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4 components of projects incremental cash flows

- capital expenditures -changes in net work capital -operating cash flows -cash flow from salvage or disposal

consider when estimating a projects incremental cash flows

- erosion costs - opportunity costs -sunk cost - synergy gains

the capital budgeting is to accept a project if

IRR> WACC

Net Present Value (NPV)

a benefit cost measure, pv of all of a project's estimated cash flows

erosion cost

a new product or service competes with revenue generated by a current product or service offered by a firm

an unlettered firm is an

all-equity firm

​________ capital structure refers to a combination of debt and equity that maximizes the value of the firm.

an optimal

in deriving the WACC, market values are preferred over

book values

Financial leverage is the degree to which a firm or individual utilizes​ ________.

borrowed money to magnify equity earnings

how does cash flows differ from net income

cashflow measure the actual inflow and outflow of cash while profits represent accounting measure of periodic performance - you can spend operating cash flows but not its net income -cash flows area broader

two ways of estimating a firm's cost of equity

constant dividend growth model and CAPM

The return to the investor is the​ ________.

cost to the borrower

the cost of capital uses the amounts of

equity, preferred stock, and debt as the capital structure of weights

the NPV tells us the ------- of a proposed project on the value of a firm

expected dollar impact

sunk costs

expenses that have or will be incurred, regardless of the decision to accept or reject a project

Internal Rate of Return (IRR)

finance name of the expected rate of return on a project discount rate that produces an NPV of zero

two names of are used fro a firm's cost of capital

hurdle rate and WACC

to be considered acceptable, a project must have an NPV

is greater than 0

financial leverage

is the degree to which a firm or individual utilities borrowed money (debt) to make money (equity)

opportunity cost

lost opportunity to generate revenue from an owned assets because it be used in a new project

investors ____________ for estimating the WACC

prefer market value to book value

A rising WACC​ ________ the values of the​ firm's future cash flows.

reduces

synergy gains

sales increase for other existing products related to the introduction of a new product

when the IRR exceeds the cost of capital

the NPV will be positive

the before tax cost of debt is higher than

the after-tax cost of debt

when calculating the after tax average cost of capital (Acc), which of the following costs is adjusted for taxes in the equation?

the before- tax cost of debt

of an asset or liability is its cost carried on the balance sheet

the book value

the cost of capital is

the cost of each financing component multiplied by that component's percent of the total borrowed

At the optimal debt−to−equity ​ratio, the cost of capital​ (WACC) is​ ________ for the firm. This point reflects the maximum benefit of leverage.

the lowest

If earnings reflect a return greater than the cost of​ debt, then​ ________.

the more debt the company has sold, the better off the shareholders are

estimating a project's incremental cash flows

the timing and magnitude of incremental cash flows is critical

One way of measuring the advantage of financial leverage to the owners of the company is​ ________.

to examine the earnings per share (EPS) of a company before and after borrowing from debt lenders

cost of capital

weighted average of the cost of a firm's sources of financing debt, preferred stock, and common stock ("equity")


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