Finance Timed Exam Quiz

Question 1
1. Multinational financial management requires that
 
 the effects of changing currency values be included in financial analyses.
 
 legal and economic differences need not be considered in financial decisions because these differences are insignificant.
 
 political risk should be excluded from multinational corporate financial analyses.
 
 traditional U.S. and European financial models incorporating the existence of a competitive marketplace not be recast when analyzing projects in other parts of the world.
 
 cultural differences need not be accounted for when considering firm goals and employee management.

Question 2
1. Fool Proof Software is considering a new project whose data are shown below.  The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4.  Revenues and other operating costs are expected to be constant over the project’s 10-year expected life.  What is the Year 1 cash flow?
Equipment cost (depreciable basis) $59,000
Sales revenues, each year $60,000
Operating costs (excl. depr.) $25,000
Tax rate 35.0%
 
   $26,312
   $34,590
   $29,565
   $28,973
   $33,112

 
Question 3
1. If one U.S. dollar buys 0.9875 Canadian dollars, how many U.S. dollars can you purchase for one Canadian dollar?

 
 0.8203
 
 1.0532
 
 1.0937
 
 0.9418
 
 1.0127

 
Question 4
1. Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the U.S. dollar and the euro is $1.00 = 0.50 euro.  What is the cross rate of Swiss francs to euros?
 
 0.3688
 
 0.4113
 
 0.3546
 
 0.3830
 
 0.4433

 
Question 5
1. As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with the following data.  What is the Year 1 cash flow?
Sales revenues $13,600
Depreciation $4,000
Other operating costs $6,000
Tax rate 35.0%
 
   $6,340
   $5,896
   $7,671
   $5,579
   $7,481

 

Question 6
1. Which of the following statements is CORRECT?
 
 An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.
 
 Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.
 
 A good example of a sunk cost is a situation where a bank opens a new office, and that new office leads to a decline in deposits of the bank’s other offices.
 
 A good example of a sunk cost is money that a banking corporation spent last year to investigate the site for a new office, then expensed that cost for tax purposes, and now is deciding whether to go forward with the project.
 
 If sunk costs are considered and reflected in a project’s cash flows, then the project’s calculated NPV will be higher than it otherwise would have been had the sunk costs been ignored.

 
Question 7
1. One year ago, a U.S. investor converted dollars to yen and purchased 100 shares of stock in a Japanese company at a price of 3,150 yen per share. The stock’s total purchase cost was 315,000 yen.  At the time of purchase, in the currency market 1 yen equaled $0.00952.  Today, the stock is selling at a price of 3,465 yen per share, and in the currency market $1 equals 130 yen.  The stock does not pay a dividend.  If the investor were to sell the stock today and convert the proceeds back to dollars, what would be his realized return on his initial dollar investment from holding the stock?

 
 a.   2.97%

 
 b.   1.15%

 
 c. – 3.71%

 
 d. – 9.19%

 
 e. -11.12%

 

 

Question 8
1. A company is considering a new project.  The CFO plans to calculate the project’s NPV by estimating the relevant cash flows for each year of the project’s life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flows), then discounting those cash flows at the company’s overall WACC.  Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows?
 
 All sunk costs that have been incurred relating to the project.
 
 All interest expenses on debt used to help finance the project.
 
 The additional investment in net operating working capital required to operate the project, even if that investment will be recovered at the end of the project’s life.
 
 Sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year.
 
 Effects of the project on other divisions of the firm, but only if those effects lower the project’s own direct cash flows.

  
Question 9
1. If one British pound can purchase $1.90 U.S. dollars, how many British pounds can one U.S. dollar buy?
 
 0.4947
 
 0.6105
 
 0.4053
 
 0.5263
 
 0.4579

Question 10
1. Your company, RMU Inc., is considering a new project whose data are shown below.  What is the project’s Year 1 cash flow?
Sales revenues $25,500
Depreciation $8,000
Other operating costs $12,000
Tax rate 35.0%
 
   $13,196
   $11,691
   $9,955
   $11,575
   $10,186

  
Question 11
1. A currency trader observes the following quotes in the spot market:
1 U.S. dollar     =  83.0000 Japanese yen
1 British pound  = 2.2500 Swiss francs
1 British pound  = 1.6500 U.S. dollars
  

Given this information, how many yen can be purchased for 1 Swiss franc?
 
