FINC
Which of the following would you prefer?
two hundred ten dollars today
What is the ROI of a project that requires investments of $500 in each of the first 3 years and yields an income of $120, $85, and $35 in each of the first 3 years?
16.0%
Which project would you select based on NPVs assuming the same 10% discount rate for both? Project A requires an initial outlay of $1,000 and provides an annual income of $500 for 3 years. Project B requires an initial outlay of $2,000 and yields an annual income of $900 for 3 years.
A
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
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
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
How does a decrease in a depreciation schedule (e.g., a 6-year schedule to a 4-year schedule) affect NPV when a tax rate is 30%?
Increase NPV
How does an increase in depreciation expense affect FCF (free cash flow) when a tax rate is 30%?
Increases FCF
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?
Increases FCF
How does a decrease in Current Assets (other than cash) affect cash?
Increases cash
What would happen to a project's NPV if its cash inflows are pushed closer to the present?
NPV increases
You are using ROI to evaluate a project that requires investments of $500 in each of the first 3 years, and yields annual income of $100, $50, and $25 in each of the first 3 years. What would happen to ROI if the annual incomes double?
ROI doubles
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
How are future values affected by changes in interest rates?
The higher the interest rate, the larger the future value will be.
How are present values affected by changes in interest rates?
The lower the interest rate, the larger the present value will be.
Increasing the debt of the firm decreases the cash taxes owed.
True
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.
You are deciding among several different bank accounts. Which of the following will generate the highest effective annual rate (EAR)?
a 6 percent rate with monthly compounding
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.
The process of figuring out how much an amount that you expect to receive in the future is worth today is called
discounting
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
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.
What should be the objective of management?
maximize shareholder value
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
Which financial statement reports the amounts of cash that the firm generated and distributed during a particular time period?
statement of cash flows
