# BUSI 320 Corporate Finance Quiz

The change in real GDP resulting from an initial change in spending can be calculated by:

A. Dividing the multiplier by the initial change in spending

B. Dividing the initial change in spending by the multiplier

C. Multiplying the multiplier by the initial change in spending

D. Adding the initial change in spending to the multiplier

The simple multiplier formula assumes the following, except:

A. The economy has excess capacity and room to expand output

B. Firms will raise prices as buyers buy more of their output

C. People will spend more if they earn additional income

D. Business firms will increase production if demand for their output increases

In 2008, the Federal government provided tax rebate checks to taxpayers in the hope that:

A. C would shift down

B. C would shift up

C. G would shift down

D. G would shift up

When the Federal government provides tax rebate checks to taxpayers, as it did in 2008, the intent is to push the aggregate expenditures schedule in the economy upwards.

A. True

B. False

The multiplier measures the change in real GDP that results from a given change in the price level.

A. True

B. False

When the Federal government provides tax rebate checks to taxpayers, as it did in 2008, the intent is to push the aggregate expenditures schedule in the economy upwards.

A. True

B. False

In the Great Recession of 2007-2009, the sector of the economy that decreased the most was G.

A. True

B. False

An economy characterized by high unemployment is likely to be:

A. Experiencing a high rate of economic growth

B. Experiencing hyperinflation

C. In a recessionary expenditure gap

D. In an inflationary expenditure gap

A commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent. The amount by which a single commercial bank and the amount by which the banking system can increase loans are respectively:

A. $30,000 and $150,000

B. $50,000 and $250,000

C. $50,000 and $500,000

D. $100,000 and $500,000

Lowering the reserve ratio:

A. increases the discount rate.

B. decreases the discount rate.

C. changes required reserves to excess reserves.

D. decreases the amount of excess reserves banks must keep.

The economy is experiencing a low rate of economic growth and the Fed decides to pursue an expansionary money policy. Which set of actions by the Fed would be most consistent with this policy?

A. Selling government securities and lowering the discount rate

B. Selling government securities and raising the discount rate

C. Buying government securities and raising the discount rate

D. Buying government securities and lowering the discount rate

Inflationary pressure is a growing problem for the economy. Therefore, the Federal Reserve decides to pursue a policy to reduce the inflationary pressure. Which policy changes by the Fed would reinforce each other to achieve that objective?

A. Selling government securities and raising the discount rate

B. Selling government securities and lowering the discount rate

C. Buying government securities and lowering the discount rate

D. Buying government securities and lowering the reserve ratio

The Federal Reserve Banks are owned by the:

A. federal government.

B. Board of Governors.

C. U.S. Treasury. Assignment Print View 7/29/14, 10:57 PM

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1. award:

1.00 point

2. award:

1.00 point

Assume a corporation has earnings before depreciation and taxes of $102,000, depreciation of $40,000,

and that it has a 35 percent tax bracket.

a. Compute its cash flow using the following format. (Input all answers as positive values.)

Earnings before depreciation and taxes $

Depreciation

Earnings before taxes $

Taxes

Earnings after taxes $

Depreciation

Cash flow $

b. How much would cash flow be if there were only $12,000 in depreciation? All other factors are the same.

Cash flow $

c. How much cash flow is lost due to the reduced depreciation from $40,000 to $12,000?

Cash flow lost $

View Hint #1

Worksheet Difficulty: Basic

Learning Objective: 12-02 Cash flow rather

than earnings is used in the capital

budgeting decision.

The Short-Line Railroad is considering a $120,000 investment in either of two companies. The cash flows

are as follows:

Year Electric Co. Water Works

1 $ 60,000 $ 30,000

2 30,000 30,000

3 30,000 60,000

4 – 10 20,000 20,000

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3. award:

2.00 points

a. Compute the payback period for both companies. (Round your answers to 1 decimal place.)

Payback Period

Electric Co. years

Water Works years

b. Which of the investments is superior from the information provided?

