© 2000 John Petroff
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© 2000 John Petroff |
Questions for Chapter 10 Assets structure
Review questions
Q-10A.1 Should sales be studied before or after
assets? Why is the sequence important?
Q-10A.2
What is the name given to the process of planning needed acquisition
of assets?
Q-10A.3 List three types
of decisions typical of capital budgeting.
Q-10A.4 Who are involved
in capital budgeting?
Q-10A.5 Why are some outsiders
sometimes participating in the capital budgeting decision process?
Q-10B1.1
Are distortions in fixed assets large?
Q-10B1.2 Are distortions
in fixed assets characteristic of firms using GAAP accounting
or they common in firms using other accounting system?
Q-10B1.3 What accounting
rule will cause fixed assets to be understated on the balance
sheet if inflation is present?
Q-10B1.4 Can depreciation
be decomposed and analyzed by an outside analyst? Why?
Q-10B1.5 To what extent
do notes to financial statements adequately clarify the calculation
of depreciation?
Q-10B1.6 Is it possible
to tell the age of fixed assets for the financial statements?
Why?
Q-10B1.7 What correction
is sometime mandated in countries with high inflation? Is the
correction sufficient to make the balance sheet fixed assets amounts
meaningful?
Q-10B1.8 Is it possible
for an outside analyst to find useful replacement values for the
fixed assets? What can the outside analyst do?
Q-10B1.9 When are fixed
assets amounts overstated rather than understated?
Q-10B1.10 Do distortions
in fixed assets justify an analyst's visit to plants of the company?
Discuss.
Q-10B2.1
How are shares of unconsolidated affiliates shown in the balance
sheet?
Q-10B2.1 Are shares reported
on the equity method adjusted for changes in market price? Is
there any relationship with market price at all?
Q-10B3.1
What is the name given to the excess paid for an acquired over
its book value?
Q-10B3.2 What does the
excess payment for an acquired firm over book value represent,
and why is the acquiring firm willing to pay that?
Q-10B3.3 How is goodwill
amortized under GAAP? Is goodwill likely to be overstated?
Q-10B3.4 List examples
of intangible assets.
Q-10B3.5 What is the difference
in treatment of research and development under GAAP and international
accounting?
Q-10B3.6 Why are intangible
assets likely to be grossly understated under GAAP accounting?
Q-10B4.1
List some of the items that can be found in other fixed assets.
Q-10B4.2 Of the items in
other fixed assets, which ones are of serious concern to an analyst?
Q-10B5.1
When is the calculation of tangible assets and tangible net worth
necessary?
Q-10B5.2 What is deducted
in the calculation?
Q-10C1.1
What ratio is used to assess if fixed assets are efficiently used?
Q-10C1.2 Give formula for
total assets turnover.
Q-10C1.3 Give formula for
fixed assets turnover.
Q-10C1.4 What is the problem
if the ratio is too high?
Q-10C1.5 What is the problem
if the ratio is too low?
Q-10C2.1
Why is return on assets more informative than assets turnover
in assessing efficient use of assets?
Q-10C2.2 Give formula for
return on total assets.
Q-10C2.3 Give formula for
return on fixed asets.
Q-10C3.1
How can the size of fixed assets be judged on the basis of permanent
funds used?
Q-10C3.2 What should be
the relationship between the size of fixed assets and permanent
funds?
Q-10C4.1
What information can be gathered about the quality of fixed assets
from the income statement?
Q-10C4.2 If maintenance
and repair expense is lower than in other companies or in the
past, is there a potential problem? Which one?
Q-10C4.3 If maintenance
and repair expense is suddenly lower one year than it was in the
past, what message does that convey? How can one make a correct
assess if a problem exists?
Q-10D.1
What is the most common approach to achieving lower cost?
Q-10D.2 What marketing
strategy imposes on all firms to seek lower costs?
Q-10D.3 What is the name
given to process of lowering unit costs by using automation and
increased fixed costs?
Q-10D1.1
If sales are steady, what is achieved by using operating leverage?
Q-10D1.2 Do firms start
out with high operating leverage, or are they forced into it later?
Q-10D1.3 What is the down
side of using operating leverage?
Q-10D1.4 What is the name
given to the increase in potential losses as a result of increased
automation and fixed costs?
Q-10D1.5 Give formula for
degree of operating leverage.
Q-10D1.6 What is the problem
with using the ratio of degree of operating leverage?
Q-10D1.7 When is degree
of operating leverage used?
Q-10D1.8 What are other
methods of assessing operating leverage, instead of degree of
operating leverage?
Q-10D2.1
If operating leverage requires increase in sales, how are operating
and commercial risks increased?
Q-10D2.2 What causes the
profit margin to be eroded if sales need to be increased?
Q-10D2.4 Why is lowering
of selling price necessary when operating leverage is used?
Q-10D2.4 What are the consequences
of a lower selling price on profit margin, on break-even point,
on commercial risk?
Q-10D3.1
Why is commercial risk increase if sales need to be increased
considerably?
Q-10D3.2 Explain why industry
concentration and history of price retaliation should be studied
before engaging in aggressive sales expansion to justify operating
leverage.