 61.4753
 
 51.1280
 
 57.8233
 
 49.3020
 
 60.8667

Question 12
1. Temple Corp. is considering a new project whose data are shown below.  The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value.  No change in net operating working capital would be required.  Revenues and other operating costs are expected to be constant over the project’s 3-year life.  What is the project’s NPV?
Risk-adjusted WACC 10.0%
Net investment cost (depreciable basis) $65,000
Straight-line depr. rate 33.3333%
Sales revenues, each year $63,500
Annual operating costs (excl. depr.) $25,000
Tax rate 35.0%
 
   $12,551
   $12,712
   $12,069
   $16,092
   $14,000

 
Question 13
1. Suppose one British pound can purchase 1.82 U.S. dollars today in the foreign exchange market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over the next 30 days.  How many dollars will a pound buy in 30 days?
 
 $1.4860
 
 $1.6511
 
 $1.8346
 
 $2.0384
 
 $2.2422

Question 14
1. Which of the following statements is CORRECT?
 
 Since depreciation is a cash expense, the faster an asset is depreciated, the lower the projected NPV from investing in the asset.
 
 Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
 
 Corporations must use the same depreciation method for both stockholder reporting and tax purposes.
 
 Using accelerated depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a project’s forecasted NPV.
 
 Using accelerated depreciation rather than straight line normally has the effect of slowing down cash flows and thus reducing a project’s forecasted NPV.

 
Question 15
1. Which of the following are reasons why companies move into international operations?

 
 a.     To take advantage of lower production costs in regions of inexpensive labor.

 
 b.     To develop new markets for their finished products.

 
 c.     To better serve their primary customers.

 
 d.     Because important raw materials are located abroad.

 
 e.     All of the statements above are correct.

 

Question 16
1. A company is considering a proposed new plant that would increase productive capacity.  Which of the following statements is CORRECT?
 
 In calculating the project’s operating cash flows, the firm should not deduct financing costs such as interest expense, because financing costs are accounted for by discounting at the WACC.  If interest were deducted when estimating cash flows, this would, in effect,  “double count” it.
 
 Since depreciation is a non-cash expense, the firm does not need to deal with depreciation when calculating the operating cash flows.
 
 When estimating the project’s operating cash flows, it is important to include both opportunity costs and sunk costs, but the firm should ignore the cash flow effects of externalities since they are accounted for in the discounting process.
 
 Capital budgeting decisions should be based on before-tax cash flows because WACC is calculated on a before-tax basis.
 
 The WACC used to discount cash flows in a capital budgeting analysis should be calculated on a before-tax basis. To do otherwise would bias the NPV upward.

Question 17
1. If one Swiss franc can purchase $0.85 U.S. dollars, how many Swiss francs can one U.S. dollar buy?
 
 1.2588
 
 1.1765
 
 1.3647
 
 1.2471
 
 1.0824

Question 18
1. Rowell Company spent $3 million two years ago to build a plant for a new product.  It then decided not to go forward with the project, so the building is available for sale or for a new product.  Rowell owns the building free and clear–there is no mortgage on it.  Which of the following statements is CORRECT?
 
 Since the building has been paid for, it can be used by another project with no additional cost.  Therefore, it should not be reflected in the cash flows of the capital budgeting analysis for any new project.
 
 If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it.
 
 This is an example of an externality, because the very existence of the building affects the cash flows for any new project that Rowell might consider.
 
 Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects.
 
 If there is a mortgage loan on the building, then the interest on that loan would have to be charged to any new project that used the building.

Question 19
1. Which of the following statements is CORRECT?
 
 A sunk cost is any cost that must be expended in order to complete a project and bring it into operation.
 
 A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project.
 
 A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.
 
 Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the project’s NPV.
 
 A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firm’s existing stores.

Question 20
1. If the peso is worth $.07, and the Canadian dollar(C$) is worth $.70, what is the value of the peso in Canadian dollars(C$)?

 
 a.C$ 70
 
 b.C$.10
 
 C$10
 
 C$7
 
 C$1.0

 

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