finance 3000 exam 5
Which of the following statements is correct? A. A decrease in NWC involves either a reduction in current assets, which generates cash, or an increase in current liabilities, thereby freeing up the shareholder's cash for other things. B. A decrease in NWC involves either an increase in current assets, which generates cash, or a decrease in current liabilities, thereby freeing up the shareholder's cash for other things. C. An example of an increase in a net working capital is to buy more machines or another plant. D. None of these statements is correct.
A. A decrease in NWC involves either a reduction in current assets, which generates cash, or an increase in current liabilities, thereby freeing up the shareholder's cash for other things.
Which of the following statements is correct? A. A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback. B. Discounted payback uses a more aggressive reinvestment rate assumption than payback. C. Neither payback nor discounted payback uses time value of money concepts. D. None of these statements is correct.
A. A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback.
Which of the following statements is correct? A. If a new project is riskier than the firm's existing projects, then it should be expect to be "charged" a higher cost of capital than the firm's overall WACC. B. If a new project is riskier than the firm's existing projects, then it should be expect to be "charged" a lower cost of capital than the firm's overall WACC. C. The project's risk and the cost of capital to which it is compared are independent. D. None of these answers is correct.
A. If a new project is riskier than the firm's existing projects, then it should be expect to be "charged" a higher cost of capital than the firm's overall WACC.
Which of the following statements is true? A. If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital. B. If the new project is riskier than the firm's existing projects, then it should be charged a lower cost of capital. C. If the new project is riskier than the firm's existing projects, then it should be charged the firm's cost of capital. D. The new project's risk is not a factor in determining its cost of capital.
A. If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital.
A local bank is contemplating adding a new ATM to their lobby. They will need another phone line to provide communications which has a monthly cost of $50 per month. This is an example of _____________. A. Incremental cash flow B. Sunk cost C. Complementary costs D. None of these
A. Incremental cash flow
ABC Engineering just bought a new machine. All of the following are examples of incremental cash flows except _______________. A. Interest expense on the loan used to purchase the machine B. Installation costs on the new machine C. Increase in costs as a result of the new machine D. Increases in depreciation expenses as a result of the new machine
A. Interest expense on the loan used to purchase the machine
All of the following capital budgeting tools are suitable for firms facing time constraints except ______. A. NPV B. Payback C. Discounted payback D. All of these answers are suitable for firms facing time constraints.
A. NPV
Which of the following statements is correct regarding the NPV profile? A. The IRR appears as the intersection of the NPV profile with the x-axis. B. The IRR appears at the crossover point or where the two profiles intersect. C. NPV profiles for independent projects with normal cash flows will intersect. D. All of these statements are correct.
A. The IRR appears as the intersection of the NPV profile with the x-axis.
The MIRR statistic is different from the IRR statistic in that _____________. A. The MIRR assumes that the cash inflows can be reinvested at the cost of capital B. The MIRR assumes that the cash inflows can be reinvested at the IRR C. The MIRR uses weighted-average dollars D. The MIRR uses input from the NPV whereas the IRR does not
A. The MIRR assumes that the cash inflows can be reinvested at the cost of capital
What is the theoretical minimum for the weighted average cost of capital? A. The after-tax cost of debt B. The cost of preferred stock C. CAPM D. The cost of equity
A. The after-tax cost of debt
Which of the following will increase the cost of equity? A. The firm's share price falls 10%. B. The firm is expected to reduce its dividend. C. The firm's corporate tax rate increases. D. None of these answers is correct
A. The firm's share price falls 10%
Which of the following is a true statement? A. To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm's existing debt. B. To estimate the before-tax cost of debt, we need to solve for the Yield to Call (YTC) on the firm's existing debt. C. To estimate the before-tax cost of debt, we use the coupon rate on the firm's existing debt. D. To estimate the before-tax cost of debt, we use the average rate on the firm's existing debt
A. To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm's existing debt.
A decrease in net working capital (NWC) is treated as a A. cash inflow B. cash outflow C. sunk cost D. historical cost
A. cash inflow
Effects that arise from a new product or service that increase sales of the firm's existing products or services are referred to as A. complementary effects. B. substitutionary effects. C. sunk effects. D. marginal effects.
