Finance Exam 3

Ch10. Which of the following is an aspect of independent projects? A) The cash flows are unrelated. B) The cash flows are related. C) Selecting one would automatically eliminate accepting the other. D) None of the above

A) The cash flows are unrelated.

Ch13. The beta for a firm can be estimated by A) taking the weighted average of the beta for the individual projects of the firm. B) adding up the betas of the individual projects of the firm. C) taking the simple average of the beta for the individual projects of the firm. D) None of the above

A) taking the weighted average of the beta for the individual projects of the firm.

Ch10. Capital rationing implies that A) the firm does not have enough resources to fund all of the available projects. B) funding needs equal funding resources. C) the available capital will be allocated equally to all available projects. D) none of the above.

A) the firm does not have enough resources to fund all of the available projects.

Ch10. Which one of the following statements is NOT true? A) Accepting a positive-NPV project increases shareholder wealth. B) Accepting a negative-NPV project has no impact on shareholder wealth. C) Accepting a negative-NPV project decreases shareholder wealth. D) Managers are indifferent about accepting or rejecting a zero NPV project.

B) Accepting a negative-NPV project has no impact on shareholder wealth.

P. Which one of the following statements is NOT true? A) Accepting a positive-NPV project increases shareholder wealth. B) Accepting a negative-NPV project has no impact on shareholder wealth. C) Accepting a negative-NPV project decreases shareholder wealth. D) Managers are indifferent about accepting or rejecting a zero NPV project.

B) Accepting a negative-NPV project has no impact on shareholder wealth.

Ch11. General Mills just is undertaking an analysis on a new cereal. The firm realizes that if they come out with a new product it would affect sales of existing products. What is the best course of action for General Mills in this analysis? A) Treat the reduction of sales from existing cereals as a sunk cost. B) Account for the reduction of sales from existing cereals in the projection of cash flows on the new product. C) Include the allocated costs of the new cereal in the sales of the pre-existing products. D) Ignore the fact that sales of other products will be affected.

B) Account for the reduction of sales from existing cereals in the projection of cash flows on the new product.

P. When using the IRR method, you should accept the project when A) IRR <WACC B) IRR > WACC C) IRR > 0 D) IRR = 0

B) IRR > WACC

Ch10. Which of the following is NOT true about capital budgeting? A) It involves investing large capital. B) It is easy for a firm to reverse the decision of large capital investments at any time. C) It involves identifying projects that will add to a firm's value. D) It allows a firm's management to analyze potential business opportunities and decide on which ones to undertake.

B) It is easy for a firm to reverse the decision of large capital investments at any time.

P. Which one of the following is NOT a key disadvantage of the IRR method? A) With mutually exclusive projects, the IRR method can lead to incorrect investment decisions. B) The IRR is based on a discounted cash flow technique. C) An extremely high IRR can be unrealistic in terms of the reinvestment rate that is assumed. D) With unconventional cash flows, the IRR method can yield multiple answers.

B) The IRR is based on a discounted cash flow technique.

Ch13. The appropriate risk-free rate to use when calculating the cost of equity for a firm is A) an equal mix of short-term and long-term Treasury rates. B) a long-term Treasury rate. C) a short-term Treasury rate. D) None of the above

B) a long-term Treasury rate.

P. The appropriate risk-free rate to use when calculating the cost of equity for a firm is A) an equal mix of short-term and long-term Treasury rates. B) a long-term Treasury rate. C) a short-term Treasury rate. D) None of the above

B) a long-term Treasury rate.

Ch11. If you are deciding whether to take one project or another, where the projects have different useful lives, then you could utilize: A) a net present value analysis to decide which project is better for the firm. B) an equivalent annual annuity analysis to decide which project is better for the firm. C) Either of the above. D) None of the above.

B) an equivalent annual annuity analysis to decide which project is better for the firm.

Ch11. In order to calculate free cash flow by starting with incremental cash flow from operations, we should A) subtract the incremental capital expenditures and add the incremental additions to working capital. B) subtract the incremental capital expenditures and the incremental additions to working capital. C) add the incremental capital expenditures and the incremental additions to working capital. D) None of the above.

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

Ch10. Two projects are considered to be contingent projects if A) selecting one would automatically eliminate accepting the other. B) the acceptance of one project is dependent on the acceptance of the other. C) rejection of one project does not eliminate the selection of the other. D) None of the above

B) the acceptance of one project is dependent on the acceptance of the other.

P. When estimating the cost of debt capital for a firm, we are primarily interested in A) the coupon rate of the debt. B) the cost of long-term debt. C) the weighted average cost of capital. D) None of the above

B) the cost of long-term debt

Ch13. When estimating the cost of debt capital for a firm, we are primarily interested in A) the coupon rate of the debt. B) the cost of long-term debt. C) the weighted average cost of capital. D) None of the above

B) the cost of long-term debt.

Ch10. To accept a capital project when using NPV, A) the project NPV should be less than zero. B) the project NPV should be greater than zero. C) Both a and b D) None of the above

B) the project NPV should be greater than zero.

Ch10. Which of the following cash flow patterns is NOT an unconventional cash flow pattern? A) A positive initial cash flow is followed by negative future cash flows. B) A cash flow pattern in which there are alternate inflows and outflows. C) A negative initial cash flow is followed by positive future cash flows. D) A cash flow stream looks similar to a conventional cash flow stream except for a final negative cash flow.

C) A negative initial cash flow is followed by positive future cash flows.

Ch10. Two projects are considered to be mutually exclusive if A) the projects perform the same function. B) selecting one would automatically eliminate accepting the other. C) Both a and b D) None of the above

C) Both a and b

P. of the following are the two most popular capital budgeting techniques in practice? A) IRR and payback. B) NPV and payback. C) NPV and IRR. D) IRR and ARR.

