Question 1

David owns the building out of which he operates a small graphic arts business. He has extra space available and is considering converting the extra space into a gourmet coffee shop that
He would also run. A local businesswoman has offered to rent the extra space from him for her
Own needs. She has suggested she would be willing to pay $1,000 a month in rent. In
Estimating the cash flows associated with the gourmet coffee shop, David should

A)ignore the $1,000 rent since it is a non-issue if David decides to undertake the coffee shop project.
B)include the $1,000 rent as a cash inflow.
C)include the $1,000 rent as a cash outflow.
D)consider the $1,000 as an added benefit.

include the $1,000 rent as a cash outflow.

Accepted Answer

The $1,000 rent should be considered an opportunity cost of using the space for the coffee shop instead of renting it out. Therefore, it is a cash outflow for the coffee shop project because it represents foregone income.

Question 2

Kiley is considering opening a restaurant and is trying to identify the appropriate cash flows to use in evaluating this project. Which of the following should not be included?&#10;A)the cost of a liability insurance policy to protect her should a customer sue the business&#10;B)Kiley's dislike of having to work weekends&#10;C)the lease expense for the building that would house her restaurant&#10;D)All of the above should be included when determining the cash flows associated with the project.

Accepted Answer

All of the above should be included when determining the cash flows associated with the project.

Question 3

The law of one price stipulates that&#10;A)the price of an asset is independent of the market in which the asset is being offered for sale.&#10;B)identical goods must be sold to all buyers at the same price; otherwise price discrimination occurs.&#10;C)assets that are identical in all respects should sell for the same price.&#10;D)the absolute value of an asset will always equal its relative value.

Accepted Answer

The law of one price states that identical assets should have the same price, regardless of the market in which they are being sold. In other words, if two assets are identical in all respects (including risk, liquidity, and timing of cash flows), they should have the same price. The law of one price states that assets that are identical in all respects should sell for the same price. This principle is important in international finance because it implies that exchange rates should reflect the relative prices of goods and services in different countries. If the law of one price is violated, then there may be opportunities for arbitrage, which can lead to adjustments in prices until the law of one price is restored.

Question 4

Which of the following statements is true?&#10;A)Valuation is not an exact science.&#10;B)The relative value of any asset is, at best, a lucky guess.&#10;C)The true value of an asset is unaffected by externalities such as interest rate levels, the state of the economy, etc.&#10;D)In finance, it is important to determine an asset's absolute value.

Accepted Answer

Valuation involves making assumptions and subjective judgments, and therefore cannot be considered an exact science. Different analysts may arrive at different valuations for the same asset. Valuation involves making assumptions about future cash flows, discount rates, and other variables. These assumptions are subjective and can vary from person to person, making valuation an inexact science.

Question 5

Melissa is a massage therapist at a well-known spa. As such, Melissa must provide
her own oils and lotions, hot stones, and music. Melissa purchased the hot stones and
music she required when she first began her career, about a year ago. The oils and
lotions run her about $300 a month. She generates revenues of about $3,000 a month,
but the spa takes 50% of the fees she collects in return for providing the facility,
massage table, linen service, and support (e.g., receptionist and scheduler.)Melissa is
considering opening her own business now that she has built up a sufficient clientele.
She has found a place she can rent for $1,000 a month. This includes utilities. She has
estimated that a massage table would cost her $600. Linens will cost another $1,000,
but she figures she'll launder them herself and, thus, avoid the cost of a linen service.
She'll also handle her own bookings. Calculate the amount by which Melissa's net
monthly financial cash flows would increase or decrease if she sets up her own shop.
What other information would you require to estimate the costs and benefits of her
decision more accurately?

Accepted Answer

The answer of Melissa is a massage therapist at a...

Question 6

Which of the following statements is true?&#10;A)In a well-run, publicly-held company, management relies on the shareholder input to decide what policies will, in fact, maximize the value of their firm.&#10;B)Because it is difficult for management to determine what will maximize firm value in the imperfect world of reality, it is critical for the government to pass laws that will result in&#10;Value-maximizing decisions in all firms.&#10;C)Although it should be clear to corporate managers what steps are necessary to maximize firm value, managers choose to look out for their own best interests instead.&#10;D)None of the above is a true statement.

Accepted Answer

None of the statements is entirely true. While shareholder input is important in decision-making, management also takes into account a range of other factors. Similarly, government intervention cannot guarantee value-maximizing decisions in all firms, and while some managers may prioritize their own interests, this is not always the case. The reality is more complex and nuanced than any of the given statements suggest. None of the statements are entirely true. While management should take shareholder input into account, it is ultimately their responsibility to make decisions that will maximize firm value. Additionally, while government regulations can influence firm behavior, they cannot guarantee value-maximizing decisions in all firms. Finally, while there may be a conflict of interest between managers and shareholders, it does not necessarily mean that managers will always act in their own best interest instead of maximizing firm value.

