FINA 3313 FINAL EXAM - CH 9-12

Which of the following statements is correct?

The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a constant proportion of sales.

If a 20% reduction in forecast sales would not extinguish a project's profitability, then sensitivity analysis would suggest:

deemphasizing that variable as a critical factor.

______ is the accounting item to estimate a reduction in the value of an asset with the passage of time, due in particular to wear and tear

depreciation expense

What types of projects does the BNSF strategic studies team evaluate?

discretionary

According to the article, "Sunk cost fallacy: Throwing good money after bad," how can banks limit losses from bad loans?

increase bank executive turnover

Generally, increases in leverage result in______________ return and _____________________ risk.

increased; increased

____________________ results from the use of fixed - cost assets or funds to magnify returns to a firm's owners.

leverage

The primary purpose of capital budgeting is to:

maximize the shareholders' wealth

In theory, a firm should maintain financial leverage consistent with a capital structure that

maximizes the owner's wealth

Capital rationing may be beneficial to a firm if it:

weeds out proposals with weaker or biased NPVs

Jon Stevens, BNSF Vice President and Controller describes the capital spending process primarily as

- a means to ensure regulatory compliance - a balancing act that requires careful evaluation of the costs and benefits of each project

What types of analyses do the BNSF strategic studies team conduct?

- discounted cash flow - sensitivity

Identify which of these are the relevant cash flows when considering a capital budgeting project.

- lost rent from retail facility - remodeling expenses for new store increase in inventory - excepted salvage value of manufacturing equipment

The disadvantages of the IRR period method is that it

- only works for normal cash flows - requires a lot of data (estimates of all CFs) - requires complex calculations

Select all the different methods that can be used to compute depreciation expense.

- straight-line depreciation - accelerated cost recovery system (ACRS) - modified accelerated cost recovery system (MACRS)

What are advantages of payback period?

-Measures Liquidity, Easy to communicate -Does not require complex calculations -Does not require discount rate

Match the following concepts for first principle: 1. The investment decision 2. The financing decision 3. The dividend decision

1. Invest in assets that earn a return greater than the minimum acceptable hurdle rate. 2. Find the right kind of debt for your firm and the right mix of debt and equity to fund your operations 3. If you can't find investments that make your minimum acceptable rate, return the cash to owners of your business

Which of the following changes, if of a sufficient magnitude, could turn a negative NPV project into a positive NPV project?

A decrease in the fixed costs

A corporation is contemplating an expansion project. The CFO plans to calculate the project's NPV by discounting the relevant cash flows (which include the initial up-front costs, the operating cash flows, and the terminal cash flows) at the corporation's cost of capital (WACC). Which of the following factors should the CFO include when estimating the relevant cash flows?

Any opportunity costs associated with the project.

Book values have the disadvantage that they change unpredictably and may not be easy to measure.

FALSE

Finance is mainly a backward-looking summary of past decisions.

FALSE

It should not usually be clear whether we are describing independent or mutually exclusive projects in the following chapters because when we only describe one project then it can be assumed to be independent

FALSE

NPV assumes intermediate cash flows are reinvested at the cost of equity, while IRR assumes that they are reinvested at the cost of capital

FALSE

Net present value (NPV) is a sophisticated capital budgeting technique; found by adding a project's initial investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of capital.

FALSE

The market value of an assets is its cost at the time of purchase

FALSE

Projects that compete with one another so that the acceptance of one eliminates from further consideration all other projects that serve a similar function.

Mutually exclusive

The "gold standard" of investment criteria refers to:

NPV

List steps of the capital budgeting process

Step 1: Personal generation Step 2: Review and analysis Step 3: Decision Making Step 4: Implementation Step 5: Follow-up

The Internal Rate of Return (IRR) is the discount rate that equates the NPV of an investment opportunity with $0

TRUE

The multiple IRR problem occurs when the signs of a project's cash flows change more than once.

TRUE

The degree of operating leverage has which of the following characteristics?

The DOL relates the change in sales to the change in net operating income.

Which of the following statements is correct for a project with a negative NPV?

The cost of capital exceeds the IRR