A. complementary effects.
These are fees paid by firms to investment bankers for issuing new securities. A. flotation costs B. interest expense C. seller financing charges D. user fees
A. flotation costs
This is used as a measure of the total amount of available cash flow from a project. A. free cash flow B. operating cash flow C. investment in operating capital D. sunk cash flow
A. free cash flow
A project's IRR ____________________. A. is the average rate of return necessary to pay back the project's capital providers B. will change with the cost of capital C. is equal to the discounted cash flows divided by the number of cash flows if the cash flows are a perpetuity D. All of these answers are correct.
A. is the average rate of return necessary to pay back the project's capital providers
This technique for evaluating capital projects is particularly useful when firms face time constraints in repaying investors. A. payback B. internal rate of return. C. net present value D. profitability index
A. payback
This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project. A. payback B. internal rate of return C. net present value D. profitability index
A. payback
The ____________ approach to computing a divisional weighted average cost of capital (WACC) requires only that WACCs for "risky" and "relatively safe" divisions be adjusted. A. subjective B. objective C. firmwide D. implicit
A. subjective
A proxy beta is _________________. A. the average beta of firms that are only engaged in the proposed new line of business B. the industry average beta that is used in lieu of the firm's beta because the firm has not existed long enough to have a beta calculated C. the beta used when the firm has a great deal of business risk D. None of these answers is correct.
A. the average beta of firms that are only engaged in the proposed new line of business
Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock, A. the component cost will need to be integrated to figure project WACCs. B. the component cost will need to be integrated only for the firm's WACC. C. the firm can increase the project's WACC to incorporate the flotation costs' impact. D. the firm can leave the WACC alone and adjust the project's initial investment upwards
A. the component cost will need to be integrated to figure project WACCs.
The Net Present Value decision technique may not be the only pertinent unit of measure if the firm is facing A. time or resource constraints. B. a labor union. C. the election of a new board of directors. D. a major investment.
A. time or resource constraints.
Which of the following statements is correct? A. The WACC measures the before-tax cost of capital. B. An increase in the firm's marginal corporate tax rate will decrease the weighted average cost of capital. C. Flotation costs can decrease the weighted average cost of capital. D. None of these statements is correct.
B. An increase in the firm's marginal corporate tax rate will decrease the weighted average cost of capital.
Which of the following statements is correct? A. The weighted average cost of capital is calculated on a before-tax basis. B. An increase in the market risk premium is likely to increase the weighted average cost of capital. C. The weights of debt and equity should be based on the balance sheet because this is the most accurate assessment of the valuation. D. All of these statements are correct.
B. An increase in the market risk premium is likely to increase the weighted average cost of capital.
Why do we use market-value weights instead of book-value weights? A. Because often-times firms "window-dress" their financial statements. B. Because we are interested in determining what the cost of financing the firm's assets would be given today's market situation and the component costs the firm currently faces, not what the historical prices would have been. C. Because it is required in the Sarbanes-Oxley regulations. D. None of these answers is correct.
B. Because we are interested in determining what the cost of financing the firm's assets would be given today's market situation and the component costs the firm currently faces, not what the historical prices would have been.
The research chemists at MegaClean created a new cleaner that keeps car and truck tires shiny and clean for one year. They believe that this product will be highly successful and will attract customers to purchase their existing line of household cleaning products. This is an example of ___________. A. Substitutionary effect B. Complementary effect C. Opportunity effect D. Sunk cost
B. Complementary effect
Which of the following will directly impact the cost of debt? A. Capital Structure B. Debt Ratio C. Coupon Rate D. Competition within the industry
B. Debt Ratio
ABC Engineering just purchased a new machine. All of the following are examples of incremental cash flows except _______________. A. Freight charged to ship the machine B. Developmental costs to determine which machine would best work with their unique process C. Increase in electric bill to run the machine D. Reduction in maintenance expense associated with the new machine
B. Developmental costs to determine which machine would best work with their unique process
This is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division. A. Average WACC B. Divisional WACC C. Proxy WACC D. Pure-play WACC
B. Divisional WACC
Section 179 allows a business, with certain restrictions, to do which of the following? A. Offset the tax liability with the cost of the asset in the year of purchase. B. Expense the asset immediately in the year of purchase. C. Expense the asset using double declining balance depreciation during the life of the asset. D. Get a government grant to purchase the asset.
