Question 1  Which one of the following is not an ownership right of a stockholder in a corporation? To share in assets upon liquidation. To share in corporate earnings. To declare dividends on the common stock. To vote in the election of directors. Question 2  A corporation has the following account balances: Common stock, $1 par value, $30,000; Paid-in Capital in Excess of Par Value, $1,350,000. Based on this information, the average price per share issued is $4.60. number of shares outstanding are 1,380,000. number of shares issued are 30,000. legal capital is $1,380,000. Question 3  If stock is issued for a noncash asset, the asset should be recorded on the books of the corporation at fair market value. a nominal amount. cost. zero. Question 4  Which of the following represents the largest number of common shares? Outstanding shares Treasury shares Issued shares Authorized shares Question 5  A corporation purchases 20,000 shares of its own $20 par common stock for $35 per share, recording it at cost. What will be the effect on total stockholders' equity? Increase by $400,000 Increase by $700,000 Decrease by $700,000 Decrease by $400,000 Question 6  The acquisition of treasury stock by a corporation has no effect on total assets and total stockholders' equity. requires that a gain or loss be recognized on the income statement. increases its total assets and total stockholders' equity. decreases its total assets and total stockholders' equity. Question 7  Which of the following is not a right or preference associated with preferred stock? First claim to dividends. Preference to corporate assets in case of liquidation. The right to vote. To receive dividends in arrears before common stockholders receive dividends. Question 8  If preferred stock is cumulative, the preferred dividends not declared in a given year are called dividends in arrears. preferred shareholders and the common shareholders receive equal dividends. preferred shareholders and the common shareholders receive the same total dollar amount of dividends. common shareholders will share in the preferred dividends. Question 9  When common stock is issued for services or non-cash assets, cost should be either the fair market value of the consideration given up or the consideration received, whichever is more clearly evident. the book value of the common stock issued. only the fair market value of the consideration given up. only the fair market value of the consideration received. Question 10  Common Stock Dividends Distributable is classified as a(n) asset account. stockholders' equity account. expense account. liability account. Question 11  Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections: Total Assets Total Liabilities Total Stockholders' Equity Increase Decrease No change Decrease No change Increase No change Increase Decrease Decrease Increase Decrease Question 12  Which of the following show the proper effect of a s ...

1. Question 1
Which one of the following is not an ownership right of a
stockholder in a corporation?
To share in assets upon liquidation.
To share in corporate earnings.
To declare dividends on the common stock.
To vote in the election of directors.
Question 2
A corporation has the following account balances: Common
stock, $1 par value, $30,000; Paid-in Capital in Excess of Par
Value, $1,350,000. Based on this information, the
average price per share issued is $4.60.
number of shares outstanding are 1,380,000.
number of shares issued are 30,000.
legal capital is $1,380,000.
Question 3
If stock is issued for a noncash asset, the asset should be
recorded on the books of the corporation at
fair market value.
a nominal amount.
cost.
zero.
Question 4
Which of the following represents the largest number of
common shares?
Outstanding shares
Treasury shares
Issued shares
Authorized shares
Question 5
A corporation purchases 20,000 shares of its own $20 par
common stock for $35 per share, recording it at cost. What will
be the effect on total stockholders' equity?
Increase by $400,000

2. Increase by $700,000
Decrease by $700,000
Decrease by $400,000
Question 6
The acquisition of treasury stock by a corporation
has no effect on total assets and total stockholders' equity.
requires that a gain or loss be recognized on the income
statement.
increases its total assets and total stockholders' equity.
decreases its total assets and total stockholders' equity.
Question 7
Which of the following is not a right or preference associated
with preferred stock?
First claim to dividends.
Preference to corporate assets in case of liquidation.
The right to vote.
To receive dividends in arrears before common stockholders
receive dividends.
Question 8
If preferred stock is cumulative, the
preferred dividends not declared in a given year are called
dividends in arrears.
preferred shareholders and the common shareholders receive
equal dividends.
preferred shareholders and the common shareholders receive the
same total dollar amount of dividends.
common shareholders will share in the preferred dividends.
Question 9
When common stock is issued for services or non-cash assets,
cost should be
either the fair market value of the consideration given up or the
consideration received, whichever is more clearly evident.
the book value of the common stock issued.
only the fair market value of the consideration given up.
only the fair market value of the consideration received.
Question 10

