Multiple Choice Answers

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1. Projects can be classified into various categories. These include
a. new products and new businesses projects that include research and development activities
b. cost savings and revenue enhancement projects that include improvements in production technology to realize cost savings and marketing campaigns to achieve revenue enhancement
c. capacity expansion projects that involve expanding the current business by adding new equipment and facilities
d. all of these

2. The _____ for a project equals one plus the present value of the future cash flows divided by the initial investment.
a. NPV
b. PI
c. IRR
d. Payback

3. Studies show systematic differences in capital structures across industries. These are due mostly to differences in the availability of tax shelter provided by things other than debt, such as
a. hiring and firing practices
b. operating tax loss carryforwards
c. what the capital asset pricing theory tells us
d. all of these

4. According to the _____ view of dividends, dividend changes are important indicators to investors of changes in management’s expectations about the firm’s future earnings.
a. clientele
b. signaling
c. capital gains
d. transferable

5. Most debt issuers select a coupon rate that will make the bonds
a. less than par
b. worth par
c. greater than par
d. greater than or equal to par

6. Which of the following statement is true?
a. Under an indirect lease, the lessee identifies the asset it requires.
b. Under a direct lease arrangement, the owner of an asset sells it, usually at market value, for cash.
c. A lessor who provides lease financing for an expensive piece of equipment, such as an aircraft, may wish to borrow a portion of the funds to make that investment.
d. none of these

7. You are evaluating a proposed project. You find that the DCF-NPV is −$50,000. However, by investing today, you think you might have a future growth option to expand, but it would cost you an additional $100,000—in today’s dollars—to have this option. If this future opportunity occurs, you estimate the present value of this option will be $500,000. However, there’s only a 60% chance of this occurring. Does the growth option make investment in the proposed project a positive NPV?
a. Yes, the NPV is $50,000.
b. Yes, the NPV is $100,000.
c. Yes, the NPV is $125,000.
d. Yes, the NPV is $150,000.

8. Which of these statements is true?
a. Future investment opportunities are options to abandon investment possibilities in the future that result from a current opportunity or operation.
b. When a firm makes a capital budgeting decision, one option to consider is the possibility of stopping the project earlier than originally planned.
c. The abandonment option is the option to postpone, rather than cancel, an expansion.
d. none of these

9. Benefits a firm hopes to realize from the planning process include
a. past orientation
b. nonstandardized assumptions
c. preparing for contingencies
d. subjectivity