Finance 409 - Final Review

Increasing the debt of the firm decreases the cash taxes owed.

true

What is the future value of $700 deposited for one year earning 4 percent interest rate annually?

$728

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

Earnings Before Interest and Tax (EBIT)

Calculates the operating profit of a company by subtracting interest and taxes. It solely focuses on a company's ability to generate from operations. Formula for calculating earnings before interest and tax: Earnings Before Interest and Tax= Revenue- Cost of goods sold- interest- tax

Since all forecasts are essentially wrong, financial tools such as NPV and IRR are weak tools in capital budgeting for financial managers.

False

What should be the objective of management?

Maximize shareholder value

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

How are future values affected by changes in interest rates?

The higher the interest rate, the larger the future value will be.

How does a decrease in Current Assets (other than cash) affect cash?

increases cash

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 10.5 percent rate with annual compounding

Level sets of frequent, consistent cash flows are called

annuities

What is a measure of an asset's riskiness?

beta

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.

We call the process of earning interest on both the original deposit and on the earlier interest payments

compounding

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

The interest rate, i, which we use to calculate present value, is often referred to as the

discount rate

The process of figuring out how much an amount that you expect to receive in the future is worth today is called

discounting

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

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

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

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

All else equal, 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%?

increases NPV

The length of time of the annuity is very important in accumulating wealth within an annuity. What other factor also has this effect?

interest rate for compounding

Machine A costs $750,000 and depreciates on a 15-year schedule. Machine B costs $480,000 and depreciates on a 24-year schedule. Which machine has a higher Net Fixed Asset value on the Balance Sheet in year 10?

machine B

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

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