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Exam 11: Some Lessons From Recent Capital Market History

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Question 31

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Which one of the following characteristics best describes a project that has a low degree of operating leverage?

A) high variable costs relative to the fixed costs
B) relatively high initial cash outlay
C) an OCF that is highly sensitive to the sales quantity
D) high level of forecasting risk
E) a high depreciation expense

F) B) and E)
G) A) and B)

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Question 32

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Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement?

A) capital break-even
B) cash break-even
C) accounting break-even
D) financial break-even
E) internal break-even

F) A) and B)
G) C) and D)

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Question 33

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As the degree of sensitivity of a project to a single variable rises, the:

Given the following, which feature identifies the most desirable level of output for a project?

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called:

At a production level of 4,500 units, a project has total costs of $107,000.The variable cost per unit is $12.50.Assume the firm can increase production by 1,000 units without increasing its fixed costs.What will the total costs be if 4,800 units are produced?

Mr.Bear, your boss, will only agree to accept a project that, as a minimum, provides a rate of return equal to the requirement he has set for the project.Given this, explain how you can use break-even analysis to ascertain which projects will be acceptable to him as you don't want to risk hearing him growl if you waste his time presenting him with a project that is unacceptable.

Variable costs can be defined as the costs that:

The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers.These requests are seeking funding for positive net present value projects.The CFO continues to deny all funding requests due to the financial situation of the company.Apparently, the company is:

A project has the following estimated data: price = $74 per unit; variable costs = $39.22 per unit; fixed costs = $6,500; required return = 8 percent; initial investment = $8,000; life = 4 years.Ignore the effect of taxes.What is the degree of operating leverage at the financial break-even level of output?

A proposed project has fixed costs of $36,000 per year.The operating cash flow at 18,000 units is $58,000.What will be the new degree of operating leverage if the number of units sold rises to 18,500?

Spencer Tools would like to offer a special product to its best customers.However, the firm wants to limit its maximum potential loss on this product to the firm's initial investment in the project.The fixed costs are estimated at $21,000, the depreciation expense is $11,000, and the contribution margin per unit is $12.50.What is the minimum number of units the firm should pre-sell to ensure its potential loss does not exceed the desired level?

Steele Insulators is analyzing a new type of insulation for interior walls.Management has compiled the following information to determine whether or not this new insulation should be manufactured.The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight-line to zero over the 12-year life of the project.Projected fixed costs are $769,000 and the anticipated annual operating cash flow is $241,000.What is the degree of operating leverage for this project?

Sunset United is analyzing a proposed project.The company expects to sell 15,000 units, plus or minus 4 percent.The expected variable cost per unit is $120 and the expected fixed costs are $311,000.The fixed and variable cost estimates are considered accurate within a plus or minus 3 percent range.The depreciation expense is $74,000.The tax rate is 35 percent.The sales price is estimated at $170 a unit, plus or minus 2 percent.What is the contribution margin per unit for a sensitivity analysis using a variable cost per unit of $125?

Assume that a country experiences a financial crisis that causes the nation's financial markets to freeze in a manner that prevents a private firm from raising capital from any source.Explain how project analysis conducted by that firm would work in this situation.

Stellar Plastics is analyzing a proposed project.The company expects to sell 12,000 units, plus or minus 5 percent.The expected variable cost per unit is $3.20 and the expected fixed costs are $30,000.The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range.The depreciation expense is $24,000.The tax rate is 34 percent.The sales price is estimated at $7.50 a unit, plus or minus 4 percent.What is the operating cash flow for a sensitivity analysis using total fixed costs of $31,000?

The contribution margin per unit is equal to the:

When the operating cash flow of a project is equal to zero, the project is operating at the:

Which one of the following will be used in the computation of the best-case analysis of a proposed project?

Which of the following variables will be at their highest expected level under a worst case scenario? I.fixed cost II.sales price III.variable cost IV.sales quantity