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Exam 11: Some Lessons From Recent Capital Market History

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Question 41

Multiple Choice

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Which of the following values will be equal to zero when a firm is producing the accounting break-even level of output? I.operating cash flow II.internal rate of return III.net income IV.payback period

A) I only
B) III only
C) II and III only
D) I and IV only
E) I, II, and III only

F) None of the above
G) All of the above

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Question 42

Multiple Choice

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Uptown Promotions has three divisions.As part of the planning process, the CFO requested that each division submit its capital budgeting proposals for next year.These proposals represent positive net present value projects that fall within the long-range plans of the firm.The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million, respectively.For the firm as a whole, the management of Uptown Promotions has limited spending to $10 million for new projects next year.This is an example of:

A) scenario analysis.
B) sensitivity analysis.
C) determining operating leverage.
D) soft rationing.
E) hard rationing.

F) All of the above
G) B) and D)

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Question 43

Multiple Choice

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Tucker's Trucking is considering a project with a discounted payback period just equal to the project's life.The projections include a sales price of $38, variable cost per unit of $18.50, and fixed costs of $32,000.The operating cash flow is $19,700.What is the break-even quantity?

Consider a 6-year project with the following information: initial fixed asset investment = $460,000; straight-line depreciation to zero over the 6-year life; zero salvage value; price = $34; variable costs = $19; fixed costs = $188,600; quantity sold = 90,528 units; tax rate = 32 percent.What is the sensitivity of OCF to changes in quantity sold?

Miller Mfg.is analyzing a proposed project.The company expects to sell 8,000 units, plus or minus 2 percent.The expected variable cost per unit is $11 and the expected fixed costs are $287,000.The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range.The depreciation expense is $68,000.The tax rate is 32 percent.The sales price is estimated at $64 a unit, plus or minus 3 percent.What is the earnings before interest and taxes under the base case scenario?

Miller Mfg.is analyzing a proposed project.The company expects to sell 8,000 units, plus or minus 2 percent.The expected variable cost per unit is $11 and the expected fixed costs are $287,000.The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range.The depreciation expense is $68,000.The tax rate is 32 percent.The sales price is estimated at $64 a unit, give or take 3 percent.What is the net income under the worst case scenario?

Precise Machinery is analyzing a proposed project.The company expects to sell 2,100 units, give or take 5 percent.The expected variable cost per unit is $260 and the expected fixed costs are $589,000.Cost estimates are considered accurate within a plus or minus 4 percent range.The depreciation expense is $129,000.The sales price is estimated at $750 per unit, give or take 2 percent.What is the contribution margin per unit under the best case scenario?

Precise Machinery is analyzing a proposed project.The company expects to sell 2,100 units, give or take 5 percent.The expected variable cost per unit is $260 and the expected fixed costs are $589,000.Cost estimates are considered accurate within a plus or minus 4 percent range.The depreciation expense is $129,000.The sales price is estimated at $750 per unit, give or take 2 percent.The tax rate is 35 percent.The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $755.What is the operating cash flow based on this analysis?

Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits.Which one of the following represents the price that should be charged for the additional units during this sale?

By definition, which one of the following must equal zero at the cash break-even point?

The Motor Works is considering an expansion project with estimated annual fixed costs of $71,000, depreciation of $38,500, variable costs per unit of $17.90 and an estimated sales price of $26.50 per unit.How many units must the firm sell to break-even on a cash basis?

Valerie just completed analyzing a project.Her analysis indicates that the project will have a 6-year life and require an initial cash outlay of $320,000.Annual sales are estimated at $589,000 and the tax rate is 34 percent.The net present value is a negative $320,000.Based on this analysis, the project is expected to operate at the:

Sensitivity analysis is based on:

Cool Shades, Inc.(CSI) manufactures biotech sunglasses.The variable materials cost is $1.69 per unit, and the variable labor cost is $3.04 per unit.Suppose the firm incurs fixed costs of $750,000 during a year in which total production is 450,000 units and the selling price is $11.50 per unit.What is the cash break-even point?

The base case values used in scenario analysis are the ones considered the most:

Which one of the following statements concerning variable costs is correct?

What is operating leverage and why is it important in the analysis of capital expenditure projects?

Scenario analysis is best suited to accomplishing which one of the following when analyzing a project?

Simulation analysis is based on assigning a _____ and analyzing the results.

You are in charge of a project that has a degree of operating leverage of 2.64.What will happen to the operating cash flows if the number of units you sell increase by 4 percent?