Which items are necessary in calculating the net present value of a project?
I. Investment outlays
II. Discount rate
III. Incremental cash flow
IV. Time period for the project
I, II and IV
I, II and III
II, III and IV
All of the above
Operating cash flow is generated by a company’s daily operations
related to production and sales of goods and/or services.
Scenario analysis is a way of testing forecasts by changing one
assumption at a time.
Suppose a riskless project requires an initial investment of $10 and
will generate a one-time cash inflow of $30 two years later. Assuming
a risk-free interest rate of 5%, which of the following statements
about the project is NOT true?
The net present value of the project is positive.
The IRR is greater than 50 percent.
The accounting rate of return on the project is positive.
The payback period is less than 2 years
5—-Analysis of a company’s financial statements: Below are simplified versions of the balance sheet and income statement for Toys by Tom, Inc. Use this information to answer the following question.
Toys by Tom, Inc. has a current ratio of ____, suggesting ________.
9.6; reasonable ability to cover interest expense
0.57; potential illiquidity
0.21; potential collection problems
1.75; reasonable liquidity
6—It is possible for a company to grow faster than its sustainable growth rate.
7—Selecting investment projects according to rules based either on project NPV or IRR results in maximizing firm value.
8—Analysis of a company’s financial statements: Below are simplified versions of the balance sheet and income statement for Toys by Tom, Inc. Use this information to answer the following question.
What is Toys by Tom, Inc. return on assets (ROA)?
9—Which of the following is commonly used in preparing pro forma statements:
Historical financial statements
All of the above
10—-For which of the following generic businesses would you expect a combination of high asset turnover and low profit margins?
11—-A company can shorten its cash cycle by:
Reducing inventory turnover
Reducing account payables
Reducing days receivable
None of the above
12—For a levered firm, EBIT is equivalent to:
Pro forma earnings
Net income before taxes
13—-The amount by which a project increases the value of the firm is given by the project’s ______.
accounting rate of return
net present value (NPV)
internal rate of return (IRR)
14—-A dollar today is worth more than a dollar tomorrow.
15—The NPV rule, which says companies should invest in projects for which NPV is greater than 0, depends on the assumption of value maximization.
16—A company has a retention rate of 50%, sales of $25,000, beginning equity of $50,000 and profit margins of 10%, an asset turnover ratio of .75 and debt of $10,000. What is its sustainable growth rate?
Not enough information given
17—Common-size financial statements are constructed in order to:
Adjust for inflation and risk
Facilitate comparisons of different-sized companies
To comply with SEC requirements
All of the above
18—Leverage and liquidity generally rise or fall together.
19—Which of the following ratios uses sales in the denominator?
Days in inventory
Average collection period
20–What is the present value of a perpetuity of $100 given a discount rate of 5%?
21—Compute the net present value of an investment with 5 years of annual cash inflows of $100 and two cash outflows, one today of $100 and one at the beginning of the second year of $50. Use a discount rate of 10 percent.