B. Expense the asset immediately in the year of purchase.
All of the following are incremental cash flows attributable to the project except _____. A. Opportunity costs B. Financing costs C. Substitutionary effects D. Complementary effects
B. Financing costs
Which of the following is incorrect regarding the IRR statistic? A. For independent projects, IRR will give the same accept/reject decision as NPV. B. For the IRR statistic to give a different accept/reject decision from NPV, the cash flows must be non-normal and the projects must be mutually exclusive. C. To solve for the IRR, one can simply solve the NPV formula for the rate that will make the NPV equal to zero. D. None of these statements is incorrect.
B. For the IRR statistic to give a different accept/reject decision from NPV, the cash flows must be non-normal and the projects must be mutually exclusive.
Which of these statements is true regarding calculating weights for WACC? A. If we are calculating WACC for the firm, then equity, preferred stock and debt would be the entire book value of each source of capital. B. If we are calculating WACC for the firm, then equity, preferred stock and debt would be the entire market value of each source of capital. C. If we are calculating WACC for a project, then equity, preferred stock and debt would be the entire book value of each source of capital. D. If we are calculating WACC for a project, then equity, preferred stock and debt would be the entire market value of each source of capital.
B. If we are calculating WACC for the firm, then equity, preferred stock and debt would be the entire market value of each source of capital.
Suppose you have a project whose discounted payback is equal to its termination date. What can you say for sure about its PI? A. The discounted payback will be greater than zero. B. It will have a PI and NPV of zero. C. The NPV and IRR will yield the same decision. D. The IRR will just equal the cost of capital.
B. It will have a PI and NPV of zero.
All of the following are strengths of NPV except _______________. A. It works equally well for independent and mutually exclusive projects B. Managers have a preference for using a statistic that is in percent instead of dollars C. It uses a conservative reinvestment rate assumption D. These are all strengths of the NPV statistic
B. Managers have a preference for using a statistic that is in percent instead of dollars
The process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements is referred to as the _________________. A. Substitute and complement B. Pro forma analysis C. Incremental cash flows D. Estimation and depreciation analysis
B. Pro forma analysis
A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as _______________________. A. NPV B. Profitability Index C. MIRR D. Discounted Payback
B. Profitability Index
AB Mining Company just commissioned a firm to identify if an unused portion of their mine contains any silver or gold at a cost of $125,000. This is an example of a(n) _______________. A. Opportunity cost B. Sunk cost C. Incremental cash flow D. Relevant cash flow
B. Sunk cost
Which of the following statements is correct? A. The WACC is a measure of the before-tax cost of capital. B. The WACC measures the marginal cost of capital. C. It is common that the after-tax cost of debt exceeds the cost of equity. D. None of these statements is correct.
B. The WACC measures the marginal cost of capital.
Which of the following statements is correct? A. The flotation-adjusted cost of equity will always be less than the cost of equity that has not been adjusted for flotation costs. B. The flotation-adjusted cost of equity will always be more than the cost of equity that has not been adjusted for flotation costs. C. The flotation-adjusted cost of equity may be more than or less than the cost of equity that has not been adjusted for flotation costs. D. None of these statements is correct.
B. The flotation-adjusted cost of equity will always be more than the cost of equity that has not been adjusted for flotation costs.
A graph of a project's ______ is a function of cost of capital. A. discounted payback B. net present value C. modified internal rate of return D. profitability index
B. net present value
. A manufacturing firm is planning on expanding its existing operations. The expansion project is significant and will require the firm to house the expansion in a different location. The firm is considering building on a lot they own across town. The lot is currently vacant and it was paid for nearly 20 years ago. Given this information, which of the following statements is correct? A. The lot is not an incremental cash flow because it is not being utilized at this time. B. The lot is an incremental cash flow because it represents an opportunity cost. C. The lot is an incremental cash flow because it represents a sunk cost. D. The lot is not an incremental cash flow because it has already been paid for.
B. The lot is an incremental cash flow because it represents an opportunity cost.
Which of the following statements is correct? A. Discounted payback solves all the shortcomings of payback. B. The reinvestment rate of NPV and MIRR is the same. C. The MIRR and IRR have the same reinvestment rate. D. All of these are correct statements.
B. The reinvestment rate of NPV and MIRR is the same.
Which of these statements is true regarding divisional WACC? A. Using a divisional WACC vs a WACC for the firm's current operations will result in quite a few incorrect decisions. B. Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm's average beta. C. Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present less risk than the firm's average beta. D. Using a firmwide WACC to evaluate new projects would have no impact on projects that present less risk than the firm's average beta.
B. Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm's average beta.
One way to account for flotation costs of raising capital is to A. adjust all the project's cash flows so that each year it will reflect the flotation costs. B. adjust the project's initial cash flow so that it will reflect the flotation costs. C. adjust only the project's operating cash flows to account for paying back the shareholders. D. adjust the project's tax burden to account for the tax implications of raising capital.
B. adjust the project's initial cash flow so that it will reflect the flotation costs.
The Net Present Value decision technique uses a statistic denominated in A. years. B. currency. C. a percentage. D. time lines.
B. currency.
This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project plus interest at market rates. A. payback B. discounted payback C. net present value D. profitability index
B. discounted payback
A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows. A. discounted payback B. net present value C. internal rate of return D. profitability index
B. net present value
The ___________ approach to computing a divisional weighted average cost of capital (WACC) uses the average beta of projects in each division to calculate the WACC. A. subjective B. objective C. firmwide D. implicit
B. objective
An average of which of the following will give a fairly accurate estimate of what a project's beta will be? A. flotation beta B. proxy beta C. pure-play proxies D. weighted average beta
B. proxy beta
Accelerated depreciation allows firms to A. receive less of the dollars of depreciation earlier in the asset's life. B. receive more of the dollars of depreciation earlier in the asset's life. C. not pay any taxes during an asset's life. D. receive more of the dollars of depreciation later in the asset's life.
B. receive more of the dollars of depreciation earlier in the asset's life.
When looking at these types of projects, one must consider any cash flows that arise from surrendering old equipment before the end of its useful life. A. incremental B. replacement C. cost-cutting D. new
B. replacement
Effects that arise from a new product or service that decrease sales of the firm's existing products or services are referred to as A. complementary effects. B. substitutionary effects. C. sunk effects. D. marginal effects.
B. substitutionary effects.
With regard to depreciation, the time value of money concept tells us that A. delaying the depreciation expense is always better. B. taking the depreciation expense sooner is always better. C. delaying the depreciation expense is sometimes better. D. taking the depreciation expense sooner is sometimes better
B. taking the depreciation expense sooner is always better.
Which of these makes this a true statement? When determining the appropriate weights used in calculating a WACC, it should reflect A. the relative sizes of the total book capitalizations for each kind of security that the firm issues. B. the relative sizes of the total market capitalizations for each kind of security that the firm issues. C. only the market after-tax cost of debt. D. only the market after-tax cost of equity.
B. the relative sizes of the total market capitalizations for each kind of security that the firm issues.
Which of these makes this a true statement? The WACC formula A. is not impacted by taxes. B. uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing. C. uses the pre-tax costs of capital to compute the firm's weighted average cost of debt financing. D. focuses on operating costs only to keep them separate from financing costs.
B. uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing.
As new capital budgeting projects arise, we must estimate A. the float costs for financing the project. B. when such projects will require cash flows. C. the cost of the loan for the specific project. D. the cost of the stock being sold for the specific project.
B. when such projects will require cash flows.
Which of the following best describes the NPV profile? A. A graph of a project's NPV as a function of possible IRRs. B. A graph of a project's NPV over time. C. A graph of a project's NPV as a function of possible capital costs. D. None of these statements is correct.
C. A graph of a project's NPV as a function of possible capital costs.
Which of the following is most correct? A. When comparing two firms within the same industry, most analysts calculate the weighted average cost of capital on a before-tax basis to facilitate comparisons. B. Firms should use historical costs rather than marginal costs of capital. C. An increase in the risk-free rate will increase the cost of equity. D. All of these statements are equally correct.
C. An increase in the risk-free rate will increase the cost of equity.
All of the following capital budgeting tools are suitable for non-normal cash flows except ____. A. MIRR B. Profitability Index C. Discounted Payback D. NPV
C. Discounted Payback
An estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular business unit is known as the ____________. A. Business unit WACC B. Pure play beta C. Divisional WACC D. Component cost
C. Divisional WACC
The best approach to convert an infinite series of asset purchases into a perpetuity is known as the A. Net working capital approach B. Net present value approach C. Equivalent annual cost approach D. Equivalent annual cash flow approach
C. Equivalent annual cost approach
All of the following capital budgeting tools are suitable for non-normal cash flows except ____. A. MIRR B. Profitability Index C. IRR D. NPV
C. IRR
Which of the following is a reason why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division? A. Managers in different divisions may use different methods to calculate the WACC. B. The expected return of the new project may be incorrect. C. If projects are assigned to the wrong division, the risk of that division may be significantly different than the risk of the project, implying that the project will be evaluated with a divisional cost of capital that is much different from what a project-specific cost of capital would be. D. None of these answers is correct.
