Fundamentals of Corporate Finance 3e Test Bank
Chapter 12: Evaluating Project Economics
1.
Total variable costs for a firm do not vary directly with the number of units sold.
A)
True
B)
False
Ans:
B
2.
A project with a higher proportion of fixed costs will have cash flows and accounting profits
that are more sensitive to changes in revenues than an otherwise identical project with a lower
proportion of fixed costs.
A)
True
B)
False
Ans:
A
3.
A synonym for pretax operating cash flow is EBIT.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
4.
Distinguishing between fixed and variable costs will enable one to calculate the sensitivity of
EBITDA to changes in revenue.
A)
True
B)
False
Ans:
A
5.
EBITDA is more sensitive to changes in revenue than EBIT.
A)
True
B)
False
Ans:
B
6.
Depreciation and amortization can be considered a fixed cost of the firm, for accounting break-
even purposes.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
7.
Operating leverage is a measure of the sensitivity of net income to changes in revenue.
A)
True
B)
False
Ans:
B
8.
The degree of pretax cash flow operating leverage will change for different levels of revenue.
A)
True
B)
False
Ans:
A
9.
If a firm’s degree of accounting operating leverage is 1.12, a 10 percent increase in revenue
should result in a 12.0 percent increase in EBIT.
A)
True
B)
False
Ans:
B
revenue, the increase in EBIT = 10% × 1.12 = 11.2%
Fundamentals of Corporate Finance 3e Test Bank
10.
If Tunemony Craft had an increase in EBIT of 24 percent with an degree of accounting
operating leverage of 1.2, then the firm must have had a 20 percent increase in revenue if no
other changes were involved.
A)
True
B)
False
Ans:
A
When EBIT had an increase of 24%, the increase in revenue = 24% ÷ 1.2 = 20%
11.
If The Tower of Pizza has a cash flow degree of operating leverage equal to 1.15, then a 20
percent increase in revenue should drive a 35 percent increase in pretax operating cash flow.
A)
True
B)
False
Ans:
B
1 percent change in revenue will result in 1.15% increase in the pretax operating cash flow.
1.15 = 23%.
12.
Taxes do not enter into the equation for the degree of cash flow of operating leverage because
both fixed costs and pretax operating cash flows are measured on a pretax basis.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
13.
If there is no uncertainty regarding costs, volatility in pretax operating cash flows and
accounting operating profits will be driven entirely by changes in revenue and operating
leverage.
A)
True
B)
False
Ans:
A
14.
Operating profits and operating cash flow describe the same item.
A)
True
B)
False
Ans:
B
15.
A firm that has zero fixed costs will have a degree of cash flow operating leverage equal to one.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
16.
An increase in the proportion of a project’s costs that are fixed will increase the degree of
operating leverage for the project.
A)
True
B)
False
Ans:
A
17.
Break-even analysis tells us how many units must be sold in order for a project to break even
on a cash flow or an accounting basis.
A)
True
B)
False
Ans:
18.
If a project fails to break even from a pretax operating cash flow perspective, then the firm is
going to put more cash into the project to keep it going.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
19.
The pretax operating cash flow (EBITDA) break-even point is determined by how many units
will have to be sold in order to cover the firms fixed cash expenses.
A)
True
B)
False
Ans:
A
20.
The per-unit contribution margin is defined as the total sales price less its total variable cost.
A)
True
B)
False
Ans:
B
21.
The crossover level of unit sales is the level at which one fixed/variable cost combination of
production will begin to generate higher levels of operating cash flows than another
fixed/variable cost combination of production.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
22.
The crossover level of unit sales can be calculated for any two alternatives that have the same
level of operating leverage.
A)
True
B)
False
Ans:
B
23.
The accounting operating profit (EBIT) break-even point tells us how many units must be sold
to avoid an accounting operating loss.
A)
True
B)
False
Ans:
A
24.
The accounting operating profit break-even points are smaller than the corresponding pretax
operating cash flow break-even points for a project with positive costs.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
25.
An economic break-even point is the number of units that must be sold each year during the life
of the project so that the difference of present value of cash inflows and present value of cash
outflows is one.
A)
True
B)
False
26.
The economic break-even point considers a single year rather than the entire life.
A)
True
B)
False
Ans:
B
27.
The economic break-even point focuses on the cash flows or profits from operations rather than
after-tax free cash flows associated with the project.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
28.
