecasted net income, which in turn reduces the retained earnings shown in the projected financial statements. That chain of events results in a higher AFN than was forecasted on the first pass.
e.If assets and spontaneously generated liabilities are not projected to grow at the same rate as sales, then the AFN method will provide more accurate forecasts than the projected financial statement method.
60 Fairchild Garden Supply expects $600 million of sales this year, and it forecasts a 15% increase for next year. The CFO uses this equation to forecast inventory requirements at different levels of sales: Inventories = $30.2 + 0.25(Sales). All dollars are in millions. What is the projected inventory turnover ratio for the coming year?
61 Last year Handorf-Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?
62 Last year Emery Industries had $450 million of sales and $225 million of fixed assets, so its FA/Sales ratio was 50%. However, its fixed assets were used at only 65% of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated?
63 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.A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV), then discounting the TV at the WACC.
b.A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV), then discounting to find the IRR.
c.If a project's IRR is smaller than the WACC, then its NPV will be positive.
d.A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.
e.If a project's IRR is positive, then its NPV must also be positive.
64 Which of the following statements is CORRECT?
a.Projects with "normal" cash flows can have only one real IRR.
b.Projects with "normal" cash flows can have two or more real IRRs.
c.Projects with "normal" cash flows must have two changes in the sign of the cash flows, e.g., from negative to positive to negative. If there are more sign changes, then the cash flow stream is "nonnormal."
d.The "multiple IRR problem" can arise if a project's cash flows are "normal."
e.Projects with "nonnormal" cash flows are almost never encountered in the real world.
65 Which of the following statements is CORRECT?
a.The NPV method was once the favorite of academics and business executives, but today most authorities regard the MIRR as being the best indicator of a project's profitability.
b.If the cost of capital declines, this lowers a project's NPV.
c.The NPV method is regarded by most academics as being the best indicator of a project's profitability, hence most academics recommend that firms use only this one method.
d.A project's NPV depends on the total amount of cash flows the project produces, but because the cash flows are discounted at the WACC, it does not matter if the cash flows occur early or late in the project's life.
e.The NPV and IRR methods may give different recommendations regarding which of two mutually exclusive projects should be accepted, but they always give the same recommendation regarding the acceptability of a normal, independent project.
66 Projects C and D are mutually exclusive and have normal cash flows. Project C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%. Which of the following statements is CORRECT?
a.Project D has a higher IRR.
b.Project D is probably larger in scale than Project C.
c.Project C probably has a faster payback.
d.Project C has a higher IRR.
e.The crossover rate between the two projects is below 12%.
67. The regular payback method has a number of disadvantages, some of which are listed below. Which of these items is NOT a disadvantage of this method?
a.Lack of an objective, market-determined benchmark for making decisions.
b.Ignores cash flows beyond the payback period.
c.Does not directly account for the time value of money.
d.Does not provide any indication regarding a project's liquidity.
e.Does not directly account for differences in risk among projects.
68. Edmondson Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.
69. Humboldt Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.
Year:01 2 3 45
Cash flows:-$1,000$300 $300 $300 $300 $300
70. Rappaport Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.
71. Which of the following is NOT a cash flow and thus should not be reflected in the analysis of a capital budgeting project?
a.Changes in net operating working capital.
b.Shipping and installation costs.
e.Sunk costs that have been expensed for tax purposes.
72. A company is considering a new project. The CFO plans to calculate the project's NPV by estimating the relevant cash flows for each year of the project's life (the initial investment cost, the annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the company's WACC. Which one of the following factors should the CFO include in the cash flows when estimating the relevant cash flows?
a.All sunk costs that have been incurred relating to the project.
b.All interest expenses on debt used to help finance the project.
c.The investment in working capital required to operate the project, even if that investment will be recovered at the end of the project's life.
d.Sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year.
e.Effects of the project on other divisions of the firm, but only if those effects lower the project's own direct cash flows.
73. Laurier Inc., a household products firm, is considering production of a new detergent. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated?
a.The company will produce the detergent in a vacant building that was used to produce another product until last year. The building could be sold, leased to another company, or used in the future to produce other Laurier products.
b.The project will utilize some equipment the company currently owns but is not now using. A used-equipment dealer has offered to buy the equipment.
c.The company has spent and expensed for tax purposes $3 million on research related to the new detergent. These funds cannot be recovered, but the research is expected to benefit other projects that might be proposed in the future.
d.The new detergent will cut into sales of the firm's other detergents.
e.If the project is accepted, the company must invest $2 million in working capital. However, these funds will be recovered at the end of the project's life.
74. You work for the Sing Oil Company, which is considering a new project whose data are shown below. What is the project's operating cash flow for Year 1?
Sales revenues, each year$55,000
Other operating costs$25,000
75. You work for Athens Inc., and you must estimate the Year 1 operating cash flow for a project with the following data. What is the Year 1 operating cash flow?
Other operating costs$6,000
6 years ago.
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