Corporate FinanceBerk DeMarzo Test Bank Chapte.docx
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Corporate FinanceBerk DeMarzo Test Bank Chapte.docx
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CorporateFinanceBerkDeMarzoTestBankChapte
CorporateFinance,3e(Berk/DeMarzo)
Chapter8FundamentalsofCapitalBudgeting
ForecastingEarnings
1)WhichofthefollowingstatementsisFALSE
A)Acapitalbudgetliststheprojectsandinvestmentsthatacompanyplanstoundertakeduringthecomingyear.
B)IncomeTax=EBIT×(1-τc).
C)Whensalesofanewproductdisplacesalesofanexistingproduct,thesituationisoftenreferredtoascannibalization.
D)Overheadexpensesareoftenallocatedtothedifferentbusinessactivitiesforaccountingpurposes.
Answer:
B
Diff:
1
Section:
ForecastingEarnings
Skill:
Conceptual
2)WhichofthefollowingstatementsisFALSE
A)Saleswillultimatelydeclineastheproductnearsobsolescenceorfacesincreasedcompetition.
B)ManagerssometimescontinuetoinvestinaprojectthathasanegativeNPVbecausetheyhavealreadyinvestedalargeamountintheprojectandfeelthatbynotcontinuingit,thepriorinvestmentwillwasted.
C)Withstraight-linedepreciationtheasset'scostisdividedequallyoveritslife.
D)Aprojectsunleverednetincomeisequaltoitsincrementalrevenueslesscostsanddepreciation,evaluatedonanpre-taxbasis.
Answer:
D
Diff:
1
Section:
ForecastingEarnings
Skill:
Conceptual
3)WhichofthefollowingstatementsisFALSE
A)Webeginthecapitalbudgetingprocessbydeterminingtheincrementalearningsofaproject.
B)Themarginalcorporatetaxrateisthetaxratethefirmwillpayonanincrementaldollarofpre-taxincome.
C)Investmentsinplant,property,andequipmentaredirectlylistedasexpensewhencalculatingearnings.
D)Theopportunitycostofusingaresourceisthevalueitcouldhaveprovidedinitsbestalternativeuse.
Answer:
C
Diff:
1
Section:
ForecastingEarnings
Skill:
Conceptual
4)WhichofthefollowingstatementsisFALSE
A)Whenevaluatingacapitalbudgetingdecision,thecorrecttaxratetouseisthefirm'saveragecorporatetaxrate.
B)Todeterminethecapitalbudget,firmsanalyzealternativeprojectsanddecidewhichonestoacceptthroughaprocesscalledcapitalbudgeting.
C)Anewproducttypicallyhaslowersalesinitially,ascustomersgraduallybecomeawareoftheproduct.
D)Sunkcostshavebeenorwillbepaidregardlessofthedecisionwhetherornottoproceedwiththeproject.
Answer:
A
Diff:
2
Section:
ForecastingEarnings
Skill:
Conceptual
5)WhichofthefollowingstatementsisFALSE
A)Becausevalueislostwhenaresourceisusedbyanotherproject,weshouldincludetheopportunitycostasanincrementalcostoftheproject.
B)Sunkcostsareincrementalwithrespecttothecurrentdecisionregardingtheprojectandshouldbeincludedinitsanalysis.
C)Overheadexpensesareassociatedwithactivitiesthatarenotdirectlyattributabletoasinglebusinessactivitybutinsteadaffectmanydifferentareasofthecorporation.
D)Whencomputingtheincrementalearningsofaninvestmentdecision,weshouldincludeallchangesbetweenthefirm'searningswiththeprojectversuswithouttheproject.
Answer:
B
Diff:
2
Section:
ForecastingEarnings
Skill:
Conceptual
6)WhichofthefollowingstatementsisFALSE
A)Thefirmdeductsafractionoftheinvestmentsinplant,property,andequipmenteachyearasdepreciation.
B)Ifsecuritiesarefairlypriced,thenetpresentvalueofafixedsetofcashflowsisindependentofhowthosecashflowsarefinanced.
C)Sunkcostfallacyisatermusedtodescribethetendencyofpeopletoignoresunkcostsincapitalbudgetinganalysis.
D)Agoodruletorememberisthatifourdecisiondoesnotaffectacashflowthenthecashflowshouldnotaffectourdecision.
Answer:
C
Diff:
2
Section:
ForecastingEarnings
Skill:
Conceptual
7)WhichofthefollowingstatementsisFALSE
A)Theultimategoalincapitalbudgetingistodeterminetheeffectofthedecisiontotakeaparticularprojectonthefirm'scashflows.
B)Totheextentthatoverheadcostsarefixedandwillbeincurredinanycase,theyareincrementaltotheprojectandshouldbeincludedinthecapitalbudgetinganalysis.
C)UnleveredNetIncome=(Revenue-Costs-Depreciation)×(1-τc).
D)Earningsarenotcashflows.
Answer:
B
Diff:
2
Section:
ForecastingEarnings
Skill:
Conceptual
8)WhichofthefollowingstatementsisFALSE
A)Projectexternalitiesaredirecteffectsoftheprojectthatmayincreaseofdecreasetheprofitsofotherbusinessactivitiesofthefirm.
B)Incrementalearningsaretheamountbywhichthefirm'searningsareexpectedtochangeasaresultoftheinvestmentdecision.
C)Theaveragesellingpriceofaproductanditscostofproductionwillgenerallychangeovertime.
D)Anymoneythathasalreadybeenspentisasunkcostandthereforeirrelevantinthecapitalbudgetingprocess.
