# Which items are necessary in calculating the net present value of a project?

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 ________.

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9.6; reasonable ability to cover interest expense

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0.57; potential illiquidity

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0.21; potential collection problems

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1.75; reasonable liquidity

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6—It is possible for a company to grow faster than its sustainable growth rate.

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True

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False

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

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True

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False

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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)?

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6.9%

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0.86

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

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Historical financial statements

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Projected sales

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Efficiency ratios

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All of the above

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10—-For which of the following generic businesses would you expect a combination of high asset turnover and low profit margins?

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Supermarkets

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Banks

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Software developers

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Airlines

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11—-A company can shorten its cash cycle by:

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Reducing inventory turnover

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Reducing account payables

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Reducing days receivable

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None of the above

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12—For a levered firm, EBIT is equivalent to:

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Net income

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Pro forma earnings

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Operating profit

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Net income before taxes

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13—-The amount by which a project increases the value of the firm is given by the project’s ______.

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accounting rate of return

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net present value (NPV)

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internal rate of return (IRR)

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present value

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

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True

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False

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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.

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True

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False

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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?

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2.5%

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1.7%

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3.75%

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Not enough information given

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17—Common-size financial statements are constructed in order to:

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Adjust for inflation and risk

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Facilitate comparisons of different-sized companies

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To comply with SEC requirements

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All of the above

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18—Leverage and liquidity generally rise or fall together.

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True

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False

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

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Days in inventory

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Receivables turnover

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Cash ratio

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Average collection period

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

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$2,000

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$3,000

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$1,500

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$500

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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.

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$229.08

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$287.60

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$233.62

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$271.53

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