When making financial projections, if a particular expense item cannot be predicted with any degree of confidence, it should be forecast at the most likely value it would ever likely reach.

True

False

FRICTO analysis does not point out poor investments.

True

False

If a company consistently uses hurdle rates that are higher than its marginal cost of capital, then:

A) it will certainly increase its earnings.

B) it may have fewer and fewer investment alternatives.

C) the risk of the firm will decrease.

D) A and C.

E) B and C.

The ratio which many observers use to quantify the stock market’s opinion of a firm is the:

A) ROE.

B) EPS.

C) D/E.

D) E/A.

E) none of the above.

Dividends are not the sole source of returns for shareholders.

True

False

The advantage of using the marginal cost of capital as a company’s average hurdle rate is:

A) capital market estimations of risk are probably more objective than the company’s.

B) it does not reflect the incremental cost of funding future investments.

C) it is the basis of the market’s assessments of a company’s investment decisions.

D) A and C.

E) A, B, and C.

A target cost of capital is:

A) always implied unless the term existing or current is used.

B) the capitalization that management is shooting for.

C) the capitalization that will result before an asset is financed.

D) A and B.

E) A, B, and C.

The final step(s) in using pro formas are to:

A) test the assumptions.

B) compare the results of the sensitivity analysis to the decision maker’s risk tolerance in the current situation.

C) create best- and worst-case scenarios.

D) A and C.

E) A, B, and C.

The utility of sensitivity analysis is as great in merger valuations as it is in capital budgeting.

True

False

NPV is the preferred method for ranking investments because:

A) it quantifies the proportion of cash flows to initial investment.

B) it directly measures the creation of value.

C) it is sensitive to changes in the hurdle rate assumption.

D) A and B.

E) B and C.

Qualitative comparisons may be as important as the numerical comparisons in financial analysis.

True

False

A valuation determines whether a merger should occur; legalities determine what form the business combination should be.

True

False

As the interest rate used to discount future cash flows is decreased, present value of the future cash inflows:

A) increases.

B) decreases.

C) stays the same.

For capital budgeting purposes, an asset’s depreciable life is:

A) always equal to the time horizon of an evaluation.

B) equal to the asset’s useful life.

C) equal to the asset’s economic life.

D) an arbitrary period dictated by GAAP.

E) none of the above.

Residual cash flows are estimated when:

A) the useful lives of alternatives are different.

B) one asset has a shorter economic life than its alternatives.

C) one asset has a longer economic life than its alternatives.

D) A and B.

E) A, B, and C.

It is not impossible for the acquisition price of a target firm ever to fall below book value.

True

False

The risk-free rate of return used to determine a firm’s cost of capital will not vary depending upon the financial and operating risk level of the firm.

True

False

If an investment’s IRR is higher than the firm’s chosen hurdle rate, then the investment:

A) has a positive NPV.

B) is of greater risk than the overall risk of the firm.

C) should be qualitatively considered before selection.

D) A and C.

E) A, B, and C.

A firm’s dividend policy cannot be established independently of its growth plans.

True

False

A discount factor:

A) is the same as compounding future cash flows.

B) performs the reverse function of a compounding interest rate.

C) allows investors to quantify a figure which would make them indifferent to returns from an investment.

D) B and C.

E) A, B, and C.

Which of the following would be included among the investment numbers of a capital budget?

A) Purchase price of the asset.

B) Trade-in value of an asset being replaced.

C) Investment tax credit from acquisition.

span style=”font-size: 9pt; font-family: Arial, sans-serif;”>D) Installation costs of the machinery.

E) All of the above.

Many analysts prefer the quick ratio to the current ratio because the former compares only cash equivalents to current liabilities.

True

False

Flexibility issues are those which:

A) deal with a company’s financing reserves.

B) impact the debt capacity that a firm should maintain.

C) All of the above.

A future feasibility study to determine the environmental impact of a planned investment should be included in the incremental cash flows of an investment analysis.

True

False

If managers do not foresee investment opportunities in the coming year that are as attractive as they have seen in the past, it is not necessarily appropriate to raise the dividend to the level that mature companies pay.

True

False

Analysts within a company are less likely to fall into the ‘false accuracy trap’ when they develop pro formas than would external analysts because insiders have access to more detailed information.

True

False

Financial strength ratios indicate a firm’s capitalization.

True

False

Horizontal and vertical percentage trends are not particularly useful in projecting future financial statements.

True

False

The ‘efficient market’ theory seems to be reasonable because:

A) there are fewer financial analysts valuing securities.

B) there are hundreds of investors trying to make money from improperly valued securities, and the market forces which result drive stock prices to a fair value.

C) statistical assessments are becoming increasingly important in financial analysis.

D) B and C.

E) A, B, and C.

The most accurate pro formas do not necessarily contain the most detail.

True

False

It is best when evaluating mergers to rely on several quantitative methods.

True

False

If managers have discovered an attractive investment but financing opportunities are not as good as they have been, they should probably not delay the acquisition since financing and investment decisions should not be mixed.

True

False

Management can improve its ROA by increasing investments in property, plant, and equipment.

True

False

Hypotheses that are formed during the qualitative analysis cannot be verified when the analyst reviews the firm’s historical performance.

True

False

Present value calculations allow managers to:

A) choose assets which create the most value, even if their cash flows are timed differently.

B) express present values in terms of future cash flows.

C) create value for the firm.

D) A and C.

E) A, B, and C.

In order to use a cash flow in perpetuity as a residual value for an asset, it must be reasonably assumed that the cash flows from that asset have not leveled off.

True

False

The present value of a cash flow allows an investor to assess:

A) the present value of a future cash flow.

B) the value of a stream of cash flows in terms of the best and most certain alternative.

C) what equivalent present payment would be equally acceptable in lieu of the investment under consideration.

D) A and B.

E) A, B, and C.

Even though accounting practices vary, comparisons between a firm and its industry as a whole are considered helpful.

True

False

More detail in a pro forma doesn’t necessarily mean greater accuracy.

True

False

A firm with substantial fixed costs such as a manufacturing overhead will have a lower degree of risk in the trough of a business cycle than will a firm with high variable costs and limited fixed costs.

True

False