Q-10D3.3 Explain why using
operating leverage is dangerous if sales are vulnerable.
Q-10D3.3 List examples
of sales vulnerability.
Q-10E.1
What is the name given to the process a company uses to select
projects?
Q-10E.2 What are the three
classification of projects by nature and level of risk for the
firm?
Q-10E.3 What are the two
major methods of selecting projects in capital budgeting?
Q-10E.4 Why isn't possible
for an outsider to properly evaluate project selected by a company?
Q-10E1.1
How is risk factor incorporated in capital budgeting methods?
Q-10E1.2 Does the incorporation
of risk factor modifies project selection in Zee Company?
Q-10E2.1
What justifies the low risk factor assigned to projects of replacement
of equipment?
Q-10E2.2 How is the discount
rate calculated for a replacement of equipment project?
Q-10E2.3 Does a replacement
of equipment have a positive cash revenue?
Q-10E2.4 Does a replacement
of equipment have positive cash flows from cost savings?
Q-10E2.5 List the elements
of cash flow calculation of a replacement of equipment project.
Q-10E2.6 Why is the risk
factor of sales expansion identical to the current level of company
risk?
Q-10E2.7 List the elements
of cash flows calculation for an expansion of sales project.
Q-10E2.8 How is the discount
rate calculated for an expansion of sales project.
Q-10E2.9 What additional
outlays must be included aside from increased facilities in an
expansion of sales project?
Q-10E2.10 Why is a project
of new product introduction more risky for a firm that its existing
average level of risk?
Q-10E2.11 What additional
outlays must be considered in a new product introduction project?
Q-10E2.12 List all the
elements of initial outlay of a new product introduction project.
Q-10E2.13 List all the
elements of cash flows calculation for a new product introduction
project.
Q-10E2.14 How is the discount
rate calculated for a new product introduction project?
Q-10E3.1 What problem of selection among alternative vendors is common in the replacement of equipment project?
Q-10E3.2 What are the
five methods of dealing with mutually exclusive projects with
unequal lives?
Q-10E3.3 Give formula
for annualized NPV.
Q-10E3.4 Give formula
for annuity equivalent NPV. Explain the meaning of the statistic.
Q-10E3.5 Give formula
for infinite life equivalent NPV. Explain the meaning of the statistic.
Q-10E3.6 Which is the
methods of evaluating projects of unequal lives is the most robust?
Q-10E3.7 What does it
mean that a method of project selection is robust?
Q-10E3.8 Which of the
methods of selecting projects with unequal lives is the simplest
while giving the correct choice most of the time?
Q-10E3.9 Do all project
selections methods give the same conclusion when a common number
of years is used to evaluate projects of unequal lives?
Q-10E3.10 Are NPV and
annualized NPV the same with common number of years and initial
unequal number of years?
Q-10E3.11 Are annuity
equivalent NPV and infinite-life equivalent NPV the same with
common number of years and initial unequal number of years? Why
would that be expected? What does that imply for the robustness
of the statistic?
Q-10E4.1
What problem of selection may exist when mutually exclusive projects
are of different size?
Q-10E4.2 What can cause
projects that are not mutually exclusive to become mutually exclusive?
Q-10E4.3 What is the method
to deal with mutually exclusive projects of different size
Q-10E5.1
What is the cause of conflict between NPV and IRR in all circumstances
(different lives, different sizes, different timing of cash flows,
or different risk factors)?
Q-10E5.2 What is the assumed
rate of reinvestment of cash flows in NPV?
Q-10E5.3 What is the assumed
rate of reinvestment of cash flows in IRR?
Q-10E5.4 On what depends
the resolution of conflict between NPV and IRR?
Q-10E5.5 Give formula
for adjusted NPV.
Q-10E5.6 Give formula
for adjusted IRR.
Q-10E6.1
Is there a general corporate finance principle that projects should
be selected irrespective of financing? Discuss reasons and exceptions.
Q-10E6.2 What is the general
name given to the case where there are more good projects than
funds available?
Q-10E6.3 Is capital rationing
a violation of the principle of separating project decision and
financing?
Q-10E6.4 Are the reasons
for capital rationing just financing?
Q-10E6.5What are common
reasons underlying a capital rationing decision?
Q-10E6.6 How is a problem
of capital rationing resolved?
Q-10E7.1
What is being optimized in a capital rationing problem?
Q-10E7.2 What is the mathematical
procedure to find a solution to a constrained optimization?
Q-10F.1 How important is the quality of cash flow estimates for capital budgeting and optimal operating leverage?
Q-10F.2 How difficult
is it to estimate future sales revenues?
Q-10F.3 What can an analyst
do to verify the sales revenue projections in cash flow data?
Q-10F.3 How useful is pro
forma statement of cash flow for an outside analyst seeking to
study company inveting plans?
Q-10F.4 What is free
cash flow of great importance for success in capital budgeting?
Q-10F.5 Does free cash
flow impact current assets or future ability to deal with unexpected?
Q-10G.1 Is the improvement
in gross margin correlated with the size of fixed asset at the
aggregate level?
Q-10G.2 Do larger firms
in the United States have larger gross profit margins?
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