1.

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

2—-

Operating cash flow is generated by a company’s daily operations

related to production and sales of goods and/or services.

True

False

3.

Scenario analysis is a way of testing forecasts by changing one

assumption at a time.

True

False

4—

.

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.

True

False

7—Selecting investment projects according to rules based either on project NPV or IRR results in maximizing firm value.

True

False

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)?

6.9%

0.86

9—Which of the following is commonly used in preparing pro forma statements:

Historical financial statements

Projected sales

Efficiency ratios

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?

Supermarkets

Banks

Software developers

Airlines

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:

Net income

Pro forma earnings

Operating profit

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)

present value

14—-A dollar today is worth more than a dollar tomorrow.

True

False

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.

True

False

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?

2.5%

1.7%

3.75%

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.

True

False

19—Which of the following ratios uses sales in the denominator?

Days in inventory

Receivables turnover

Cash ratio

Average collection period

20–What is the present value of a perpetuity of $100 given a discount rate of 5%?

$2,000

$3,000

$1,500

$500

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.

$229.08

$287.60

$233.62

$271.53