exam 3 questions (non math)

the net present value:

-is consistent with shareholder wealth maximization goal. -uses the discounted cash flow valuation technique. -will provide a direct measure of how much a firm's value will change because of the capital project

in brokered markets:

-the commission charged by brokers is a lower cost to buyers and sellers than the cost of direct search. -buyers and sellers are brought together for a commission. -brokers build a pool of price information through their extensive contacts.

which is an example of an OTC market?

NASDAQ

a construction firm is evaluating two value-adding projects. The first project deals with building access roads to a new terminal at the local airport. The second project is to build a parking garage on a piece of land that the firm owns adjacent to the airport. The firm's decision will be to

accept both projects because they are independent of one another

whenever a project has a negative impact on an existing project's cash flows, then that effect should:

be included as a negative revenue amount on the new project's cash flow analysis.

two projects are considered to be independent if

both selecting one would have no bearing on accepting the other and their cash flows are unrelated.

which has a right to vote in the election of the board of directors of a company?

common stockholders

which of the following cash flows would not be considered as a part of the initial investment in a project?

cost of debt to finance the project

which one of the following markets is a type of secondary market for securities in the US

dealer

long-term debt typically describes

debt with a maturity greater than 1 year

what represents the special cases of capital budgeting?

deciding when to replace an existing asset

depreciation expense ________

decreases taxable income and decreases taxes

income taxes have the effect of

decreasing the cost of debt for a firm

cash flows over a projects life should include _______

depreciation expense

which of the steps is necessary when computing the value of common stock

determining the required rate of return based on the riskiness of the cash flows

in which of the following types of security markets do sellers often rely primarily on word of mouth communication to find interested buyers?

direct search

the least efficient of all the different types of secondary markets is the:

direct search market

if a person finds a buyer for the 100 shares of a company he owns, this is

direct search market transaction

when discounting cash flows

discount nominal cash flows using a nominal rate of return

which is a simplifying assumption that is made when applying the dividend discount model to common stock valuation?

dividen growth rate is not equal to the required rate of return

growth stocks are typically defined as the stocks of a company whose

earnings are growing at above average rate

in capital budgeting, we use cash flows that are

estimated

if a corporation doesnt declare and pay preferred dividends as scheduled, it is technically in default and cant be forced into bankruptcy by preferred stockholders

false

which of the following is the best example of a sunk cost?

historical research and development costs

the cost of equity is equal to

rate of return required by stockholders.

the dealer's selling price of a given stock is also known as the ask price

true

bond issuance costs include

-investment banking fees. -legal fees. -accountant fees.

a firm's overall cost of capital is

a weighted average of the costs of capital for the collection of individual projects that the firm is working on.

other than things held constant, the use of accelerated depreciation rates would make the NPV of a project smaller

false

preferred stock is legally a form of debt of a corporation

false

the constant growth dividend model cant be applied to value the stock of a company whose dividends are declining at a constant rate

false

the cost arising from using a building that could have been leased out is an example of a sunk cost

false

the cash flows used in capital budgeting calculations are based on:

forecasts of future cash revenues, expenses, and investment outlays.

capital rationing implies that

funding needs exceed funding resources

if a company's weighted average cost of capital is less than the required return on equity, then the firm

has debt in its capital structure

the value of a share of stock depends on

how often it will pay a dividend

preferred stock is considered to be a special type of debt rather than equity because

if preferred stock dividends are not paid it would be legally viewed as a default

which of the following statements is true about secondary markets?

in secondary markets, outstanding shares of stock are bought and sold among investors.

if a firm has the option of leasing some factory space to another firm or utilizing it for another product line, then if the firm chose the product line how should it handle the lost lease payments on the factory space?

include it as opportunity cost

when we calculate the free cash flows for a project, we first compute the

incremental cash flows from operations

the NPV and IRR methods will always agree when you are evaluating _____ projects and the project's cash flows are _____.

independent; conventional

which of the following is NOT true about capital budgeting?

it allows a firm to reverse the decision of large capital investments at any time.

bonds have ____________________ than stock

less risk and less upside potential for return

which is a characteristic of common stock

limited liability for owners

the firm's ____________ is used to calculate NOPAT because the profits from a project are assumed to be incremental to the firm.

marginal tax rate

the reason we cant apply the constant growth dividend model in the case where the growth rate, g, is greather than or equal to the required rate, R, is because it would result in the value of the stock becoming

negative

which of the following statements is NOT true about common stock?

owners of common stock are guaranteed dividend payments by the firm.

which of the following statements is true about common stock?

owners of common stock have the lowest-priority claim on the firm's assets in the event of bankruptcy.

which of the following capital budgeting technique ignores the time value of money?

payback period

a projects salvage value is likely to be ignored in the

payback period technique

preferred stock is sometimes treated like a debt security because:

preferred dividend payments are similar to bond interest payments and are fixed in nature regardless of the firm's earnings.

which of the following statements is NOT true about preferred stock?

preferred dividends are tax deductible just like the interest on bonds.

preferred stock resembles a bond because

preferred stock pays fixed dividends which is similar to the interest paid on bonds

which is an example of an incremental capital expenditure?

purchase of additional machinery

growth stocks usually do not pay dividends. therefore, the stock value increases because the firms

reinvest earnings to provide dividends in the future

in order to calculate free cash flow by starting with incremental cash flow from operations, we should

subtract the incremental capital expenditures and the incremental additions to working capital.

thich of the following is an aspect of independent projects?

the cash flows are unrelated to one another

the internal rate of return is

the discount rate that makes the NPV equal to zero.

for the constant growth rate dividend model to work, which of the following assumptions must hold?

the growth rate must be less than the required rate of return

bond contracts include specific terms, but not

the price at which the bond will be sold in the bond market

over the life of a project, a firm using the MACRS method rather than the straight line method will have ______

the same total taxes

cash flows used for analyzing capital budgeting proposals differ from those included in the accounting statement of cash flows by

they are forward looking, while accounting cash flows are historical

which is a major role of secondary markets

to provide good marketability for securities

an example of variable cost is the labor cost to assemble each product

true

common stockholders are owners of a corporation

true

growth stocks pay little or no dividends

true

sunk costs should not be considered when calculating a project's incremental cash flows

true

the NYSE and NASDAQ are 2 of the 3 largest exchanges in the world based on the value of shares traded

true

the bid price is the price that a dealer pays for a security

true

the value of a firm's equity is calculated as the sum of the PV of all expected future cash flows

true

the value of a stock that experiences supernormal growth can be calculated as the PV of all dividends during the period of supernormal growth plus the PV of a constantly growing dividend

true