ECO 550 Week 11 Final Exam
1. Capital expenditures:
a. are easily reversible
b. are forms of operating expenditures
c. Affect long-run future profitability
d. Involve only money, not machinery
e. none of the above
2. Any current outlay that is expected to yield a flow of benefits beyond one year in the future is:
a. a capital gain
b. a wealth maximizing factor
c. a capital expenditure
d. a cost of capital
e. a dividend reinvestment
3. If the acceptance of Project A makes it impossible to accept Project B, these projects are:
a. contingent projects
b. complementary projects
c. mutually inclusive projects
d. mutually exclusive projects
e. none of the above
4. Which of the following is (are) a guideline(s) to be used in the estimation of cash flows?
a. cash flows should be measured on an incremental basis
b. cash flows should be measured on an after-tax basis
c. all the indirect effects of the project should be included
d. all of the above
e. none of the above
5. In order to help assure that all relevant factors will be considered, the capital-expenditure selection process should include the following steps except:
a. generating alternative capital-investment project proposals
b. estimating cash flows for the project proposals
c. reviewing the investment projects after they have been implemented
d. allocate manpower to the various divisions within the firm
e. a and d
6. Which of the following would not be classified as a capital expenditure for decision-making purposes?
a. purchase of a building
b. investment in a new milling machine
c. purchase of 90-day Treasury Bills
d. investment in a management training program
e. all of the above are capital expenditures
7. The decision by the Municipal Transit Authority to either refurbish existing buses, buy new large buses, or to supplement the existing fleet with mini-buses is an example of:
a. independent projects
b. mutually exclusive projects
c. contingent projects
d. separable projects
e. none of the above
8. Which of the following is (are) a basic principle(s) when estimating a project's cash flows?
a. cash flows should be measured on a pre-tax basis
b. cash flows should ignore depreciation since it is a non-cash charge
c. only direct effects of a project should be included in the cash flow calculations
d. cash flows should be measured on an incremental basis
e. all of the above
9. Which of the following items is (are) not considered as part of the net investment calculation?
a. installation and shipping charges
b. acquisition cost of new asset
c. salvage value of old equipment that is being replaced
d. first year's net cash flow
e. c and d
10. The relationship between NPV and IRR is such that :
a. both approaches always provide the same ranking of alternatives
b. the IRR of a project is equal to the firm's cost of capital when the NPV of a project is $0
c. if the NPV of a project is negative, then the IRR must be greater than the cost of capital
d. all of the above
e. none of the above
11. GE Appliance Division believes which of the following warrants shifting assembly of appliances back from Shanghai to Louisville, KY:.
a. The negotiation of a two-tiered wage structure for union labor,
b. Faster innovations when product design engineers and assembly line team leaders are located in the same place,
c. quicker delivery to retail dealers reduce inventory storage
d. none of the above,
e. all of the above.
12. The cost of capital can be thought of as the rate of return required by investors in the firm's securities.
a. true
b. false
13. In cost of capital calculations, the flotation cost on new debt is usually ignored because the flotation cost percentage for large debt issues is relatively low.
a. true
b. false
14. The cost of internal equity (retained earnings) is ____ the cost of external equity (new common stock).
a. greater than
b. equal to
c. less than
15. The expected rate of return from a share of stock consists of:
a. a dividend return
b. capital appreciation (or depreciation)
c. interest
d. a and b only
e. a, b, and c
16. The weights used in calculating the firm's weighted-average cost of capital are equal to the proportion of debt and equity ____.
a. used to finance the project
b. used to finance the projects undertaken last year
c. in the industry average capital structure
d. in the firm's target capital structure
e. none of the above
17. In determining the optimal capital budget, one should choose those project's whose ____ exceeds the firm's ____ cost of capital.
a. internal rate of return, average
b. internal rate of return, marginal
c. internal rate of return, historic
d. average rate of return, marginal
e. none of the above
18. In the constant-growth dividend valuation model, the required rate of return on common stock (i.e., cost of equity capital) can be shown to be equal to the sum of the dividend yield plus the ____.
a. yield-to-maturity
b. present value yield
c. risk-free rate
d. dividend growth rate
e. none of the above
19. The ____ depicts the risk-return relationship in the market for all securities:
a. characteristic line
b. security market line
c. investment opportunity curve
d. marginal cost of capital schedule
e. none of the above
20. Beta in the CAPM is ____.
a. one measure of the systematic risk of a stock
b. estimated as the slope of a regression line between an individual security's returns and returns for the market index.