C. If projects are assigned to the wrong division, the risk of that division may be significantly different than the risk of the project, implying that the project will be evaluated with a divisional cost of capital that is much different from what a project-specific cost of capital would be.
A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows is referred to as ______________. A. PI B. IRR C. NPV D. MIRR
C. NPV
Which of the following is a true statement regarding the appropriate tax rate to be used in the WACC? A. One would use the marginal tax rate that the firm paid the prior year. B. One would use the average tax rate that the firm paid the prior year. C. One would use the weighted average of the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction. D. One would use the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction.
C. One would use the weighted average of the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction.
All of the following capital budgeting tools are suitable for non-normal cash flows except ____. A. MIRR B. Profitability Index C. Payback D. NPV
C. Payback
Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project), rather than the gross return? A. Internal Rate of Return, IRR B. Modified Internal Rate of Return, MIRR C. Profitability Index, PI D. Net Present Value, NPV
C. Profitability Index, PI
A local bank is contemplating opening a new branch bank in a large superstore across town from their main office. It is estimated that the new branch will generate $20,000 after expenses each month. The manager wonders if all these revenues should be considered an incremental cash flow. Given this information, which of the following statements is correct? A. $20,000 is generated by the new branch bank and therefore it is an incremental cash flow. B. We would first need to assess the opportunity cost of placing a branch in a different location to answer this question. C. Some amount less than the $20,000 is incremental because of substitutionary effects. D. Some amount less than the $20,000 is incremental because of complementary effects.
C. Some amount less than the $20,000 is incremental because of substitutionary effects.
Which of the following will directly impact the cost of equity? A. Expected growth rate in sales B. Expected future tax rates C. Stock price D. Profit margins
C. Stock price
Coke is planning on marketing a new drink called Very Berry Coke which is a mixture of raspberry and blackberry flavors blended to perfection and added to the highly secret Coca-Cola formula. This new product is expected to reduce the sales of their existing product, Cherry Coke, by $10 million dollars per year. This is an example of a _______________. A. Pro forma effect B. Complementary effect C. Substitutionary effect D. Opportunity effect
C. Substitutionary effect
If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a(n) ________________. A. Incremental cash outflow B. Opportunity cost C. Sunk cost D. Expensible item
C. Sunk cost
Due to rapid growth, a computer superstore is contemplating expanding by adding another location. Which of the following items should the financial officer NOT include in estimating the cash flow associated with this expansion? A. The company owns the land of the future site of the new location. B. The new location is expected to take sales away from the existing location. C. The company spent $100,000 six months ago in a major advertising campaign which will help the new store become profitable sooner. D. All of these items should be included in the analysis.
C. The company spent $100,000 six months ago in a major advertising campaign which will help the new store become profitable sooner.
Which of the following is a situation in which you would want to use the constant growth model approach for estimating the component cost of equity? A. When the firm has a low beta. B. When the firm has multiple divisions. C. When the firm's stock is expected to experience constant dividend growth. D. When the firm has a high level of financial leverage.
C. When the firm's stock is expected to experience constant dividend growth.
Which of following is a situation in which you would want to use the CAPM approach for estimating the component cost of equity? A. When you are able to estimate the market risk premium with certainty. B. When you are able to estimate the risk-free rate with certainty. C. When you are able to estimate the firm's beta with certainty. D. When the firm pays a constant dividend.
C. When you are able to estimate the firm's beta with certainty.
Neither payback period nor discounted payback period techniques for evaluating capital projects account for A. time value of money. B. market rates of return. C. cash flows that occur after payback. D. cash flows that occur during payback.
C. cash flows that occur after payback.
For which situation below would one need to "smooth out" the variation in each set of cash flows so that each becomes a perpetuity? A. choosing between projects with differing risks B. choosing between independent project C. choosing between alternative assets with differing lives D. choosing between alternative assets with equal lives
C. choosing between alternative assets with differing lives
. Flotation costs are _______________. A. insignificant and can be assumed away B. the difference between the bid-ask spread on the sale of the security C. commissions to the underwriting firm that floats the issue D. None of these answers are correct.
C. commissions to the underwriting firm that floats the issue
An objective approach to calculating divisional WACCs would be done by A. simply considering the project's risk relative to the firm's lines of business and adjusting upward or downward to account for subjective opinions of project risk. B. computing the average beta for the firm, the firm's CAPM formula, and the firm's WACC. C. computing the average beta per division, using these figures for each division in the CAPM formula, and then constructing divisional WACCs. D. simply averaging out all the WACCs for all the firm's projects.
C. computing the average beta per division, using these figures for each division in the CAPM formula, and then constructing divisional WACCs.
Which of the following is NOT included when calculating the depreciable basis for real property? A. freight charges for item B. sales tax paid for item C. financing fees D. installation and testing fees
C. financing fees
A capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return. A. discounted payback B. net present value C. internal rate of return D. profitability index
C. internal rate of return
When calculating the weighted average cost of capital, weights are based on A. book values. B. book weights. C. market values. D. market betas.
C. market values.
A capital budgeting technique that converts a project's cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return, IRR, decision rule. A. discounted payback B. net present value C. modified internal rate of return D. profitability index
C. modified internal rate of return
These are groups or pairs of projects where you can accept one but not all. A. dependent B. independent C. mutually exclusive D. mutually dependent
C. mutually exclusive
Which of these completes this statement to make it true? The constant growth model is A. always going to have assumptions that will hold true. B. able to be adjusted for stocks that don't expect constant growth without sizeable errors. C. only going to be appropriate for the limited number of stocks that just happen to expect constant growth. D. only going to be appropriate for the limited number of stocks that just happen to expect nonconstant growth.
C. only going to be appropriate for the limited number of stocks that just happen to expect constant growth.
This is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements. A. incremental cash flows B. cash flow analysis C. pro forma analysis D. substitutionary analysis
C. pro forma analysis
This is the concept that a unit's sales will follow an approximate bell-shaped curve versus a steady sales life. A. bell curve cycle B. coefficient of variation C. product life cycle D. NWC life cycle
C. product life cycle
This is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing. A. generally accepted accounting principle B. financing principle C. separation principle D. WACC principle
C. separation principle
The benchmark for the Profitability Index, PI, is the A. cost of capital B. managers' maximum number of years C. zero or anything larger than zero D. zero or anything less than zero
C. zero or anything larger than zero
We accept projects with a positive NPV because it means that ____________. A. We have recovered all our costs B. We are creating wealth for shareholders C. The project's expected return exceeds the cost of capital D. All of these
D. All of these
Which of the following will impact the cost of equity component in the weighted average cost of capital? A. The risk-free rate B. Beta C. Expected return on the market D. All of these
D. All of these
Which of the following statements is correct with respect to Section 179 deductions? A. It was designed to help small businesses. B. It allows the firm to expense the asset immediately in the year of purchase. C. Most businesses can expense up to $108,000 of property placed in service during each year. D. All of these are correct statements.
D. All of these are correct statements.
A disadvantage of the payback statistic is that ___________. A. It does not reflect the time value of money B. It does not give an indication of the project's riskiness C. It does not consider cash flows beyond the payback period D. All of these are disadvantages of payback
D. All of these are disadvantages of payback
Which of the following makes this a true statement? Ideally, when searching for a beta for a new line of business A. one could find other firms engaged in the proposed new line of business and use their betas as proxies to estimate the project's risk. B. one would like to find at least three or four pure-play proxies. C. two, or even one, proxies might represent a suitable sample if their line of business resembles the proposed new project closely enough. D. All the answers make this a true statement.
D. All the answers make this a true statement.
An asset's cost plus the amounts you paid for items such as sales tax, freight charges, and installation and testing fees is referred to as the ___________________. A. Opportunity cost B. Sunk cost C. Asset costing reference D. Depreciable basis
D. Depreciable basis
When calculating operating cash flow for a project, one would calculate it as being mathematically equal to which of the following? A. EBIT - Interest - Taxes + Depreciation B. EBIT - Taxes C. EBIT + Depreciation D. EBIT - Taxes + Depreciation
D. EBIT - Taxes + Depreciation
A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as ______________. A. IRR B. EAR C. NPV D. MIRR
D. MIRR
The least-used capital budgeting technique in industry is ____________. A. NPV B. IRR C. Payback D. MIRR
D. MIRR
Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV? A. Independent projects that are evaluated at a high cost of capital. B. Mutually exclusive projects that are evaluated at a low cost of capital. C. Any projects that exhibit differences in scale or timing. D. Mutually exclusive projects that exhibit differences in scale or timing.