The NPV of a project will equal $0 when the present value of the annual FCFs from the project,
PV (FCF), equals the present value of net nonrecurring investments.
A)
True
B)
False
Ans:
A
29.
An analysis in which a firm would like to know the effect of a price change on the NPV of a
project, holding all other variables and forecasts constant, is one type of sensitivity analysis.
A)
True
B)
False
Ans:
A
30.
If a firm knows that a price change will have an effect on a number of other forecast variables,
such as the sales forecast, then the firm might require scenario analysis rather than sensitivity
analysis.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
31.
Within a simulation analysis, the firm will need to come up with some distributional
assumptions concerning the forecast inputs, such as the mean and variance of the sales forecast.
A)
True
B)
False
Ans:
A
32.
Simulation analysis has the benefit of providing a pinpoint accurate forecast of a project’s NPV.
A)
True
B)
False
Ans:
B
33.
Sensitivity analysis involves examining the sensitivity of the output from an analysis, such as
the NPV to changes in individual assumptions.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
34.
The economic break-even point focuses on the after-tax free cash flows associated with the
project for its entire life.
A)
True
B)
False
Ans:
A
35.
EBITDA stands for:
A)
earnings before interest, taxes, and amortized depreciation.
B)
earnings before interest, taxes, depreciation, and amortization.
C)
earnings before interest and taxes.
D)
earnings before interest, taxes, dividend, and accrued expenses.
Ans:
B
36.
Revenue minus variable and fixed costs best describes:
A)
EBIT.
B)
EBITDA.
C)
NOPAT.
D)
EAT.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
37.
Another name for EBITDA is:
A)
pretax operating cash flow.
B)
accounting operating cash flow.
C)
net income before tax.
D)
net income after tax.
Ans:
A
38.
Compared to an identical project with a lower proportion of fixed costs, a project with a higher
proportion of fixed costs will have:
A)
a higher degree of sensitivity of EBITDA to a change in revenues.
B)
a lower degree of sensitivity of EBITDA to a change in revenues.
C)
no discernible difference of a change in sensitivity of EBITDA to a change in revenues.
D)
a stable net income stream as a function of revenues.
Ans:
A
39.
If a firm is about to operate in an environment in which there will be a great deal of variability
in the level of revenues, then the firm:
A)
should structure its cost structure to have high fixed costs and higher total variable costs.
B)
should structure its cost structure to have high fixed costs and consequently lower per
unit variable costs.
C)
should structure its cost structure to have low fixed costs and consequently higher per
unit variable costs.
D)
should leave the cost structure unchanged.
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
40.
The degree of pretax cash flow operating leverage provides us with:
A)
a measure of how sensitive pretax operating cash flows are to changes in revenue.
B)
a measure of how sensitive accounting operating profits are to changes in revenue.
C)
a measure of how sensitive NOPAT is to changes in tax rates.
D)
a measure of how sensitive accounting operating profits are to changes in tax rates.
Ans:
A
41.
_____ is a measure of the sensitivity of EBITDA or EBIT to changes in revenue.
A)
Total leverage
B)
Financial leverage
C)
Operating leverage
D)
Combined leverage
Ans:
C
42.
Depreciation and amortization are treated like fixed costs:
A)
in the calculation of the degree of pretax cash flow operating leverage.
B)
in the calculation of the degree of accounting operating leverage.
C)
for cash flow purposes.
D)
for computing dividend.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
43.
If the degree of accounting operating leverage is 1.3 for a firm, then a 10 percent increase in
revenue should drive a:
A)
12% increase in pretax operating cash flows.
B)
13% increase in EBIT.
C)
30% increase in EBIT.
D)
1.3% increase in pretax operating cash flows.
Ans:
B
44.
Which of the following statements is true?
A)
The degree of pretax cash flow operating leverage remains same for any level of
revenue.
B)
The higher the proportion of fixed costs to variable costs in a project, the greater the
sensitivity of pre-tax operating cash flows to changes in revenue.
C)
Depreciation and amortization are deducted to get pretax operating cash flows.
D)
The lower the proportion of fixed costs to variable costs in a project, the more pre-tax
operating cash flows will vary as revenue varies.
Ans:
B
45.
The higher a project’s operating leverage, _____.
