Finance Final Exam
Why, empirically, does a AAA-rated bond carry a lower yield compared to a B-rated bond?
A AAA-rated bond carries less risk
To get to Free Cash Flows from accounting earnings
Add back depreciation and amortization and subtract capital expenditures
What is the correct accounting identity?
Assets = Debt + Equity
What is a measure of an asset's riskiness?
Beta
How does a decrease in Current Liabilities affect cash?
Decreases Cash
How does an increase in Current Assets (other than cash) affect cash?
Decreases Cash
The interest rate, i, which we use to calculate present value, is often referred to as the
Discount Rate
Accounting earnings or bottom-line net income is an accurate representation of the cash creation of the firm.
FALSE
As a metric for free cash flows of the firm, EBITDA is the revenue less the cost of goods sold, sales general and administrative costs, depreciation, interest and taxes.
FALSE
Since all forecasts are essentially wrong, financial tools such as NPV and IRR are weak tools in capital budgeting for financial managers.
FALSE
Cash flows available to pay the firm's stockholders and debt holders after the firm has made the necessary working capital investments, fixed asset investments, and developed the necessary new products to sustain the firm's ongoing operations is referred to as:
Free Cash Flow
The firm sells a piece of equipment no longer needed for operation. This asset has a book value of $1,000. What impact does this sale have on Free Cash Flow?
Free Cash Flow
This is cash flow available for payments to stockholders and debt holders of a firm after the firm has made investments in assets necessary to sustain the ongoing operations of the firm.
Free Cash Flow
You are evaluating an investment that requires $1,000 upfront, and pays $100 at the end of each of the first 2 years, and an additional lump-sum of $2,000 at the end of year 2. What would happen to the IRR if the annual payments at the end of each of the first 2 years go down from $100 to $50?
IRR Decreases
A piece of equipment costs $2,500. If this asset depreciates on a 5-year schedule, the Net Fixed Asset value on the Balance sheet in year 2 will be more or less than this same asset depreciating on a 3-year schedule?
MORE
Which financial statement reports the amounts of cash that the firm generated and distributed during a particular time period?
Statement of Cash Flows
What would happen to a project's NPV if its cash inflows are pushed closer to the present?
NPV Increases
Which of the following is the equivalent of $300 received today?
Seven hundred ninety-five dollars ninety-nine cents to be received 20 years in the future assuming a 5 percent annual interest rate
Stock A has a beta of -0.2, whereas stock B has a beta of 0.1. Which one of the two stocks would you expect to provide a higher return?
Stock B
Increasing the debt of the firm decreases the cash taxes owed.
TRUE
Company XYZ has a target capital structure of 50% equity and 50% debt. Its cost of equity is 6%, and cost of debt is 8%. What would happen to XYZ's WACC if its capital structure were to shift to 75% equity and 25% debt? Assume a tax rate is 40%.
WACC Increases
Company XYZ has a target capital structure of 30% equity and 70% debt. Its cost of equity is 10%, and cost of debt is 5%. What would happen to XYZ's WACC if its capital structure were to shift to 40% equity and 60% debt?
WACC increases
Is it possible for a firm to have positive net income and yet to have cash flow problems?
Yes, this can occur when a firm is growing very rapidly.
Level sets of frequent, consistent cash flows are called
annuities.
Free cash flow is defined as
cash flows available for payments to stockholders and debt holders of a firm after the firm has made investments in assets necessary to sustain the ongoing operations of the firm.
We call the process of earning interest on both the original deposit and on the earlier interest payments
compounding
Net operating profit after taxes (NOPAT) is defined as which of the following?
net profit a firm earns after taxes, but before any financing costs
A dollar paid (or received) in the future is
not worth as much as a dollar paid (or received) today