3. Common Stock Dividends Distributable is classified as a(n)
asset account.
stockholders' equity account.
expense account.
liability account.
Question 11
Indicate the respective effects of the declaration of a cash
dividend on the following balance sheet sections:
Total Assets Total Liabilities Total Stockholders' Equity
Increase Decrease No change
Decrease No change Increase
No change Increase Decrease
Decrease Increase Decrease
Question 12
Which of the following show the proper effect of a stock split
and a stock dividend?
Item Stock Split Stock Dividend
Total paid-in capital Increase Increase
Total retained earnings Decrease Decrease
Total par value (common) Decrease Increase
Par value per share Decrease No change
Question 13
Restricting retained earnings for the cost of treasury stock
purchased is a
legal restriction.
contractual restriction.
stock restriction.
voluntary restriction.
Question 14
Retained earnings are occasionally restricted
to set aside cash for dividends.
due to contractual loan restrictions.
to keep the legal capital associated with paid-in capital intact.
if preferred dividends are in arrears
Question 15
Prior period adjustments

4. may only decrease retained earnings.
do not affect retained earnings.
may only increase retained earnings.
may either increase or decrease retained earnings.
Question 1
Which of the following statements is CORRECT?
Answer
For a project with normal cash flows, any change in the WACC
will change both the NPV and the IRR.
To find the MIRR, we first compound cash flows at the regular
IRR to find the TV, and then we discount the TV at the WACC
to find the PV.
The NPV and IRR methods both assume that cash flows can be
reinvested at the WACC. However, the MIRR method assumes
reinvestment at the MIRR itself.
If two projects have the same cost, and if their NPV profiles
cross in the upper right quadrant, then the project with the
higher IRR probably has more of its cash flows coming in the
later years.
If two projects have the same cost, and if their NPV profiles
cross in the upper right quadrant, then the project with the
lower IRR probably has more of its cash flows coming in the
later years.
2 points
Question 2
Which of the following statements is CORRECT?
Answer
If a project with normal cash flows has an IRR greater than the
WACC, the project must also have a positive NPV.
If Project A’s IRR exceeds Project B’s, then A must have the
higher NPV.
A project’s MIRR can never exceed its IRR.
If a project with normal cash flows has an IRR less than the
WACC, the project must have a positive NPV.

5. If the NPV is negative, the IRR must also be negative.
2 points
Question 3
Which of the following statements is CORRECT?
Answer
The regular payback method recognizes all cash flows over a
project’s life.
The discounted payback method recognizes all cash flows over
a project’s life, and it also adjusts these cash flows to account
for the time value of money.
The regular payback method was, years ago, widely used, but
virtually no companies even calculate the payback today.
The regular payback is useful as an indicator of a project’s
liquidity because it gives managers an idea of how long it will
take to recover the funds invested in a project.
The regular payback does not consider cash flows beyond the
payback year, but the discounted payback overcomes this
defect.
2 points
Question 4
Projects S and L both have an initial cost of $10,000, followed
by a series of positive cash inflows. Project S’s undiscounted
net cash flows total $20,000, while L’s total undiscounted flows
are $30,000. At a WACC of 10%, the two projects have
identical NPVs. Which project’s NPV is more sensitive to
changes in the WACC?
Answer
Project S.
Project L.
Both projects are equally sensitive to changes in the WACC
since their NPVs are equal at all costs of capital.
Neither project is sensitive to changes in the discount rate,
since both have NPV profiles that are horizontal.
The solution cannot be determined because the problem gives us
no information that can be used to determine the projects’
relative IRRs.

6. 2 points
Question 5
Which of the following statements is CORRECT? Assume that
the project being considered has normal cash flows, with one
outflow followed by a series of inflows.
Answer
A project’s NPV is found by compounding the cash inflows at
the IRR to find the terminal value (TV), then discounting the
TV at the WACC.
The lower the WACC used to calculate a project’s NPV, the
lower the calculated NPV will be.
If a project’s NPV is less than zero, then its IRR must be less
than the WACC.
If a project’s NPV is greater than zero, then its IRR must be
less than zero.
The NPV of a relatively low-risk project should be found using
a relatively high WACC.
2 points
Question 6
Which of the following statements is CORRECT?
Answer
The MIRR and NPV decision criteria can never conflict.
The IRR method can never be subject to the multiple IRR
problem, while the MIRR method can be.
One reason some people prefer the MIRR to the regular IRR is
that the MIRR is based on a generally more reasonable
reinvestment rate assumption.
The higher the WACC, the shorter the discounted payback
period.
The MIRR method assumes that cash flows are reinvested at the
crossover rate.
2 points
Question 7
Which of the following statements is CORRECT? Assume that
the project being considered has normal cash flows, with one
outflow followed by a series of inflows.

7. Answer
The longer a project’s payback period, the more desirable the
project is normally considered to be by this criterion.
One drawback of the regular payback for evaluating projects is
that this method does not properly account for the time value of
money.
If a project’s payback is positive, then the project should be
rejected because it must have a negative NPV.
The regular payback ignores cash flows beyond the payback
period, but the discounted payback method overcomes this
problem.
If a company uses the same payback requirement to evaluate all
projects, say it requires a payback of 4 years or less, then the
company will tend to reject projects with relatively short lives
and accept long-lived projects, and this will cause its risk to
increase over time.
2 points
Question 8
Which of the following statements is CORRECT?
Answer
The NPV, IRR, MIRR, and discounted payback (using a
payback requirement of 3 years or less) methods always lead to
the same accept/reject decisions for independent projects.
For mutually exclusive projects with normal cash flows, the
NPV and MIRR methods can never conflict, but their results
could conflict with the discounted payback and the regular IRR
methods.
Multiple IRRs can exist, but not multiple MIRRs. This is one
reason some people favor the MIRR over the regular IRR.
If a firm uses the discounted payback method with a required
payback of 4 years, then it will accept more projects than if it
used a regular payback of 4 years.
The percentage difference between the MIRR and the IRR is
equal to the project’s WACC.
2 points
Question 9

8. Which of the following statements is CORRECT? Assume that
the project being considered has normal cash flows, with one
outflow followed by a series of inflows.
Answer
A project’s NPV is generally found by compounding the cash
inflows at the WACC to find the terminal value (TV), then
discounting the TV at the IRR to find its PV.
The higher the WACC used to calculate the NPV, the lower the
calculated NPV will be.
If a project’s NPV is greater than zero, then its IRR must be
less than the WACC.
If a project’s NPV is greater than zero, then its IRR must be
less than zero.
The NPVs of relatively risky projects should be found using
relatively low WACCs.
2 points
Question 10
Which of the following statements is CORRECT?
Answer
The NPV method assumes that cash flows will be reinvested at
the WACC, while the IRR method assumes reinvestment at the
IRR.
The NPV method assumes that cash flows will be reinvested at
the risk-free rate, while the IRR method assumes reinvestment
at the IRR.
The NPV method assumes that cash flows will be reinvested at
the WACC, while the IRR method assumes reinvestment at the
risk-free rate.
The NPV method does not consider all relevant cash flows,
particularly cash flows beyond the payback period.
The IRR method does not consider all relevant cash flows,
particularly cash flows beyond the payback period.
2 points
Question 11
Which of the following statements is CORRECT? Assume that
the project being considered has normal cash flows, with one

9. outflow followed by a series of inflows.
Answer
A project’s regular IRR is found by compounding the initial
cost at the WACC to find the terminal value (TV), then
discounting the TV at the WACC.
A project’s regular IRR is found by compounding the cash
inflows at the WACC to find the present value (PV), then
discounting the TV to find the IRR.
If a project’s IRR is smaller than the WACC, then its NPV will
be positive.
A project’s IRR is the discount rate that causes the PV of the
inflows to equal the project’s cost.
If a project’s IRR is positive, then its NPV must also be
positive.
2 points
Question 12
Projects C and D are mutually exclusive and have normal cash
flows. Project C has a higher NPV if the WACC is less than
12%, whereas Project D has a higher NPV if the WACC exceeds
12%. Which of the following statements is CORRECT?
Answer
Project D probably has a higher IRR.
Project D is probably larger in scale than Project C.
Project C probably has a faster payback.
Project C probably has a higher IRR.
The crossover rate between the two projects is below 12%.
2 points
Question 13
Projects S and L are equally risky, mutually exclusive, and have
normal cash flows. Project S has an IRR of 15%, while Project
L’s IRR is 12%. The two projects have the same NPV when the
WACC is 7%. Which of the following statements is CORRECT?
Answer
If the WACC is 10%, both projects will have positive NPVs.
If the WACC is 6%, Project S will have the higher NPV.
If the WACC is 13%, Project S will have the lower NPV.

10. If the WACC is 10%, both projects will have a negative NPV.
Project S’s NPV is more sensitive to changes in WACC than
Project L's.
2 points
Question 14
Which of the following statements is CORRECT?
Answer
An NPV profile graph shows how a project’s payback varies as
the cost of capital changes.
The NPV profile graph for a normal project will generally have
a positive (upward) slope as the life of the project increases.
An NPV profile graph is designed to give decision makers an
idea about how a project’s risk varies with its life.
An NPV profile graph is designed to give decision makers an
idea about how a project’s contribution to the firm’s value
varies with the cost of capital.
We cannot draw a project’s NPV profile unless we know the
appropriate WACC for use in evaluating the project’s NPV.
2 points
Question 15
Westchester Corp. is considering two equally risky, mutually
exclusive projects, both of which have normal cash flows.
Project A has an IRR of 11%, while Project B's IRR is 14%.
When the WACC is 8%, the projects have the same NPV. Given
this information, which of the following statements is
CORRECT?
Answer
If the WACC is 13%, Project A’s NPV will be higher than
Project B’s.
If the WACC is 9%, Project A’s NPV will be higher than
Project B’s.
If the WACC is 6%, Project B’s NPV will be higher than
Project A’s.
If the WACC is greater than 14%, Project A’s IRR will exceed
Project B’s.
If the WACC is 9%, Project B’s NPV will be higher than

11. Project A’s.
2 points
Question 16
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?
Answer
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 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.
2 points
Question 17
Which of the following rules is CORRECT for capital budgeting
analysis?
Answer
The interest paid on funds borrowed to finance a project must
be included in estimates of the project’s cash flows.
Only incremental cash flows, which are the cash flows that
would result if a project is accepted, are relevant when making
accept/reject decisions.
Sunk costs are not included in the annual cash flows, but they

12. must be deducted from the PV of the project’s other costs when
reaching the accept/reject decision.
A proposed project’s estimated net income as determined by the
firm’s accountants, using generally accepted accounting
principles (GAAP), is discounted at the WACC, and if the PV of
this income stream exceeds the project’s cost, the project should
be accepted.
If a product is competitive with some of the firm’s other
products, this fact should be incorporated into the estimate of
the relevant cash flows. However, if the new product is
complementary to some of the firm’s other products, this fact
need not be reflected in the analysis.
2 points
Question 18
A firm is considering a new project whose risk is greater than
the risk of the firm’s average project, based on all methods for
assessing risk. In evaluating this project, it would be reasonable
for management to do which of the following?
Answer
Increase the estimated IRR of the project to reflect its greater
risk.
Increase the estimated NPV of the project to reflect its greater
risk.
Reject the project, since its acceptance would increase the
firm’s risk.
Ignore the risk differential if the project would amount to only a
small fraction of the firm’s total assets.
Increase the cost of capital used to evaluate the project to
reflect its higher-than-average risk.
2 points
Question 19
Dalrymple Inc. is considering production of a new product. In
evaluating whether to go ahead with the project, which of the
following items should NOT be explicitly considered when cash
flows are estimated?
Answer

13. The company will produce the new product in a vacant building
that was used to produce another product until last year. The
building could be sold, leased to another company, or used in
the future to produce another of the firm’s products.
The project will utilize some equipment the company currently
owns but is not now using. A used equipment dealer has offered
to buy the equipment.
The company has spent and expensed for tax purposes $3
million on research related to the new detergent. These funds
cannot be recovered, but the research may benefit other projects
that might be proposed in the future.
The new product will cut into sales of some of the firm’s other
products.
If the project is accepted, the company must invest $2 million in
working capital. However, all of these funds will be recovered
at the end of the project’s life.
2 points
Question 20
Which of the following statements is CORRECT?
Answer
Using accelerated depreciation rather than straight line would
normally have no effect on a project’s total projected cash flows
but it would affect the timing of the cash flows and thus the
NPV.
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 (e.g.,
straight line or accelerated) for stockholder reporting and tax
purposes.
Since depreciation is not a cash expense, it has no effect on
cash flows and thus no effect on capital budgeting decisions.
Under accelerated depreciation, higher depreciation charges
occur in the early years, and this reduces the early cash flows
and thus lowers a project’s projected NPV.
2 points

14. Question 21
A company is considering a proposed new plant that would
increase productive capacity. Which of the following statements
is CORRECT?
Answer
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.
The WACC used to discount cash flows in a capital budgeting
analysis should be calculated on a before-tax basis.
2 points
Question 22
Which of the following statements is CORRECT?
Answer
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 now that the
NPV method is widely used, it is possible to simply include
sunk costs in the cash flows and then calculate the PV of the