c. useful in estimating the firm's cost of debt capital
d. a and b only
e. a, b, and c
21. The effect of changes in the level of interest rates on security returns is an example of ____.
a. systematic risk
b. unsystematic risk
c. nondiversifiable risk
d. a and c only
e. b and c only
22. The ____ method assumes that the cash flows over the life of the project are reinvested at the ____.
a. net present value; computed internal rate of return
b. internal rate of return; firm's cost of capital
c. net present value; firm's cost of capital
d. net present value; risk-free rate of return
e. none of the above
23. All of the following except ____ are shortcomings of cost-benefit analysis.
a. difficulty in measuring third-party costs
b. difficulty in measuring third-party benefits
c. failure to consider the time value of benefits and costs
d. difficulty of accounting for program interactions
e. a and b
24. Which of the following should not be counted in a cost-benefit analysis?
a. direct benefits and costs
b. real secondary benefits
c. technological secondary costs
d. pecuniary benefits
e. intangibles
25. The social rate of discount is best approximated by:
a. the cost of government borrowing
b. the opportunity cost of resources taken from the private sector
c. 3 percent
d. 30 percent
e. none of the above
26. In cost-effectiveness analysis, constant cost studies:
a. are rarely used
b. attempt to specify the output which may be achieved from a number of alternative programs, assuming all are funded at the same level
c. are useless because they fail to adequately evaluate program benefits
d. try to find the least expensive way of achieving a certain objective
e. none of the above
27. Cost-benefit analysis is the public sector counterpart to ____ used in private, profit-oriented firms.
a. ratio analysis
b. break-even analysis
c. capital budgeting techniques
d. economic forecasting
e. none of the above
28. Direct costs of a public sector investment project are generally easier to measure than the direct benefits.
a. true
b. false
29. In calculating the benefit-cost ratio, social benefits and costs are discounted at the
a. internal rate of return
b. federal funds rate
c. Treasury Bill rate
d. long-term government bond rate
e. none of the above
30. The discount rate utilized in public sector budgeting performs the functions of:
a. allocating funds between the public and private sectors
b. allocating funds between present consumption and investment (i.e., future consumption)
c. allocating funds between debt and equity securities
d. a and b only
e. none of the above
31. In cost-benefit analysis, a low discount rate tends to favor projects with relatively ____ lives.
a. short
b. long
32. The social discount rate used in cost-benefit analysis is equal to a weighted average of the Treasury Bill rate and the long-term government borrowing rate.
a. true
b. false
33. Public sector investment projects are economically justifiable only when:
a. the discounted social benefits exceed the discounted social costs
b. the internal rate of return exceeds the social discount rate
c. the benefit-cost ratio exceeds zero
d. a and b only
e. a, b, and c
1. Differentiate the following TC function: TC = 150 + 200 Q - 4 Q2 + .6 Q3
a. dTC/dQ = 200 - 8Q + 1.8 Q2
b. dTC/dQ =-8 + 1.8 Q2
c. dTC/dQ = 200
d. dTC/dQ = 200 - 4Q + .6Q2
e. dTC/dQ = 1.8 Q2
2. The total revenue function (where Q = output), is: TR = 400 Q - 4 Q2
a. TR is maximized at Q = 20
b. TR is maximized at Q = 30
c. TR is maximized at Q = 40
d. TR is maximized at Q = 50
e. TR is maximized at Q = 60
3. The following is a cubic demand function in P. Find the derivative dQ/dP of: Q= 4+3P-.5P2 + .02P3.
a. dQ/dP = 4 + 3P – P + .06P2
b. dQ/dP = 3
c. dQ/dP = 3 – P + .06P2
d. dQ/dP = .06P2
e. dQ/dP = .06
4. If the first derivative of Y with respect to X is: dY/dX = -4•X2, then the second derivative is:
a. -4
b. -8•X
c. -4•X
d. -8•X2
e. -8
5. The second derivative of the function (d2Y/dX2 ) is negative at the optimal solution of X=22. Therefore, we know that the solution X=22, where the first derivative equals zero…
a. must be a minimum.
b. must be a maximum.
c. may be either a maximum or a minimum.
d. would be nothing, because the second derivative is negative.
6. Differentiate the following function with respect to Q: TC = 50 + 100Q -6Q2 +.5Q3
a. dTC/dQ = 50 + 100 -6Q + .5Q2
b. dTC/dQ = 100 -12Q + 1.5Q2
c. dTC/dQ = 50 + 100 -2Q + 3Q2
d. dTC/dQ = 100
The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.
Answer
percentage; sales; percentage; EBIT
unit; sales; unit; EBIT
percentage; EBIT; percentage; sales
unit; EBIT; unit; sales
The short-run cost function is:
Answer
where all inputs to the production process are variable
relevant to decisions in which one or more inputs to the production process are fixed
not relevant to optimal pricing and production output decisions
crucial in making optimal investment decisions in new production facilities
Theoretically, in a long-run cost function:
Answer
all inputs are fixed
all inputs are considered variable
some inputs are always fixed
capital and labor are always combined in fixed proportions
Evidence from empirical studies of long-run cost-output relationships lends support to the:
Answer
existence of a non-linear cubic total cost function
hypothesis that marginal costs first decrease, then gradually increase over the normal operating range of the firm
hypothesis that total costs increase quadratically over the ranges of output examined
hypothesis that total costs increase linearly over some considerable range of output examined
In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:
Answer
one minus the variable cost ratio
contribution margin per unit
selling price per unit
standard deviation of unit sales
In a study of banking by asset size over time, we can find which asset sizes are tending to become more prominent. The size that is becoming more predominant is presumed to be least cost. This is called:
Answer
regression to the mean analysis.
breakeven analysis.
survivorship analysis.
engineering cost analysis.
a Willie Sutton analysis
Buyers anticipate that the temporary warehouse seller of unbranded computer equipment will
Answer
deliver high quality products consistent with expectations
not attempt to establish any warranty enforcement mechanisms
offer several prices and qualities
produce only one quality
In the long-run, firms in a monopolistically competitive industry will
Answer
earn substantial economic profits
tend to just cover costs, including normal profits
seek to increase the scale of operations
seek to reduce the scale of operations
In the short-run for a purely competitive market, a manufacturer will stop production when:
Answer
the total revenue is less than total costs
the contribution to fixed costs is zero or less
the price is greater than AVC
operating at a loss
A firm in pure competition would shut down when: