Chapter 01 Quiz A



Chapter 11 Quiz A Student Name _________________________ Student ID ____________

________ 1. The Premium Clothing Co. manufactures a product that has a degree of operating leverage of 2.5. What percentage change in sales quantity is needed to increase the operating cash flow by 7.4 percent?

a. 2.50 percent b. 2.96 percent c. 3.38 percent d. 4.90 percent

________ 2. Bright Ideas, Inc. is trying to determine what the operating cash flow of a new project will be if the project is

to break-even on a financial basis at a quantity of 2,700 units. The projections include fixed costs of $14,300, a sales price of $32.50, variable costs per unit of $18.45, and a depreciation expense of $26,750. What is the amount of the operating cash flow?

a. $11,185 b. $12,615 c. $23,635 d. $25,485

________ 3. Which one of the following occurs at the financial break-even point?

a. The IRR is equal to -100 percent.

b. Discounted payback period is equal to the life of the project.

c. The NPV is equal to the initial cash outflow.

d. The IRR exceeds the required rate of return.

________ 4. DOL is equal to:

a. 1 / Contribution margin.

b. 1 − Contribution margin.

c. 1 + FC / OCF.

d. 1 + VC / OCF.

________ 5. Which one of the following methods of analysis determines which variable presents the greatest forecasting

risk for a proposed project?

a. rationing b. scenario c. break-even d. sensitivity

________ 6. The contribution margin per unit sold is:

a. another term for the profit margin per unit.

b. equal to the sales price minus the sum of the fixed and the variable costs per unit.

c. the percentage of the sales price that remains after the variable costs have been deducted.

d. the percentage of the sales price that is needed to cover the variable costs of the item.

Use this information to answer questions 7 through 10.

Jettson Brothers, Inc. is considering the introduction of a new product. Company management has prepared the following estimates related to the project as well as the related range of values, where applicable. The project under consideration has a four-year life and costs $100,000. Assume there is no salvage value and that the project is relatively risky and requires a 16 percent rate of return.

Sales quantity 9,000 ( 8 percent Fixed costs $16,000 ( 3 percent

Sales price $18.00 ( 5 percent Depreciation $25,000

Variable cost per unit $11.00 ( 2 percent Tax rate 35 percent

________ 7. What is the contribution margin under the optimistic scenario?

a. $5.88 b. $6.32 c. $8.12 d. $8.98

________ 8. What is the projected pessimistic earnings before interest and taxes? (Round to the nearest whole dollar)

a. $7,206 b. $11,810 c. $22,000 d. $38,406

________ 9. What is the projected optimistic net income? (Round to the nearest whole dollar)

a. $21,560 b. $24,964 c. $33,170 d. $38,406

________ 10. What is the projected base case net present value? (Round to the nearest whole dollar)

a. $9,300 b. $9,968 c. $39,300 d. $39,809

Chapter 11 Quiz A Answers

1. b Percentage change in sales quantity = .074 / 2.5 = .0296 = 2.96 percent

2. c [pic]; OCF* = $23,635 at the financial break-even point

3. b

4. c

5. d

6. c

7. c Contribution margin for the optimistic scenario = ($18.00 ( 1.05) – ($11.00 ( .98) = $8.12

8. a EBIT for pessimistic scenario = [9,000 ( .92] ( [($18 ( .95) – ($11 ( 1.02)] – ($16,000 ( 1.03) – $25,000 = $7,206.40 = $7,206

9. b Net income for the optimistic scenario = {[9,000 ( 1.08] ( [($18.00 ( 1.05) – ($11.00 ( .98)] – ($16,000 ( .97) – $25,000} ( {1 – .35} = $24,964.16 = $24,964

10. b EBIT for base case scenario = [9,000 ( ($18.00 – $11.00)] – $16,000 – $25,000 = $22,000

Tax = $22,000 ( .35 = $7,700

OCF for base case scenario = $22,000 + $25,000 – $7,700 = $39,300

[pic]

CF0 -$100,000

C01 $39,300

F01 4

I = 16

NPV CPT

$9,968.499 = $9,968

Chapter 11 Quiz B Student Name _________________________ Student ID ____________

________ 1. Which one of the following occurs at the cash break-even point?

a. The IRR is -100 percent.

b. The discounted payback period equals the life of the project.

c. The payback period equals the life of the project.

d. The NPV is positive.

________ 2. Operating leverage is:

a. the percentage of a product’s selling price that remains after the variable production costs have been

subtracted.

b. the relationship between a product’s selling price and it’s total production cost.

c. the degree to which a project is committed to fixed production costs.

d. equal to (FC + D) / (P − v).

________ 3. Which one of the following methods of analysis presents the most optimistic and the most pessimistic

outcomes which are realistically anticipated from a proposed project?

a. scenario b. break-even c. sensitivity d. rationing

________ 4. Which one of the following values is equal to zero at the accounting break-even point?

a. OCF

b. NPV

c. payback period

d. IRR

________ 5. Bright Ideas, Inc. is trying to determine what the selling price of a new product should be if the project is to

break-even on an accounting basis at a quantity of 3,000 units. The projections include fixed costs of $5,875,

variable costs per unit of $17.50, and a depreciation expense of $3,200. What is the price they should charge?

a. $18.57 b. $19.46 c. $20.53 d. $21.13

________ 6. The Premium Clothing Co. manufactures a project that has a degree of operating leverage equal to 1.4. How

will the operating cash flows change if the quantity sold decreases by 6.3 percent?

a. -8.82 percent b. -4.90 percent c. 2.22 percent d. 4.50 percent

Use this information to answer questions 7 through 10.

Jettson Brothers, Inc. is considering the introduction of a new product. Company management has prepared the following estimates related to the project as well as the related range of values, where applicable. The project under consideration has a two-year life and costs $5,000. Assume there is no salvage value and that the project is relatively risky and requires a 16 percent rate of return.

Sales quantity 4,000 ( 6 percent Fixed costs $11,000 ( 5 percent

Sales price $15.50 ( 4 percent Depreciation $2,500

Variable cost per unit $ 9.25 ( 3 percent Tax rate 35 percent

________ 7. What is the contribution margin under the pessimistic scenario?

a. $5.35 b. $5.91 c. $6.25 d. $6.59

________ 8. What is the projected base case net income? (Round to the nearest whole dollar)

a. $4,025 b. $6,074 c. $7,475 d. $11,281

________ 9. What is the projected optimistic earnings before interest and taxes? (Round to the nearest whole dollar)

a. $9,262 b. $11,500 c. $15,002 d. $17,355

________ 10. What is the projected pessimistic net present value? (Round to the nearest whole dollar)

a. -$11,012 b. -$5,352 c. $5,352 d. $11,012

Chapter 11 Quiz B Answers

1. a

2. c

3. a

4. d

5. c [pic]

6. a Percentage change in OCF = 1.4 ( - .063 = -.0882 = -8.82 percent

7. a Contribution margin for the pessimistic scenario = ($15.50 ( .96) – ($9.25 ( 1.03) = $5.3525 = $5.35

8. c Net income for the base case scenario = {[4,000 ( ($15.50 – $9.25)] – $11,000 – $2,500} ( {1 – .35} = $7,475

9. d EBIT for optimistic scenario = [4,000 ( 1.06] ( [($15.50 ( 1.04) – ($9.25 ( .97)] – ($11,000 ( .95) – $2,500 = $17,355.40 = $17,355

10. c EBIT for pessimistic scenario = [4,000 ( .94] ( [($15.50 ( .96) – ($9.25 ( 1.03)] – ($11,000 ( 1.05) − $2,500 = $6,075.40

Tax = $6,075.40 ( .35 = $2,126.39

OCF for pessimistic scenario = $6,075.40 + $2,500 − $2,126.39 = $6,449.01

[pic]

CF0 -$5,000

C01 $6,449.01

F01 2

I = 16

NPV CPT

$5,352.16 = $5,352

Chapter 11 Quiz C Student Name _________________________ Student ID ____________

________ 1. Which one of the following conditions exists at the accounting break-even point?

a. The payback period equals the life of the project.

b. The NPV is negative and exactly equal to the initial cash outlay.

c. The IRR is -100 percent.

d. The IRR is equal to the required rate of return.

________ 2. The lower the degree of operating leverage, the _____ the potential danger from _____ risk.

a. greater; capital

b. greater; forecasting

c. lower; capital

d. lower; forecasting

________ 3. The analysis of a project which combines scenario and sensitivity analysis is called _____ analysis.

a. simulation b. rationing c. DOL d. break-even

________ 4. Which one of the following determines the level of output required for a project to have a zero net present

value?

a. sensitivity analysis

b. cash break-even analysis

c. financial break-even analysis

d. scenario analysis

________ 5. Bright Ideas, Inc. is trying to determine what the selling price of a new product should be if the project is to

break-even on a cash basis at a quantity of 1,900 units. The projections include fixed costs of $3,800, variable

costs per unit of $8.64, and a depreciation expense of $620. What is the price they should charge?

a. $10.64 b. $10.97 c. $11.57 d. $11.74

________ 6. The Premium Clothing Co. manufactures a product with a degree of operating leverage of 2.5. If the fixed costs are $800 and the depreciation expense is $430 what is the operating cash flow of this project?

a. $246.67 b. $320.00 c. $533.33 d. $820.00

Use this information to answer questions 7 through 10.

Jettson Brothers, Inc. is considering the introduction of a new product. Company management has prepared the following estimates related to the project as well as the related range of values, where applicable. The project under consideration has a five-year life and costs $15,000. Assume the tax rate is 34 percent, there is no salvage value, and the project requires a 12 percent rate of return.

Sales quantity 2,000 ( 7 percent

Sales price $14.00 ( 10 percent

Variable cost per unit $10.00 ( 2 percent

Fixed costs $8,000 ( 1 percent

Depreciation $3,000

________ 7. What is the contribution margin under the pessimistic scenario?

a. $2.40 b. $3.80 c. $4.00 d. $5.60

________ 8. What is the projected optimistic net income? (Round to the nearest whole dollar)

a. $702 b. $904 c. $2,687 d. $3,904

________ 9. What is the projected base case earnings before interest and taxes? (Round to the nearest whole dollar)

a. -$6,616 b. -$3,000 c. $1,920 d. $362

________ 10. What is the projected optimistic net present value? (Round to the nearest whole dollar)

a. -$1,654 b. -$1,064 c. $1,064 d. $1,654

Chapter 11 Quiz C Answers

1. a

2. d

3. a

4. c

5. a [pic]; P = $10.64

6. c [pic]

7. a Contribution margin for the pessimistic scenario = ($14.00 ( .9) – ($10.00 ( 1.02) = $2.40

8. a Net income for the optimistic scenario = {[2,000 ( 1.07] ( [($14.00 ( 1.10) − ($10.00 ( .98)] – ($8,000 ( .99) − $3,000} ( {1 − .34} = $702.24 = $702

9. b EBIT for base case scenario = [2,000 ( ($14.00 – $10.00)] – $8,000 – $3,000 = -$3,000

10. a EBIT for optimistic scenario = [2,000 ( 1.07] ( [($14 ( 1.10) – ($10 ( .98)] – ($8,000 ( .99) − $3,000 = $1,064

Tax = $1,064 ( .34 = $361.76

OCF for optimistic scenario = $1,064 + $3,000 − $361.76 = $3,702.24

[pic]

CF0 -$15,000

C01 $3,072.24

F01 5

I = 12

NPV CPT

-$1,654.25 = -$1,654

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