Which one of the following is not a characteristic of a negotiable certificate of deposit?
Negotiable certificates of deposit
Answer : D
A certificate of deposit (CD) is a form of savings deposit that cannot be withdrawn before maturely without incurring a high penalty. A negotiable CD can be traded. CDs usually have a fairly high rate of return compared with other savings instruments because they are for fixed, usually long-term periods. However, their yield is 1less than that of commercial paper and bankers' acceptances because they are less risky.
Question 2
The following forecasts have been prepared for a new investment by Oxford Industries of $20 million with an 8-year life:
Assume that Oxford employs straight-line depreciation, and that they are taxed at 35%. Assuming an opportunity cost of capital of 14%, what is the NPV of this project, based on expected outcomes?
Answer : B
The first step is to calculate the annual cash flows from the project for the base case (the expected values). These may be calculated as shown:
This level of cash flow occurs for each of the 8 years of the project. The present value of an 8-year, $1 annuity is 4.639 at 14%. The NPV of the project is therefore given by:
Question 3
In an insourcing vs. outsourcing decision1 the decision process favors the use of total costs rather than unit costs. The reason is that
Answer : D
Unit costs should be used with extreme care. In each situation, they may be calculated based on a different volume level from that anticipated, so comparability may be lost. Irrelevant costs included in the unit cost should be disregarded; only relevant costs should be included in the analysis. Allocated costs should also be ignored, and only the relevant costs that will change with the option chosen should be considered.
Question 4
Alberto Corp. has common and preferred shares outstanding with the following characteristics:
Alberto Corp. has earnings per share of
Answer : C
EPS equals the income available for distribution to common shareholders divided by the number of common shares outstanding, or $4.00 [($250,000 NI - $50,000 preferred dividends) 50,000 common shares]
Question 5
The tax impact of equipment depreciation affects capital budgeting decisions. Currently, the Modified Accelerated Cost Recovery System (MACRS) is used as the depreciation method for most assets for tax purposes. The MACRS method of depreciation for assets with 3, 5. 7. and 1 0-year recovery periods is most similar to which one of the following depreciation methods used for financial reporting purposes?
Answer : D
MACRS for assets with lives of 10 years or less is based on the 200% declining-balance method of depreciation. Thus, an asset with a 3-year life would have a straight-line rate of 33-113%. or a double- declining-balance rate of 66-2/3%.
Question 6
In Michael F. Porter's model of the value creation chain1 the primary activities include
Answer : A
The model consists of primary and supporting activities. The primary activities are inbound logistics, operations, outbound logistics, marketing and sales, and service. Inbound logistics activities involve the firms' capture of materials to be processed. Operations activities are conversion processes. Outbound logistics activities include shipment of products. Marketing and sales activities are the promotion and sale of final products. Service activities provide customer service. The four support activities are infrastructure (e.g., administration, finance, and planning), procurement, human resources, and technology development. --- ---
Question 7
Tonya, Inc. has a cost of capital of 15% and is considering the acquisition of a new machine that costs $800,000 and has a useful life of 5 years. Tonya projects that earnings and cash flow will increase as follows:
Interest rate factors at 15% are as follows:
The net present value of this investment is
Answer : C
The NPV is calculated by discounting the after-tax cash flows from an investment by the cost of capital:
Subtracting the $800,000 initial cost from the $837,200 present value of the future inflows produces an NPV of $37,200.
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