A)
the lower the sensitivity of EBIT to changes in revenue
B)
the greater the sensitivity of EBITDA to changes in revenue
C)
the lower the sensitivity of net profit to changes in variable costs
D)
the greater the sensitivity of net profit to changes in variable costs
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
46.
Which is the term used to define how many units must be sold for pre-tax operating cash flow
to be equal to zero?
A)
Pre-tax accounting operating profit break-even point
B)
Pre-tax operating financial leverage break-even point
C)
Pre-tax accounting sensitivity break-even point
D)
Pre-tax operating cash flow break-even point
Ans:
D
47.
Which of the following differentiates accounting operating profit break-even point from pre-tax
operating cash flow break-even point?
A)
Accounting operating profit break-even point includes interest expense in the numerator,
whereas pre-tax operating cash flow does not.
B)
Pre-tax operating cash flow break-even point includes income taxes in the denominator,
whereas accounting operating profit break-even point does not.
C)
Accounting operating profit break-even point includes depreciation & amortization in the
numerator, whereas pre-tax operating cash flow does not.
D)
Pre-tax operating cash flow break-even point includes interest expense in the numerator,
whereas accounting operating profit break-even point does not.
Ans:
C
48.
The economic break-even point is the number of units that must be sold each year over the life
of a project in order for the NPV of that project to equal to _____.
A)
$0
B)
$1
C)
the present value of cash inflows
D)
the present value of investment
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
49.
The difference between revenue and variable cost is called:
A)
total contribution.
B)
net profit.
C)
EBIT.
D)
EAT.
Ans:
A
50.
Which of the following statements is true of the economic break-even point?
A)
It is the number of units that must be sold for accounting operating profit to equal $0.
B)
It is the level of unit sales at which cash flows or profitability for one project alternative
switches from being lower than that of another alternative to being higher.
C)
It is the number of units that must be sold each year during the life of a project so that the
NPV of a project equals $0.
D)
It is the number of units that must be sold for pretax operating cash flow to be $0.
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
51.
Sancore Inc. decided to invest in a project costing $35,000. It is assumed that all of $8,000
working capital will be recovered at the end of the project, which is four years. The opportunity
cost of capital is 10%. Compute the present value of net non-recurring investment of the
project. (Do not round intermediate calculation. Round the final answer to the nearest dollar.)
A)
$36,713
B)
$45,657
C)
$46,713
D)
$35,657
Ans:
C
52.
Astroscope Tours finds that if it were to increase its price by 10 percent, it would have a 6
percent reduction in the NPV of its new 3-Hour Tour. Considering other things to be
unchanged, Astroscope’s analysis could be described as:
A)
Monte Carlo simulation.
B)
break-even analysis.
C)
sensitivity analysis.
D)
variance analysis.
Ans:
Fundamentals of Corporate Finance 3e Test Bank
IMA: Business Economics
53.
If a firm were interested in knowing the effect of a single input change on the net present value
of a project, then the firm would most likely want to perform:
A)
a Monte Carlo simulation.
B)
a scenario analysis.
C)
a sensitivity analysis.
D)
a break-even analysis.
Ans:
C
54.
If a firm wanted to find the effect of a change in the variable cost per unit of production on the
net present value of a project, then the firm might perform:
A)
a sensitivity analysis.
B)
a scenario analysis.
C)
a Monte Carlo simulation.
D)
a cash flow simulation.
Ans:
A
55.
At times, when a firm is considering an alternative such that a set of variables affecting a
project are interrelated, then analysis that considers this interrelation could be performed. This
is called:
A)
a sensitivity analysis.
B)
a scenario analysis.
C)
a Monte Carlo simulation.
D)
a horizontal analysis.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
56.
A firm is considering two distinct set of circumstances that assume high inflation and low
inflation. In the high inflationary set of circumstances, the price per unit will be affected as well
as the variable and fixed costs. If the low-inflation set of circumstances is considered the
baseline, then the analysis concerning the high inflationary circumstances could be considered:
A)
a sensitivity analysis.
B)
a scenario analysis.
C)
a Monte Carlo simulation.
D)
a horizontal analysis.
Ans:
B
57.
Scenario analysis can help a firm to:
A)
understand the degree of uncertainty that a different set of project-affecting
circumstances may hold.
B)
eliminate all of the uncertainty that a different set of project-affecting circumstances may
hold.
C)
transform a risky project into a risk-free project.
D)
understand the degree of certainty that a similar set of project-affecting circumstances
may hold.
Ans:
A