# Multiple choice questions

1. Under MACRS, an asset which originally cost $10,000 is being depreciated using a 5 -year normal recovery period. What is the depreciation expense in year 3?

A) $1,900

B) $1,200

C) $1,500

D) $2,100

4. Calculate net operating profit after taxes (NOPAT) if a firm has sales of $1,000,000, operating profit (EBIT) of $100,000, interest expense of $50,000, and a tax rate of 30%.

A) $35,000.

B) $700,000.

C) $70,000.

D) none of the above.

10. Assume Julian has a choice between two deposit accounts. Account A has an annual percentage rate of 7.55 percent but with interest compounded monthly. Account B has an annual percentage rate of 7.45 percent with interest compounded continuously. Which account provides the highest effective annual return?

A) Account A.

B) Account B.

C) Both provide the same effective annual return.

D) We don't have sufficient information to make a choice.

12. The ________ the coefficient of variation, the ________ the risk.

A) lower; lower

B) higher; lower

C) lower; higher

D) more stable; higher

be monitored.

15. Unsystematic risk is not relevant, because

A) it does not change.

B) it can be eliminated through diversification.

C) it cannot be estimated.

D) it cannot be eliminated through diversification.

20. The less certain a cash flow, the ________ the risk, and the ________ the present value of the cash flow.

A) lower; higher

B) lower; lower

C) higher; lower

D) higher; higher

24. A firm has the balance sheet accounts, common stock, and paid-in capital in excess of par, with values of $10,000 and $250,000, respectively. The firm has 10,000 common shares outstanding. If the firm had a par value of $1, the stock originally sold for

A) $24/share.

B) $25/share.

C) $26/share.

D) $30/share.

25. Following the theory of the 'efficient market hypothesis' all of the following are true EXCEPT

A) securities are typically in equilibrium, meaning they are fairly priced and their expected returns equal their required returns.

B) insider trading scandals have proven that stocks are not fully and fairly priced; as a result, it would be worthwhile for investors should spend time searching for mispriced (over- or under-valued) stocks.

C) at any point in time, security prices fully reflect all public information available about the firm and its securities, and these prices react swiftly to new information.

D) since stocks are fully and fairly price, it follows that investors should not waste their time trying to find and capitalize on miss-priced (under- or over-valued) securities.

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#### Solution Preview

Please see the attached file:

1. Under MACRS, an asset which originally cost $10,000 is being depreciated using a 5 -year normal recovery period. What is the depreciation expense in year 3?

A) $1,900

B) $1,200

C) $1,500

D) $2,100

Answer: A) $1,900

MACRS Depreciation Schedule

Year 5-year

1 20.000%

2 32.000%

3 19.200%

4 11.520%

5 11.520%

6 5.760%

Depreciation in the year 3 = 19.2% x $10,000 = $ 1920

4. Calculate net operating profit after taxes (NOPAT) if a firm has sales of $1,000,000, operating profit (EBIT) of $100,000, interest expense of $50,000, and a tax rate of 30%.

A) $35,000.

B) $700,000.

C) $70,000.

D) none of the above.

Answer: C) $70,000.

NOPAT = EBIT (1-Tax Rate) = $100,000 (1-0.3) = $70,000

10. Assume Julian has a choice between two deposit accounts. Account A has an annual percentage rate of 7.55 percent but with interest compounded monthly. Account B has an annual percentage rate of 7.45 percent with interest compounded continuously. Which account provides the highest effective ...

#### Solution Summary

Answers multiple choice questions on depreciation expense, NOPAT, effective annual return, coefficient of variation, unsystematic risk, present value, efficient market hypothesis.