FINAN 450 Test 3

Which of the following are expected cash flows to investors in stocks?

- dividends - capital gains

NASDAQ has which of these features?

-Computer network of securities dealers -Multiple market maker system

Once cash flows have been estimated, which of the following investment criteria can be applied to them?

-NPV -IRR -payback period

If a project has multiple internal rates of return, which of the following methods should be used?

-NPV -MIRR

A benchmark PE ratio can be determined using:

-a company's own historical PEs -the PEs of similar companies

The basic NPV investment rule is:

-accept a project if the NPV is greater than zero -if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference -reject a project if its NPV is less than zero.

The IRR rule can lead to bad decisions when _____ or _____.

-cash flows are not conventional -projects are mutually exclusive

Investment in net working capital arises when ___.

-cash is kept for unexpected expenditures -inventory is purchased -credit sales are made

Which of the following are reasons why it is more difficult to value common stock than it is to value bonds?

-common stock cash flows are not known in advance -the rate of return required by the market is not easily observed -the life of a common stock is essentially forever

steps involved in the discounted payback period

-discount the cash flows using the discount rate -add the discounted cash flows -accept if the discounted payback period is less than some pre-specified number of years

Which of the following are features of common stock?

-it generally has voting rights -it has no special preference in receiving dividends -it has no special preference in bankruptcy

Preferred stock has preference over common stock in the _____.

-payment of dividends -distribution of corporate assets

Which of the following are fixed costs?

-rent on production facility -cost of equipment

Operating cash flow is a function of _____.

-taxes -depreciation -earnings before interest and taxes

When evaluating cost-cutting proposals, how are operating cash flows affected?

-there is an additional depreciation -the decrease in costs increases operating income

The rules for depreciating assets for tax purposes are based upon provisions in the ___.

1986 Tax Reform Act

What is net working capital?

Current assets minus current liabilities

Which capital budgeting decision method finds the present value of each cash flow before calculating a payback period?

Discounted payback period

While making capital budgeting decisions, which of the following sentence is true regarding the initial investment of net working capital?

It is expected to be recovered by the end of the project's life.

Which of the following occurs in the primary market?

Newly-issued stocks are initially sold

Which one of the following is the equation for estimating operating cash flows using the tax shield approach?

OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation × Tax rate

What is the equation for estimating operating cash flows using the top-down approach?

OCF = Sales - Costs - Taxes

According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:

a target average accounting return

A project should be __________ if its NPV is greater than zero.

accepted

Cash flows should always be considered on a(n) ___________ basis.

after-tax

Opportunity costs are ____.

benefits lost due to taking on a particular project

The AAR is calculated by taking the average net income and dividing it by the average _____ value.

book

OCF is calculated as net income plus depreciation using the _____ approach.

bottom-up

A person who brings buyers and sellers together is called a(n) ______.

broker

the decision-making process for accepting and rejecting projects.

capital budgeting

Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ____.

dealer

To calculate the OCF using the bottom-up approach, add ___________to net income.

depreciation

An NYSE member who acts as a dealer in particular stocks is called a ______ market maker.

designated

Incremental cash flows come about as a(n) ________ consequence of taking a project under consideration.

direct

A ___________is a payment by a corporation to shareholders, made in either cash or stock.

dividend

Common stock has no special preference either in receiving ________or in bankruptcy.

dividends

The assumption of constant growth infers that _________.

dividends change at a constant rate

When developing cash flows for capital budgeting, it is _____ to overlook important items.

easy

The cash flows of a new project that come at the expense of a firm's existing projects is called __________.

erosion

True or false: The MIRR function eliminates multiple IRRs and should replace NPV.

false

For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.

fasle

The ___________ step is to determine whether cash flows are relevant.

first

An NYSE member who executes customer buy and sell orders is called a ______broker.

floor

The profitability index is calculated by dividing the PV of the _________ cash flows by the initial investment.

future

Sunk costs are costs that ____.

have already occurred and are not affected by accepting or rejecting a project

Interest expenses incurred on debt financing are ______ when computing cash flows from a project.

ignored

The payback period can lead to incorrect decisions if it is used too literally because it ____.

ignores cash flows after the cutoff date

An increase in depreciation expense will ____ cash flows from operations.

increase

With cost-cutting proposals, when costs decrease, operating cash flows ___________.

increase

_____________ cash flows come about as a direct consequence of taking a project under consideration.

incremental

Stock price reporting has increasingly moved from traditional print media to the ______ in recent years.

internet

The computation of equivalent annual costs is useful when comparing projects with unequal _____.

lives

A share of common stock is _________ difficult to value in practice than a bond.

more

By ignoring time value, the payback period rule may incorrectly accept projects with a ______ NPV.

negative

a measure of how much value is created or added today by undertaking an investment.

net present value

Accounts receivable and accounts payable are not an issue with project cash flow estimation unless changes in ______________ are overlooked.

net working capital

One of the flaws of the payback period method is that cash flows after the cutoff date are ___.

not considered in the analysis

The IRR rule can lead to bad decisions when cash flows are _____ or projects are mutually exclusive.

not conventional

When voting for the board of directors, the number of votes a shareholder is entitled to is usually __________vote per share held.

one

When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:

one vote per share held

The amount of time needed for the cash flows from an investment to pay for its initial cost is the _____ period.

payback

This capital budgeting method allows lower management to make smaller, everyday financial decisions effectively.

payback method

A stock with dividend priority over common stock is called a Blank______ stock.

preferred

Initial public offerings of stock occur in the ____ market.

primary

The accelerated cost ________ system is a depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications.

recovery

Erosion will ______ the sales of existing products.

reduce

Opportunity costs are classified as ______ costs in project analysis.

relevant

The first step in estimating cash flow is to determine the _________ cash flows.

relevant

Using the payback period rule will bias toward accepting which type of investment?

short term investment

A calculated NPV of $15,000 means that the project is expected to create a positive value for the firm and _____.

should be accepted if there is no capital rationing constraint

The payback period method allows lower management to make _______ everyday financial decisions effectively.

smaller

The NYSE member who acts as a dealer in a small number of securities is called a(n) _____.

specialist

The ________ alone principle is the assumption that evaluation of a project may be based on the project's incremental cash flows.

stand

According to the _________ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm."

stand-alone

The goal of many successful organizations is a(n) ______ rate of growth in dividends.

steady

The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date.

suggests accepting

Investment firms that are active participants in stocks assigned to them are called _______________ liquidity providers.

supplemental

Which approach to estimating the operating cash flows uses the following equation? OCF = (Sales − Costs) × (1 − Tax rate) + Depreciation × Tax rate

tax shield approach

Which of the following is an example of a sunk cost?

test marketing expenses

Which of the following entities declares a dividend?

the board of directors

When the stock being valued does not pay dividends...

the dividend growth model can still be used.

True or false: IRR approach may lead to incorrect decisions in comparison of two mutually exclusive projects.

true

True or false: When developing cash flows for capital budgeting, it is easy to overlook important items.

true

The computation of equivalent annual costs is useful when comparing projects with _____ lives.

unequal

The _________curse says that the lowest bidder is the one who underbid the most.

winner's

When analyzing a proposed investment, we ___________ include interest paid or any other financing costs.

won't

When a firm finances new investments, it may set up accounts payable with suppliers, but the balance that the firm must supply is called the investment in net __________ capital.

working

Capital Corp is considering a project whose internal rate of return is 14%. If Capital's required return is 14%, the project's NPV is:

zero