D. Mutually exclusive projects that exhibit differences in scale or timing.
Which of the following tools is suitable for choosing between mutually exclusive projects? A. Profitability Index B. IRR C. MIRR D. NPV
D. NPV
All of the following are strengths of payback except ____________________. A. Its benchmark is not determined by a relevant external constraint B. It incorporates the time value of money C. It uses a conservative reinvestment rate D. None of these
D. None of these
The reason that we do not use an after-tax cost of preferred stock is __________. A. because preferred dividends are paid out of before-tax income B. because most of the investors in preferred stock do not pay tax on the dividends C. because we can only estimate the marginal tax rate of the preferred stockholders D. None of these answers is correct.
D. None of these answers is correct.
Which of the following statements is correct? A. If the risk-free rate increases, it will have no impact on the weighted average cost of capital. B. Investor returns are reduced when float costs increase, and therefore float costs reduce the weighted average cost of capital. C. The weighted average cost of capital is a historical cost. D. None of these statements is correct.
D. None of these statements is correct.
Which of the following statements is correct? A. Most current assets are depreciated using the MACRS depreciation calculation. B. Most large corporations use Section 179 to depreciate their assets. C. Most businesses benefit from accelerated depreciation; therefore the straight-line depreciation method is preferred by most businesses. D. None of these statements is correct.
D. None of these statements is correct.
Which of the following statements is correct? A. A decrease in the firm's marginal corporate tax rate will decrease the weighted average cost of capital. B. Flotation costs can decrease the weighted average cost of capital. C. The cost of debt is based on the cost of all liabilities, including accounts payable and accruals. D. None of these statements is correct.
D. None of these statements is correct.
All of the following can be included in the depreciable basis of an asset except _______. A. Freight charges B. Installation fees C. Sales tax D. Variable costs
D. Variable costs
Suppose a new project was going to be financed partially with retained earnings. What flotation costs should you use for retained earnings? A. Use the same flotation cost that would be used to issue new common stock. B. Use an average of the flotation costs for debt, preferred and common stock. C. Use the industry average flotation cost for common stock. D. Zero.
D. Zero.
A project has normal cash flows. Its IRR is 15 percent and its cost of capital is 10 percent. Given this, the project must have: A. only one negative cash flow. B. a PI that is negative. C. a discounted payback period that is shorter than its payback period. D. an NPV that is greater than zero.
D. an NPV that is greater than zero.
All capital budgeting techniques A. render the same investment decision. B. use the same measurement units. C. include all crucial information. D. exclude some crucial information.
D. exclude some crucial information.
Concerning incremental project cash flow, this is a cost one would never count as an expense of the project. A. initial investment B. taxes paid C. operating expenses of the project D. financing costs
D. financing costs
This is the IRS convention that requires that all property placed in service during a given period is assumed to be placed in service at the midpoint of that period. A. mid-point convention B. mid-month convention C. mid-quarter convention D. half-year convention
D. half-year convention
Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects? A. payback period B. discounted payback period C. modified internal rate of return D. net present value
D. net present value
These are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive. A. expected cash flows B. time line cash flows C. non-normal cash flows D. normal cash flows
D. normal cash flows
If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a A. committed cost B. complementary cost C. obligated cost D. sunk cost
D. sunk cost
Which of the following makes this a true statement? If the new project does significantly increase the firm's overall risk, A. the increased risk will be borne equally amongst the bond holders, preferred stockholders, and common stockholders. B. the increased risk will be borne disproportionately by bond holders. C. the increased risk will be borne disproportionately by preferred stockholders. D. the increased risk will be borne disproportionately by common stockholders
D. the increased risk will be borne disproportionately by common stockholders
When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose A. either project if they both are more than managers' maximum payback period. B. neither project if they both are less than managers' maximum payback period. C. the project that pays back the soonest. D. the project that pays back the soonest if it is equal to or less than managers' maximum payback period.
D. the project that pays back the soonest if it is equal to or less than managers' maximum payback period.