Finance Test 3

Pricing preferred stock is most similar to pricing ______.

A perpetuity

True statement

An increase in working capital can be bought about by an increase in inventory

To get the operating cash flow, given the net income, we add back ______.

Depreciation

Whenever a new product competes against a company's already existing products and reduces the sales of those products, _________ occur.

Erosion Costs

An investment banker's fees are part of the _____ associated with issuing new debt or equity.

Flotation Costs

In capital budgeting, the appropriate decision rule for an average-risk project is to accept if the _____ is greater than the WACC.

IRR

True about payback period method?

It ignores the cash flow after the initial outflow has been recovered

The advantage of ____ over _____ depreciation is that you can write off more of your capital costs in the earlier years.

MACRS; Straight-line depreciation

Generally speaking, when the information is available, investors prefer to use ____ rather than ____ when evaluating a firm.

Market Values; Book Values

The best rule for choosing projects when a firm has a limited amount of funds is to accept the group of projects with the greatest combined _______.

NPV

The _____ model is usually considered the best of the capital budgeting decision-making models.

Net Present Value (NPV)

The ____ model answers one question: How soon will I recover my initial investment?

Payback Period

The _____ method of capital budgeting is a ratio of the present value of benefits divided to the initial investment cost.

Profitability Index (PI)

______ are an accounting measure of performance during a specific period of time, while _____ is the actual inflow or outflow of money.

Profits; Cashflow

Proper way to adjust cost of debt to estimate the after-tax cost of debt? (equation)

Rd * (1- Tc)

_______ of a project are those that have already been incurred and are irrelevant to our current financing decisions.

Sunk Costs

The Net Present Value of an investment is ________.

The present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project

False statement

Two projects are mutually exclusive if the acceptance of one project has no bearing on the acceptance or rejection of the other project

In capital budgeting, the _____ is the appropriate discount rate to use when calculating the NPV of an average risk project.

WACC

The IRR is the discount rate that produces _______.

an NPV = 0