15. project.
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.
2 points
Question 23
Currently, Powell Products has a beta of 1.0, and its sales and
profits are positively correlated with the overall economy. The
company estimates that a proposed new project would have a
higher standard deviation and coefficient of variation than an
average company project. Also, the new project’s sales would
be countercyclical in the sense that they would be high when the
overall economy is down and low when the overall economy is
strong. On the basis of this information, which of the following
statements is CORRECT?
Answer
The proposed new project would have more stand-alone risk
than the firm’s typical project.
The proposed new project would increase the firm’s corporate
risk.
The proposed new project would increase the firm’s market risk.
The proposed new project would not affect the firm’s risk at all.
The proposed new project would have less stand-alone risk than
the firm’s typical project.
2 points
Question 24
Which of the following should be considered when a company
estimates the cash flows used to analyze a proposed project?
Answer
The new project is expected to reduce sales of one of the
company’s existing products by 5%.
Since the firm’s director of capital budgeting spent some of her
time last year to evaluate the new project, a portion of her
salary for that year should be charged to the project’s initial
cost.
The company has spent and expensed $1 million on R&D

16. associated with the new project.
The company spent and expensed $10 million on a marketing
study before its current analysis regarding whether to accept or
reject the project.
The firm would borrow all the money used to finance the new
project, and the interest on this debt would be $1.5 million per
year.
2 points
Question 25
Which of the following statements is CORRECT?
Answer
Sensitivity analysis is a good way to measure market risk
because it explicitly takes into account diversification effects.
One advantage of sensitivity analysis relative to scenario
analysis is that it explicitly takes into account the probability of
specific effects occurring, whereas scenario analysis cannot
account for probabilities.
Well-diversified stockholders do not need to consider market
risk when determining required rates of return.
Market risk is important, but it does not have a direct effect on
stock prices because it only affects beta.
Simulation analysis is a computerized version of scenario
analysis where input variables are selected randomly on the
basis of their probability distributions.
2 points
Question 26
Which of the following statements is CORRECT?
Answer
Sensitivity analysis as it is generally employed is incomplete in
that it fails to consider the probability of occurrence of the key
input variables.
In comparing two projects using sensitivity analysis, the one
with the steeper lines would be considered less risky, because a
small error in estimating a variable such as unit sales would
produce only a small error in the project’s NPV.
The primary advantage of simulation analysis over scenario

17. analysis is that scenario analysis requires a relatively powerful
computer, coupled with an efficient financial planning software
package, whereas simulation analysis can be done efficiently
using a PC with a spreadsheet program or even with just a
calculator.
Sensitivity analysis is a type of risk analysis that considers both
the sensitivity of NPV to changes in key input variables and the
probability of occurrence of these variables’ values.
As computer technology advances, simulation analysis becomes
increasingly obsolete and thus less likely to be used as
compared to sensitivity analysis.
2 points
Question 27
Langston Labs has an overall (composite) WACC of 10%, which
reflects the cost of capital for its average asset. Its assets vary
widely in risk, and Langston evaluates low-risk projects with a
WACC of 8%, average-risk projects at 10%, and high-risk
projects at 12%. The company is considering the following
projects:
Project Risk Expected Return
A High 15%
B Average 12%
C High 11%
D Low 9%
E Low 6%
Which set of projects would maximize shareholder wealth?
Answer
A and B.
A, B, and C.
A, B, and D.
A, B, C, and D.
A, B, C, D, and E.
2 points
Question 28
Which of the following is NOT a relevant cash flow and thus
should not be reflected in the analysis of a capital budgeting

18. project?
Answer
Changes in net working capital.
Shipping and installation costs.
Cannibalization effects.
Opportunity costs.
Sunk costs that have been expensed for tax purposes.
2 points
Question 29
Which of the following statements is CORRECT?
Answer
If a firm is found guilty of cannibalization in a court of law,
then it is judged to have taken unfair advantage of its
competitors. Thus, cannibalization is dealt with by society
through the antitrust laws.
If a firm is found guilty of cannibalization in a court of law,
then it is judged to have taken unfair advantage of its
customers. Thus, cannibalization is dealt with by society
through the antitrust laws.
If cannibalization exists, then the cash flows associated with the
project must be increased to offset these effects. Otherwise, the
calculated NPV will be biased downward.
If cannibalization is determined to exist, then this means that
the calculated NPV if cannibalization is considered will be
higher than the NPV if this effect is not recognized.
Cannibalization, as described in the text, is a type of externality
that is not against the law, and any harm it causes is done to the
firm itself.
2 points
Question 30
When evaluating a new project, firms should include in the
projected cash flows all of the following EXCEPT:
Answer
Changes in net working capital attributable to the project.
Previous expenditures associated with a market test to
determine the feasibility of the project, provided those costs

19. have been expensed for tax purposes.
The value of a building owned by the firm that will be used for
this project.
A decline in the sales of an existing product, provided that
decline is directly attributable to this project.
The salvage value of assets used for the project that will be
recovered at the end of the project’s life.