Andrews/Intake 12 Financial Management Mid-term Quiz

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Midterm Quiz

Multiple Choice (choose the correct answer)

1. The long-term planning process for making and financing

investments that affect a company’s financial results over a number
of years is referred to as A

a. Capital budgeting.
b. Strategic planning.
c. Master budgeting.
d. Long-range planning.

2. Net present value models incorporate which of the following items? D

a. Only the time value of money.

b. Only expected cash inflows and outflows.
c. Only a minimum desired rate of return.
d. All of the above items are incorporated into net present value
models.

3. The time value of money tables (present-value tables) can be used to

streamline the present value calculations related to a project’s future
cash flows. If the project’s future cash flows each period are equal in
dollar amount over the life of the project, you can use the
__________ table to quickly determine the present value of the cash
stream. C
a. Present value of $1
b. Nature of interest
c. Present value of an ordinary annuity of $1
d. Compound interest

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Andrews/Intake 12 Financial Management Mid-term Quiz

4. The net present value (NPV) model can be used to evaluate and rank
two or more proposed projects. The approach that computes the
total impact on cash flows for each option and then converts these
total cash flows to their present values is called the D
a. Differential approach.
b. Incremental approach.
c. Contribution approach.
d. Total project approach.

5. Relevant cash flows for net present value (NPV) models include all of
the following except B

a. Outflows to purchase new equipment.

b. Depreciation expense on the newly acquired piece of
equipment.
c. Reductions in operating cash flows as a result of using the new
equipment.
d. Cash outflows related to purchasing additional inventories for
another retail store.

6. Capital budgeting decisions must consider the effect of income taxes

on the discounted cash flows. Which tax rate should be used in
discounted cash flow models?
B

a. Average tax rate.

b. Marginal income tax rate.
c. Proportional tax rate.
d. Direct tax rate.

7. Circle B, a chain of grocery stores, has $7,000,000 in pre-tax income.

The company pays 15 percent tax on the first $50,000 of income, 30
percent tax on the next $285,000 of income, and 36 percent tax on
the remainder. Circle B’s average tax rate is C
a. 27 percent.
b. 33 percent.

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Andrews/Intake 12 Financial Management Mid-term Quiz

c. 35.6 percent.
d. 36 percent.

8. Which of the following items is excluded from the computation of

cash inflows and outflows from a proposed project, but is included in
the cash effects of income taxes related to the proposed project? A
a. Depreciation.
b. Purchase of inventories.
c. Future disposal value of the project.
d. Purchase and installation of equipment for the project.

9. The number of years over which an asset is depreciated for tax

purposes is referred to as the A

a. Useful life.
b. Recovery period.
c. Residual period.
d. Expected life.

10. The decline in the purchasing power of the dollar is called C

a. Depreciation.
b. Risk.
c. Inflation.
d. Devaluation.

11. There are several capital budgeting decision models that do not use
discounted cash flows. What is the name of the simple technique that
calculates the total time it will take to recover, using cash inflows
from operations, the amount of cash invested in a project? B
a. Recovery period.
b. Payback model.
c. External rate of return.
d. Accounting rate of return.

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Andrews/Intake 12 Financial Management Mid-term Quiz

12. A follow-up evaluation of a capital project is performed to see that

investment expenditures are proceeding on time and on budget, to
compare actual cash flows with those originally predicted, and to
evaluate continuation of the project. This follow-up is called a A
a. Post audit.
b. Performance evaluation.
c. Management audit.
d. Project review.

Use the following information for questions 13 and 14.

Saigon Green is considering buying some new equipment to boost sales.

Equipment investment is $ 500,000, applying straight line depreciation and
useful life of equipment is 5 years. The profitability of the company is 15%.

Below is the company's expected annual earnings report.

Sales Revenue $ 500,000

Cost does not include depreciation $ 300,000
Depreciation $ 100,000
The total cost $ 400,000
Taxable income $ 100,000
Income tax (20%) $ 20,000
Net income $ 80,000

13. Estimated annual cash flow is _____. B

a. $ 120,000
b. $ 180,000
c. $ 110,000
d. $ 100,000

14. The present value of the annual tax savings from depreciation is
_____. B

a. $ 80,000

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Andrews/Intake 12 Financial Management Mid-term Quiz

b. $ 67,043
c. $ 81,584
d. $ 94,822

Use the following information for questions 15, 16 and 17.

Lagi Company is considering to select one of the two projects that exclude
each other (choose one project, ignore the other project) have cash flow
as follows:

Year 0 1
Project A (500) 600
Project B 500 (600)

15. Which project you choose (based on scientific criteria)? B

a. Both
b. Can not conclude
c. A
d. B

16. If you know the opportunity cost of capital of Lagi is 15%, what
project do you choose? C
a. Both
b. Can not conclude
c. A
d. B

17. If the opportunity cost of capital of Lagi is 25%, what project do you
choose? D

a. Both
b. Can not conclude
c. A
d. B

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Andrews/Intake 12 Financial Management Mid-term Quiz

Use the following information for questions 18, 19 and 20.

The information of a bond is given below

Par/face value $ 1000

Coupon 10%
Time of maturity 2 years

18. If your opportunity cost of capital is 15%, how much you are willing
to buy? A

a. $ 918.7
b. $ 850.5
c. $ 1,050.5
d. $ 1,000.0

19. If your opportunity cost of capital is 8%, how much you are willing to
buy? D

a. $ 950.8
b. $ 890.5
c. $ 1,050.5
d. $ 1,035.7

20. If your opportunity cost of capital is 10%, how much you are willing
to buy? D

a. $ 918.7
b. $ 850.5
c. $ 1,050.5
d. $ 1,000.0

GOOD LUCK!

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