finance final exam
The introduction of a new product at Elia Pharmaceuticals will require a $450,000 increase in inventory, a $730,000 increase in Accounts Receivable, and a $180,000 increase in Accounts Payable. Introduction of the product will also require a $700,000 expenditure for advertising. The increase in net working capital required for the introduction of this product is
$1,000,000
accounting break-even point
tells us the level of sales necessary to cover our total fixed and variable operating costs where total fixed costs include both cash fixed costs and depreciation expense
the weights used to determine the relative importance of the firm's sources of capital should reflect
current market values
the investor's RRR differs from the firm's cost of capital due to the
tax deductibility of interest
cash break-even point
tells us the level of sales where we have covered our cash fixed costs (ignoring depreciation) and as a result our cash flow is zero
which of the following is the best example of an incremental cash inflow/outflow
what the total cash flows will be to the company if the project is undertaken as opposed to what they would have been if the project had not been undertaken
an optimal capital structure is achieved
when a firm's weighted average cost of capital (WACC) is minimized
If the before−tax cost of debt is 9% and the firm has a 34% marginal tax rate, the after−tax cost of debt is 5.94%
true
capital structure represents the mix of equity and interest-bearing debt used by a firm
true
mutually exclusive projects may be ranked differently when higher or lower discount rates are used
true
one type of real option is to delay the beginning of a project until conditions are more favorable
true
projects may appear to have less risk when real options are considered
true
the cost of common equity is already on after-tax basis since dividends paid to common stockholders are not tax-deductible
true
the option to abandon a project before the end of its forecasted life may increase its NPV
true
when evaluating projects with real options, businesses must consider the probability that the option will be exercised
true
when investors increase their RRR, the cost of capital increases simultaneously
true
when replacing an existing asset, the cash inflow associated with the sale of the old asset and any related tax effects must be considered and accounted for in the analysis
true
when several sign reversals in the cash flow stream occur, the IRR can have more than one positive IRR
true
A firm has an issue of preferred stock that pays an annual dividend of $2.00 per share and currently is selling for $18.50 per share. Finally, the firm's marginal tax rate is 34%. This firm's cost of financing with new preferred stock is
10.81%
Welch's Lawn Care products just paid a dividend of $1.85. This dividend is expected to grow at a constant rate of 3% per year, so the next expected dividend is $1.90. The stock price is currently $12.50. . The company's marginal tax rate is 35%. Compute the cost of common equity
18.2%
with respect to the capital budgeting practices of large US corporations
IRR and NPV have been gaining popularity
recent surveys of the CFOs of large US companies rank the popularity of major capital budgeting methods in which order
IRR, NPV, payback, discounted payback, profitability index
when various capital budgeting techniques rank mutually exclusive projects differently, which of the following is theoretically most reliable
NPV
which of the following must be adjusted for the firm's tax rate when estimating the weighted average cost of capital (WACC)
cost of debt
J&P accounting purchased new tax software two years ago. The software is still useable, but faster, more comprehensive software is available. If J&P purchases the new software, the cost of the old software is
a sunk cost
which of the following would increase the net working capital for a project? an increase in
accounts receivable
which of the following is a real option with respect to a capital budgeting decision
an option to expand the scale of the project. real options, you can expand, delay, abandon
which of the following reasons causes investors to require a lower rate of return on the firm's bonds than on its stock
bondholders bear less risk than common stockholders bear-higher risk=higher rate of return
when the impact of taxes is considered, as the firm takes on more debt
cash flows will increase because taxes will decrease
the CAPM approach is used to determine the cost of
common equity
for tax purposes, interest on corporate debt is
deductible for the borrower, but not for the investor
a company converts space to use as a manufacturing facility. previously it was rented to another company as a warehouse. this is an example of a sunk cost
false
net present value is suitable for comparing projects with unequal lives
false
real options are derivative securities that derive their value from the value of the underlying projects
false
real options are traded on both the american exchange and chicago board options exchange (CBOE)
false
the initial outlay of an asset does not include installation costs
false
the pertinent issue for determining whether overhead costs should be part of a projects relevant after-tax cash flow is whether the project benefits from the overhead items
false
when computing a firm's cost of capital, book values should be used because they are more objective
false-use current market values as weights
real options can have the effect of
gaining information about future opportunities, increasing a projects NPV, reducing a projects risk
if interest expense lowers taxes, why does the WACC not decrease indefinitely with the addition of more debt
increasing debt too much can result in a greater likelihood of firm failure (financial distress)
holding all other variables constant, which of the following would increase net working capital for a given year on a project
increasing inventory levels
the inclusion of bankruptcy costs and taxes in firm valuation
is consistent with a saucer-shaped cost of capital curve
which of the following is considered to be a deficiency of the IRR
it could produce more that one rate of return
the calculation of differential cash flows over a project's life should include which of the following
labor and material savings, investment in net working capital, additional revenues attributable to the project
which of the following is an example of a sunk cost
market study expenses incurred in order to decide is a firm should accept a project
which of the following is a reasonable conclusion from the tradeoff theory of capital structure
modest levels of debt have a more favorable impact on a firm's average costs of capital and stock price than no debt
which of the following is not considered in the calculation of incremental cash flows
not considered:sunk cost considered:depreciation tax shield, opportunity costs
which of the following expenses should be included when estimating cash flows for investment projects
opportunity cost
a firm's capital structure consists of which of the following
preferred stock, bonds, common stock
relevant incremental cash flows include
sales captured from the firm's competitors, incremental sales brought to the firm as a whole, retained sales that would have been lost to new competing products
accounting break-even analysis uses
sales, variable costs and fixed costs for a single period
which of the following is not a typical real option in capital budgeting
the option to discount the project at a lower rate of return
which of the following overhead expenses is a relevant, incremental cash flow
the project will increase the number of employees by 10%, so an additional human resource assistant must be hired to handle personnel issues directly related to the project
which of the following best describes a firm's cost of capital
the rate of return that must be earned on its investments in order to satisfy the firm's investors
the cost of capital is
the rate of return the firm must earn on its investments in order to satisfy the RRR of the firm's investors, the RRR for new capital investments which have typical or average risk, the opportunity cost of using funds to invest in new projects
when starbuck's decides to acquire seattle's best coffee company, it presumably concluded that
the rate of return they would earn on seattle's best would be equal to or higher than the rate of return they could earn on other investments of equal risk