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BEC CH. 3 - Question
| Question | Answer |
|---|---|
| Which tool would most likely be used to determine the best course of action under conditions of uncertainty? | Expected Value Method |
| In sits. when management must decide on accepting or rejecting 1 time-only special orders,where there is sufficient idle capcty, which one is not relevant to the decision? a.Absorption costs b.Direct costs c.Variable costs d.Incremental costs | A.Absorption costs are not relevant. All of the following costs are relevant in such situations: b. Direct costs c. Variable costs d. Incremental costs |
| All of the following capital budgeting analysis techniques use cash flows as the primary basis for the calculation, except for the: a. Net present value. b. Internal rate of return. c. Discounted payback period. d. Accounting rate of return. | D-Accounting rate of return does not use cash flows as the primary basis for the calculation. It measures the accrual accounting return instead of cash flows: Accounting rate of return = Increase in expected average annual net income/Average investment |
| When is the internal rate of return (IRR) method is less reliable than the net present value(NPV) technique? | *Several alternating periods of net cash inflows & net cash outflows *amounts of cash flows differ significantly. IRR is strictly % measure of return,NPV is an absolute. Timing or amt of cash flows under IRR can be misleading when compared to NPV method. |
| An advantage of the net present value method over the internal rate of return model in discounted cash flow analysis is that the net present value method: | When using the net present value method of capital budgeting, different hurdle rates can be used for each year of the project. |
| In evaluating capital budget project,the NPV model is gen not affected by: a.Method of funding the project b.Initial cost c. Amt of added working capital needed for opes during the term of project d. Amt of the project's associated deprcn tax allowance. | A.Method of funding the project has no effect on NPV model.NPV uses hurdle rate to discount cash flows. If NPV is +, the prjct is acceptable. Method of financing the prjct, & cost, are independent of the process of screening the project for acceptability. |
| The capital budgeting model that is generally considered the best model for long-range decision making is the: a. Payback model. b. Accounting rate of return model. c. Unadjusted rate of return model. d. Discounted cash flow model. | "d" is correct. The discounted cash flow model is the best for long-term decisions. Discounted cash flow methods include NPV, IRR, and profitability index. |
| The segment margin of an investment center after deducting the imputed interest on the assets used by the investment center is known as: | Residual income is the segment margin of an investment center after deducting the imputed interest (hurdle rate) on the assets used by the investment center. |
| The basic objective of the residual income approach of performance measurement and evaluation is to have a division maximize its: | Residual income is defined as income in excess of a desired minimum return. |
| The imputed interest rate used in the residual income approach for performance measurement and evaluation can best be characterized as the: | Historical weighted average cost of capital is usually used as the target or hurdle rate in the residual income approach. |
| The capital structure of a firm includes bonds with a coupon rate of 12% and an effective interest rate is 14%. The corporate tax rate is 30%. What is the firm's net cost of debt? | Net cost of debt is computed as the effective interest rate net of tax or 14%x.70 = 9.8%.? is tricking you into using 12%coupon vs the eff. interest rate. The coupon rate is used only if it is the same as the eff. int rate & there are no flotation costs. |
| The benefits of debt financing over equity financing are likely to be highest in which of the following situations? | The benefits of debt financing over equity financing are likely highest if marginal tax rates are high (because int on debt is ded for tax purposes)& if there are few noninterest tax benefits (bc there is little/no reason to depart from debt financing). |
| What is the formula for residual income? | Residual income is the difference between net income and the required return. The required return is net book value (total assets) times the hurdle rate (required rate of return). |
| The optimal capitalization for an organization usually can be determined by the: | The optimal capitalization for an organization usually can be determined by the lowest total weighted-average cots of capital (WACC). Capitalization at WACC serves to maximize shareholder's equity. |
| Which of the following factors is inherent in a firm's operations if it utilizes only equity financing? a. Financial risk. b. Business risk. c. Interest rate risk. d. Marginal risk. | B.Business risk represents the risk that might affect the shareholder value of that company. If an entity purely uses its own cumulative earnings in capitalizing its operations, it is exposed to the risks of its own unique circumstances. |
| The amount of inventory that a company would tend to hold in stock would decrease as: | b. Variability of sales decreases. c. Cost of running out of stock decreases. d. Length of time that goods are in transit decreases. |
| What is the formula for effective interest rate? | Annual Interest/Net Cash Available |
| The optimal level of inventory is affected by: | 1. The inventory usage rate. 2. The cost per unit of inventory - which will have a direct impact on inventory carrying costs. 3. The cost of placing on order impacts order frequency, which affects order size and optimal inventory levels. |
| In inventory management, the safety stock will tend to increase if the: a. Carrying cost increases. b. Cost of running out of stock decreases. c. Variability of lead-time increases. d. Fixed order cost decreases. | "c" is correct. If lead times became more variable, the amount of safety stock needed to reduce the risk of stock outs will increase. |
| Which of the following inventory management approaches orders at the point where carrying costs equate nearest to restocking costs in order to minimize total inventory cost? a.Economic order quantity b.Just-in-time c.Materials requirements planning d.ABC | The economic order quantity (EOQ) method of inventory control anticipates orders at the point where carrying costs are nearest to restocking costs. The objective of EOQ is to minimize total inventory costs. |
Created by:
sophanna