Accounting Final Exam

If a project's net present value is positive the project is ___ if negative the project is ____

+ acceptable - unacceptable

Why is external common equity capital more expensive then internal common equity capital?

Because the cost of external must take into account flotation costs, internal does not.

Which of the following is a basic principle when estimating a project's cash flows?

Cash flows should be measured on an incremental basis.

A capital budgeting project's internal rate of return is the rate of return causing

Causing NPV to equal 0

A project's net present value is the sum of the PRESENT values of the net cash flows

Compounded at the required rate of return minus the net investment

The net present value

Difference between a projects benefits and costs

Why is the cost of raising capital with debt typically less costly for a firm than raising capital with preferred stock?

Interest is a tax-deductible cost, preferred dividends are not.

Which of the following is true for 5-year project with a 3-year payback period?

Not enough information to determine anything about the project's net present value.

A capital budgeting project's

Opportunity cost not sunk are relevant to the projects investment decision

If a capital budgeting project's cash flows are not normal

Payback period should be used

Profitability index

Ratio of benefits and costs

If a depreciable asset is sold for MORE than its book value, then

Taxes must be paid on the difference

The weights in a firm's weighted average cost of capital should be

a measure of the firm's target capital structure.

If a project's internal rate of return is greater than R.R.R the project is _____ if less than ------

acceptable internal rate> R.R.R unacceptable internal rate < R.R.R

Taxes are a relevant cost that should be

accounted for in the firm's weighted average cost of capital.

When making a capital budgeting decision, cash flows should be estimated on

an incremental basis, not a total basis.

Which one of the following would NOT typically be considered a capital budgeting project for a restaurant?

buying toilet paper for both the ladies' and men's restrooms

net cash flows are typically

cash inflows

net investment is typically

cash outflow

seniority of bonds

common stock Preferred Stock Bonds

What will an increase in depreciation have upon a firm?

decrease profit and increase cash flow

The estimation of a project's net cash flows (NCF) should include changes in

depreciation cash of operating costs sales revenue

profitability index for an acceptable capital budgeting project

greater than 1.0

The estimation of a project's net cash flows (NCF) should NOT include changes in

interest expense

The payback period is a useful measure of a project's

liquidity risk

treated as components of capital in cost of capital schedule calculations

long term debt common equity preferred stock

payback period measures

measures how long it takes for a project's benefits to recover the project's cost

your university is considering what to do with the current football stadium. They plan to invest to upgrade the current football stadium or invest to build a new one closer to campus. What kind of projects are these?

mutually exclusive projects

provides consistent investment decisions for independent projects with normal cash flows

net present value, profitability index, internal rate of return, and modified internal rate of return methods

Which one of the following would typically be considered a capital budgeting project for a restaurant?

renovating the ladies' restroom installing a new fire suppression and alarm system buying a new dishwashing system

capital structure

represents the long-term or permanent sources of the firm's financing

The discounted payback period

takes into account the time value of money.

A project's payback period is

the amount of time required for the project's net cash flows to recover or pay back the net investment

A project's net present value is

the best single measure of a projects profitability it is a measure of a project's contribution to firm value

A project's net investment is compared to

the project's net cash flows in order to make a decision.

Issuance or flotation costs are the costs investors pay to

to INVESTORS when they purchase common stock

The cost of capital raised by the issuance of bonds is

typically lower than the cost of capital raised from the issuance of preferred stock or common stock.

short-term debt

typically not treated as one of the components of capital in cost of capital schedule calculations

dividend valuation model

typically used to estimate the cost of using external equity capital

Capital budgeting decisions are based

upon cost-benefit analysis.