Water Works

Electric Co.

rev: 04_16_2014_QC_48106

Worksheet Difficulty: Basic

Learning Objective: 12-03 The payback

method considers the importance of

liquidity, but fails to consider the time value

of money.

X-treme Vitamin Company is considering two investments, both of which cost $44,000. The cash flows are

as follows:

Year Project A Project B

1 $46,000 $38,000

2 17,000 18,000

3 13,000 15,000

Use Appendix B for an approximate answer but calculate your final answer using the formula and financial

calculator methods.

a-1. Calculate the payback period for Project A and Project B. (Round your answers to 2 decimal

places.)

Payback Period

Project A year(s)

Project B year(s)

a-2. Which of the two projects should be chosen based on the payback method?

Project A

Project B

b-1. Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent. (Do

not round intermediate calculations and round your final answers to 2 decimal places.)

Net Present Value

Project A $

Project B $

b-2. Which of the two projects should be chosen based on the net present value method?

Project A

Project B

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4. award:

1.00 point

5. award:

1.00 point

c. Should a firm normally have more confidence in the payback method or the net present value

method?

Net present value method

Payback method

View Hint #1

Worksheet

Learning Objective: 12-03 The payback

method considers the importance of

liquidity, but fails to consider the time value

of money.

Difficulty: Basic

Learning Objective: 12-04 The net present

value and internal rate of return are

generally the preferred methods of capital

budgeting analysis.

You buy a new piece of equipment for $30,204, and you receive a cash inflow of $4,100 per year for 14

years. Use Appendix D for an approximate answer but calculate your final answer using the financial

calculator method.

What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a

percent rounded to 2 decimal places.)

Internal rate of return %

View Hint #1

Worksheet Difficulty: Basic

Learning Objective: 12-04 The net present

value and internal rate of return are

generally the preferred methods of capital

budgeting analysis.

Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $95,000. The

annual cash inflows for the next three years will be:

Year Cash Flow

1 $ 48,000

2 46,000

3 41,000

Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the financial

calculator method.

a. Determine the internal rate of return. (Do not round intermediate calculations. Enter your answer

as a percent rounded to 2 decimal places.)

Internal rate of return %

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6. award:

2.00 points

7. award:

1.00 point

b. With a cost of capital of 15 percent, should the equipment be purchased?

Yes

No

Worksheet Difficulty: Basic

Learning Objective: 12-04 The net present

value and internal rate of return are

generally the preferred methods of capital

budgeting analysis.

The Pan American Bottling Co. is considering the purchase of a new machine that would increase the

speed of bottling and save money. The net cost of this machine is $69,000. The annual cash flows have the

following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final

answer using the formula and financial calculator methods.

Year Cash Flow

1 $ 29,000

2 29,000

3 29,000

4 34,000

5 20,000

a. If the cost of capital is 13 percent, what is the net present value of selecting a new machine? (Do not

round intermediate calculations and round your final answer to 2 decimal places.)

Net present value $

b. What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a

percent rounded to 2 decimal places.)

Internal rate of return %

c. Should the project be accepted?

Yes

No

rev: 04_08_2014_48104

View Hint #1

Worksheet Difficulty: Intermediate

Learning Objective: 12-04 The net present

value and internal rate of return are

generally the preferred methods of capital

budgeting analysis.

Turner Video will invest $84,500 in a project. The firm’s cost of capital is 6 percent. The investment will

provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer

Assignment Print View 7/29/14, 10:57 PM

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8. award:

2.00 points

using the formula and financial calculator methods.

Year Inflow

1 $ 28,000

2 30,000

3 34,000

4 38,000

5 42,000

The internal rate of return is 12 percent.

a. If the reinvestment assumption of the net present value method is used, what will be the total value of

the inflows after five years? (Assume the inflows come at the end of each year.) (Do not round

intermediate calculations and round your answer to 2 decimal places.)

Total value of inflows $

b. If the reinvestment assumption of the internal rate of return method is used, what will be the total value

of the inflows after five years? (Use the given internal rate of return. Do not round intermediate

calculations and round your answer to 2 decimal places.)

Total value of inflows $

c. Which investment assumption is better?