Question 7

Which of the following statements about the law of one price is true?&#10;A)It is most useful in assessing the true value of identical assets that are trading in more than one country.&#10;B)It is a useful tool in determining the absolute value of an asset.&#10;C)Empirical evidence suggests that it will provide the true value of an asset, except in those rare cases in which no comparable asset exists.&#10;D)Although it rarely will provide an exact value for an asset, it will often provide a close approximation.

Accepted Answer

The law of one price states that identical goods should have the same price in different markets, accounting for transportation costs and tariffs. Although it may not provide an exact value for an asset, it will often provide a close approximation. Therefore, option D is the correct choice. Option A is incorrect because the law of one price is useful for identical assets within a single market, not across different countries. Option B is incorrect because the law of one price is not used to determine the absolute value of an asset but rather to ensure that similar assets have similar prices. Option C is incorrect because empirical evidence suggests that the law of one price may not be accurate in various circumstances, including when no comparable asset exists. The law of one price states that identical assets should have the same price in all markets. While it may not always provide an exact value for an asset, it can often provide a close approximation. Therefore, choice D is the correct statement.

Question 8

You own a firm if&#10;A)you own all the outstanding stock and all the outstanding liabilities, both financial and non-financial.&#10;B)you own all the outstanding stock.&#10;C)you own all the outstanding bonds.&#10;D)you own all the outstanding stock and bonds.

Accepted Answer

The answer of You own a firm if&#10;A)you own all...

Question 9

True, False, or Uncertain: A project's value may vary, depending on the firm&#10;evaluating it.

Accepted Answer

In an imperfect world, you need to consider the aspects of your specific firm in determining the value of a project. For example, the value of acquiring a small pharmaceutical company will undoubtedly be different if the acquiring firm is another pharmaceutical company than if it is an airline.

Question 10

The value of a firm is equal to&#10;A)the market value of its outstanding stock.&#10;B)the value of all its projects' net cash flows.&#10;C)the market value of its outstanding stock plus the market value of its outstanding bonds.&#10;D)the value of all its projects' cash inflows.

Accepted Answer

The value of a firm is equal to the present value of all its projects' net cash flows, which represents the future cash inflows and outflows of the firm. The market value of its outstanding stock and bonds may affect the value of the firm's equity, but do not determine the overall value of the firm. Cash inflows alone do not account for the cash outflows or overall profitability of the firm. Therefore, the best choice to describe the value of a firm is option B, the value of all its projects' net cash flows. The value of a firm is determined by the present value of all the cash flows generated by its projects. These cash flows are discounted by the appropriate rate of return to arrive at the present value. Therefore, the value of a firm is the sum of the present value of all its projects' net cash flows. The market value of its stock or bonds is only a reflection of the market's perception of the future cash flows of the firm and is not necessarily equal to the actual value of the firm.

Question 11

The main objective of corporate management is to&#10;A)behave in a socially responsible manner.&#10;B)minimize the value of all outstanding liabilities.&#10;C)maximize the value of the firm.&#10;D)Both A and B are true since minimizing outstanding liabilities maximizes firm value.

Accepted Answer

The answer of The main objective of corporate management is...

Question 12

Which of the following statements about project cash flows is false?&#10;A)Opportunity costs--e.g., cash flows that would be generated by an alternative project--should be included in your cash flow analysis.&#10;B)Although most projects involve both financial and non-financial costs and benefits, the non-financial items are typically minor and can be ignored when estimating a project's&#10;Value.&#10;C)In order to accurately evaluate a project's effect on value, it is necessary to quantify any non-financial costs and benefits.&#10;D)Both B and C are false statements.

Accepted Answer

The answer of Which of the following statements about project...

Question 13

What does the term &#34;opportunity cost&#34; mean?

Accepted Answer

The answer of What does the term &#34;opportunity cost&#34; mean?...

Question 14

Which of the following assets would be the most difficult to value?&#10;A)a 1968 red Mustang convertible&#10;B)World War II memorabilia&#10;C)a Caribbean vacation&#10;D)an uninhabited, privately-owned island

Accepted Answer

The answer of Which of the following assets would be...

Question 15

Which of the following would best reflect the current value of a dark green 2005 Subaru Outback, rated in good condition with 75,000 miles on it, located in Denver, Colorado?&#10;A)the price of a dark green 2005 Toyota RAV4 rated in good condition with 100,000 miles on it, located in Denver, Colorado&#10;B)the price of a dark green 2005 Subaru Outback, rated in good condition with 65,000 miles on it and located in Fairbanks, Alaska&#10;C)the price of a dark green 2005 Subaru Legacy sedan rated in good condition with 70,000 miles on it, located in Golden, Colorado&#10;D)the price of a red 2005 Subaru Outback rated in good condition with 83,000 miles on it, located in Fort Collins, Colorado

Accepted Answer

The answer of Which of the following would best reflect...

Deck 1: Introduction