Finance Final Exam

IRR Method

The rate at which PV of inflows equals PV of outflows

Opportunity costs

The value of a resource in its best alternative use

Which of the following states the component cost preferred stock? (f is the flotation cost percent, Dp is the annual preferred dividend, and Kp is the preferred's market yield on the preferred stock: a) Dp / [1-f] b) Dp / [Kp +f] c) Kp/ [1+f] d) Kp/ [1-f]

a) Dp / [1-f]

The cost of retained earnings differs from the cost of new equity due to: a) flotation costs b) dividends c) capital gains yields d) Both a and c e) all the above

a) flotation costs

The use of fixed operating cost is referred to as a) operating leverage b) a leveraged buyout c) financial leverage d) combined leverage

a) operating leverage

The _____ of a resource is its value in its best alternative use and is included in capital budgeting analysis a) opportunity cost b) sunk cost c) incremental cash flow d) None of the above

a) opportunity cost

The degree of financial leverage is measured by relating the percentage change in earning per share to the percentage change in a) sales b)EBIT c) debt ratio d) share price

b) EBIT

Which of the following is true of financial leverage? a) If affects the sensitivity of EAT to changes in sales b) It arises form the use of debt financing c) It is increased by an increase in operating leverage d) a and b

b) it arises from the use of debt financing

The use of fixed financing cost is referred to as a) operating leverage b) a leveraged buyout c) financial leverage d) combined leverage

c) financial leverage

Sunk costs

costs that have already been incurred

If a firm had the following mix of capital components: Debt: $25,000 Preferred stock: $20,000 Common stock: $55,000 it's capital structure would be described as: a) 25% debt and 75% equity b) 25% debt, 20% preferred stock, and 55% equity c) 45% debt and 55% equity d) both a and b

d) a and b

The cost of capital is a) related to the average rate of return require by investors in the firm's securities. b) the minimum rate of return the firm should require on capital budgeting projects of average risk c) approximately 10 percent for most firms d) a and b

d) a and b

Which of the following is true of financial leverage? a) It affects the sensitivity of EPS to changes in EBIT b) It arises from the use of debt financing c) It is increased by an increase in operating leverage d) a and b

d) a and b

Which of the following is a basic principle when estimating a project's cash flows? a) cash flows should be measured on a pretax basis b) cash flows should ignore depreciation because it is a non-cash charge c) only direct effects of a project should be included in cash flow calculations d) cash flows should be measured on an incremental basis

d) cash flows should be measured on an incremental basis

Truman University is thinking of opening an evening college. In figuring the cost of such a project, a figure is provided for lighting of parking lots. It is pointed out by the university's finance officer that a city ordinance requires that the parking lots be lighted whether there is an evening college in session or not. Lighting expenses in this case are a) opportunity costs b) alternative costs c) variable costs d) side effects e) sunk costs

e) sunk costs

Cash flows are _____

incremental

Sunk costs are _____ for decision making

irrelevant

Payback period

number of years it takes to payback the initial investment

Net Present Value (NPV)

the difference between present value of cash inflows and future value of cash outflows

Cost of Capital

the minimum rate that the suppliers are paid