C) NPV and IRR.

Ch10. Which of the following statements about IRR is NOT true? A) The IRR is an expected rate of return. B) The IRR is a discounted cash flow method. C) The IRR is the discount rate that makes the NPV greater than zero. D) None of the above

C) The IRR is the discount rate that makes the NPV greater than zero.

Ch10. Which of the following is true about the Net Present Value method? A) The NPV does not utilize time value of money concepts. B) The NPV allows projects to be ranked by rate of return. C) The NPV assumes that all cash flows are reinvested at the firm's discount rate. D) The NPV is a rate of return that is acceptable to the firm.

C) The NPV assumes that all cash flows are reinvested at the firm's discount rate.

Ch10. Which of the following statements about the payback method is true? A) The payback method is consistent with the goal of shareholder wealth maximization B) The payback method represents the number of years it takes a project to recover its initial investment plus a required rate of return. C) There is no economic rational that links the payback method to shareholder wealth maximization. D) None of the above statements are true.

C) There is no economic rational that links the payback method to shareholder wealth maximization.

P. Which ONE of the following statements about the payback method is true? A) The payback method is consistent with the goal of shareholder wealth maximization B) The payback method represents the number of years it takes a project to recover its initial investment plus a required rate of return. C) There is no economic rational that links the payback method to shareholder wealth maximization. D) None of the above statements are true.

C) There is no economic rational that links the payback method to shareholder wealth maximization.

Ch13. A firm's overall cost of capital is A) less than its cost of debt. B) best measured by the cost of capital of the riskiest projects that the firm is working on C) a weighted average of the costs of capital for the collection of individual projects that the firm is working on. D) None of the above

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

P. A firm's overall cost of capital is A) less than its cost of debt. B) best measured by the cost of capital of the riskiest projects that the firm is working on C) a weighted average of the costs of capital for the collection of individual projects that the firm is working on. D) None of the above

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

P. Whenever a project has a negative impact on an existing project's cash flows, then that effect should: A) be ignored. B) be ignored if the project is evaluated using the correct cost of capital. C) be included as a negative revenue amount on the new project's cash flow analysis. D) be included if the impact is limited to noncash expenditures.

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

Ch11. The cash flows used in capital budgeting calculations are based on: A) historical estimate cash flows used in capital budgeting calculations are based on: B) forecasts of net income. C) forecasts of future cash revenues, expenses, and investment outlays. D) forecasts of retained earnings available for financing projects.

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

P. When assembling the cash flows to calculate an NPV or IRR, the project's after-tax interest expenses should be subtracted from the cash flows for A) the IRR calculation, but not the NPV calculation. B) the NPV calculation, but not the IRR calculation. C) neither the NPV calculation nor the IRR calculation. D) both the NPV calculation and the IRR calculation.

C) neither the NPV calculation nor the IRR calculation.

P. When estimating the incremental after-tax free cash flows for a project, we include all of the following costs except A) costs that impact another product that the firm produces. B) incremental operating costs. C) sunk costs. D) opportunity costs.

C) sunk costs.

Ch13. In order for a firm to estimate its cost of debt capital by observing the price of its debt instruments, A) the beta of the debt must be greater than the beta of the firm's equity. B) the debt must be privately held by the firm. C) the firm must depend on markets being reasonably efficient. D) None of the above

C) the firm must depend on markets being reasonably efficient.

Ch13. The cost of capital is A) the maximum return a project can earn. B) the return that a previous project for the firm had earned. C) the minimum return that a capital budgeting project must earn for it to be accepted. D) None of the above.

C) the minimum return that a capital budgeting project must earn for it to be accepted.

Ch13. The value of the cash flows that the assets of a firm are expected to generate must equal A) the value of the cash flows claimed by the equity investors. B) the value of the cash flows claimed by the debt investors. C) the value of the cash flows claimed by both the equity and debt investors. D) the revenue produced by the firm.

C) the value of the cash flows claimed by both the equity and debt investors.

Ch10. The net present value A) uses the discounted cash flow valuation technique. B) will provide a direct measure of how much a firm's value will change because of the capital project. C) is consistent with shareholder wealth maximization goal. D) All of the above

D) All of the above

Ch10. Which of the following is a disadvantage of the payback method? A) It ignores the time value of money. B) It is inconsistent with the goal of maximizing shareholder wealth. C) It ignores cash flows beyond the payback period. D) All of the above.

D) All of the above.

Ch13. In order to use a firm's WACC to evaluate its future project's cash flows, which of the following must hold? A) The project will be financed with the same proportion of debt and equity as the firm. B) The systematic risk of the project is the same as the overall systematic risk of the firm. C) The project should have conventional cash flows. D) Both A and B above

D) Both A and B above

P. In order to use a firm's WACC to evaluate its future project's cash flows, which of the following must hold? A) The project will be financed with the same proportion of debt and equity as the firm. B) The systematic risk of the project is the same as the overall systematic risk of the firm. C) The project should have conventional cash flows. D) Both A and B above

D) Both A and B above

Ch10. In evaluating capital projects, the decisions using the NPV method and the IRR method may disagree if A) the projects are independent. B) the cash flows pattern is unconventional. C) the projects are mutually exclusive. D) Both b and c are correct

D) Both b and c are correct

Ch10. In computing the NPV of a capital budgeting project, one should NOT A) estimate the cost of the project. B) discount the future cash flows over the project's expected life. C) make a decision based on the project's NPV D) ignore the salvage value

D) ignore the salvage value.