Answer:
A
Diff:
3
Section:
ForecastingEarnings
Skill:
Conceptual
9)WhichofthefollowingstatementsisFALSE
A)Manyprojectsusearesourcethatthecompanyalreadyowns.
B)Whenevaluatingacapitalbudgetingdecision,wegenerallyincludeinterestexpense.
C)Onlyincludeasincrementalexpensesinyourcapitalbudgetinganalysistheadditionaloverheadexpensesthatarisebecauseofthedecisiontotakeontheproject.
D)Asapracticalmatter,toderivetheforecastedcashflowsofaproject,financialmanagersoftenbeginbyforecastingearnings.
Answer:
B
Diff:
2
Section:
ForecastingEarnings
Skill:
Conceptual
10)WhichofthefollowingstatementsisFALSE
A)Thesimplestmethodusedtocalculatedepreciationisthestraight-linemethod.
B)Asunkcostisanyunrecoverablecostforwhichthefirmisalreadyliable.
C)UnleveredNetIncome=EBIT×τc.
D)Thedecisiontocontinueorabandonshouldbebasedonlyontheincrementalcostsandbenefitsoftheprojectgoingforward.
Answer:
C
Diff:
1
Section:
ForecastingEarnings
Skill:
Conceptual
11)Whichofthefollowingcostswouldyouconsiderwhenmakingacapitalbudgetingdecision
A)Sunkcost
B)Opportunitycost
C)Interestexpense
D)Fixedoverheadcost
Answer:
B
Diff:
1
Section:
ForecastingEarnings
Skill:
Conceptual
12)Adecreaseinthesalesofacurrentprojectbecauseofthelaunchingofanewprojectis:
A)cannibalization.
B)asunkcost.
C)anoverheadexpense.
D)irrelevanttotheinvestmentdecision.
Answer:
A
Diff:
1
Section:
ForecastingEarnings
Skill:
Definition
13)Moneythathasbeenorwillbepaidregardlessofthedecisionwhetherornottoproceedwiththeprojectis:
A)cannibalization.
B)consideredaspartoftheinitialinvestmentintheproject.
C)anopportunitycost.
D)asunkcost.
Answer:
D
Diff:
1
Section:
ForecastingEarnings
Skill:
Definition
14)Thevalueofcurrentlyunusedwarehousespacethatwillbeusedaspartofanewcapitalbudgetingprojectis:
A)anopportunitycost.
B)irrelevanttotheinvestmentdecision.
C)anoverheadexpense.
D)asunkcost.
Answer:
A
Diff:
1
Section:
ForecastingEarnings
Skill:
Definition
Usetheinformationforthequestion(s)below.
FordMotorCompanyisconsideringlaunchinganewlineofPlug-inElectricSUVs.TheheavyadvertisingexpensesassociatedwiththenewSUVlaunchwouldgenerateoperatinglossesof$35millionnextyear.WithoutthenewSUV,Fordexpectstoearnpre-taxincomeof$80millionfromoperationsnextyear.Fordpaysa30%taxrateonitspre-taxincome.
15)TheamountthatFordMotorCompanyoweintaxesnextyearwithoutthelaunchofthenewSUVisclosestto:
A)$million
B)$million
C)$million
D)$million
Answer:
A
Explanation:
A)=$80×.30=$24million
Diff:
1
Section:
ForecastingEarnings
Skill:
Analytical
16)TheamountthatFordMotorCompanyoweintaxesnextyearwiththelaunchofthenewSUVisclosestto:
A)$million
B)$million
C)$million
D)$million
Answer:
A
Explanation:
A)=(80-35)×.30=million
Diff:
1
Section:
ForecastingEarnings
Skill:
Analytical
Usetheinformationforthequestion(s)below.
FoodForLess(FFL),agrocerystore,isconsideringofferingonehourphotodevelopingintheirstore.Thefirmexpectsthatsalesfromthenewonehourmachinewillbe$150,000peryear.FFLcurrentlyoffersovernightfilmprocessingwithannualsalesof$100,000.Whilemanyoftheonehourphotosaleswillbetonewcustomers,FFLestimatesthat60%oftheircurrentovernightphotocustomerswillswitchandusetheonehourservice.
17)Thelevelofincrementalsalesassociatedwithintroducingthenewonehourphotoserviceisclosestto:
A)$90,000
B)$150,000
C)$60,000
D)$120,000
Answer:
A
Explanation:
A)=$150,000-(cannibalizedsales)=150000-.60×100,000=$90,000
Diff:
2
Section:
ForecastingEarnings
Skill:
Analytical
18)Supposethatofthe60%ofFFL'scurrentovernightphotocustomers,halfwouldstarttakingtheirfilmtoacompetitorthatoffersonehourphotoprocessingifFFLfailstooffertheonehourservice.Thelevelofincrementalsalesinthiscaseisclosestto:
A)$60,000
B)$150,000
C)$90,000
D)$120,000
Answer:
D
Explanation:
D)=$150,000-(cannibalizedsales)=150000-(.60×.50)×100,000=$120,000
Notethattherateofcannibalizationisonly30%(.60×.50)sincetheother30%wouldhavetakentheirfilmelsewhere.
Diff:
2
Section:
ForecastingEarnings
Skill:
Analytical
Usetheinformationforthequestion(s)below.
GlucoseScanIncorporated(GSI)currentlysellsitslatestglucosemonitor,theGlucoscan3000,todiabeticpatientsfor$129.GSIplansonloweringtheirpricenextyearto$99perunit.ThecostofgoodssoldforeachGlucoscanunitis$50,andGSIexpectstosell100,000unitsoverthenextyear.
19)SupposethatifGSIdropsthepriceontheGlucoscan3000immediately,itcanincreasesalesoverthenextyearby30%to130,000units.Theincr
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