Finance study terms exam 3

The​ ________ of an asset or liability is its cost carried on the balance sheet. A. book value B. market value C. theoretical value D. hybrid value

A.

What is the relationship between the 3 principal total debt ratios?

All positively related

What does the Equity Multiplier represent?

An equity multiplier helps in measuring the financial leverage of a firm. It indicates that how much a company is relying on debt to finance its assets.

How does increased use of debt affect the cash coverage ratio and, ceteris paribus, a firm's ROE (through the DuPont framework)?

An increase in the cash coverage ratio means that a firm is less likely to default on its outstanding debt. Ceteris paribus, according to the DuPont framework, an increase in the use of debt would increase a firm's ROE

Consider a​ project's incremental cash flows in​ order: ​ -$700, $400,​ $300, $400. Assume a cost of capital of​ 7%. How does the NPV that you get by using​ Excel's NPV function all by itself compare to the correct NPV for this​ project? A. It is the same. B. It is lower. C. This question cannot be answered with the information provided. D. It is higher.

B.

Investors​ ________ for estimating the WACC. A. are indifferent between using market and book value B. prefer market value to book value C. prefer book value to market value D. prefer a mix of book and market value

B.

When calculating the after−tax weighted average cost of capital​ (WACC), which of the following costs is adjusted for taxes in the​ equation? A. The before−tax cost of preferred stock B. The before−tax cost of debt C. The before−tax cost of equity D. The after−tax cost of debt

B.

What is the difference between book values and market values and which do investors and analysts prefer to use?

Book value is the net value of a firm's assets found on its balance sheet, and it is roughly equal to the total amount all shareholders would get if they liquidated the company. Market value is the company's worth based on the total value of its outstanding shares in the market, which is its market capitalization.

The cost of capital is​ ________. A. another name for the IRR B. the cost of debt in a firm that finances with both debt and equity C. the cost of each financing component multiplied by that​ component's percent of the total borrowed D. All of the above

C.

What are the 4 basic components used to estimate a project's cash flows?

Capital investment, change in net working capital, operating cash flow

Erosion

Costs that arise when a new product or service competes with revenue generated by a current product or service offered by a firm(when there is a loss of sales of an old product because of a new product by the same company)

Opportunity cost

Costs that may not be directly observable or obvious, but result from benefits being lost as a result of taking on a project

1. How do we calculate and what is the implication of changes in the following ratios: Current, Cash Coverage, TAT, Net Profit Margin, ROA, ROE, P/E, Mkt-Bk

Current- CA/CL Cash Coverage- (EBIT+Depreciation)/Interest TAT- Sales/ Total assets NPM- NI/S ROA- NI/TA ROE- NI/TE P/E - PPS/EPS MKT-BK - (MVE/SH) /BVE/SH

What area is represented by the following ratios: Current, Cash Coverage, TAT, Net Profit Margin, ROA, ROE, P/E, Mkt-Bk

Current- liquidity Cash coverage- solvency TAT- S/TA NPM, ROA, ROE- Profitability P/E and MKT-BK - MRKT VALUE

How does straight-line depreciation work and how is it computed?

Depreciation expense is the same each and every year of the project

How is a firm's cost of capital computed and what is the generic name for the cost of capital in the TVM?

Discount rate weighted average is the computation

What is the DuPont framework and what is it used for?

Examines the ROE (Return on equity) -ROE = Profit Margin x Total Asset Turnover x Leverage Factor

Sunk

Expenses that have already been incurred, or that will be incurred (and cannot be reversed) regardless of the decision to accept/reject a project

How do we common-size the BS

For the balance sheet by dividing everything by total assets to get percentages

What are the accept/reject decision rules for the NPV and IRR?

IRR > WACC% NPV > 0 Accept

How does the cash flow from salvage compare to the selling price of an asset and what accounts for any difference?

If SP is above BK = gain If SP is below BK = loss Difference of CF Salvage =(SP-BV) * T

What is meant by, and what is an example of: synergy gains?

Impulse purchases or sales increases for other existing products related to the introduction of a new product

What is the typical pattern of how a project's changes in NWC affect its incremental cash flows?

Increase in NWC (cost = cash outflow) then decrease in NWC (gain = inflow)

What is meant by "benchmarking"?

Is a process by which you can compare the cost, price, quality and other features of your products and your business processes with those of others in the same industry. Not all of the information about the competitors may be easily available

What is the trial-and-error process that is used to find the IRR and what key relationship from Chapter 3 is at the heart of this process?

NPV profile file

How would you describe the NPV and IRR?

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. By contrast, the internal rate of return (IRR) is a calculation used to estimate the profitability of potential investments

What are some synonyms for "ratio" and what does EVERY ratio tell us?

Ratio- percentage, fraction, proportion Every ratio tells us for every one on the bottom here's how much is on the top

What is meant by "Incremental" cash flows?

Refers to cash flows that a company acquires when it takes on a new project. If you have a positive incremental cash flow, it means that your company's cash flow will increase after you accept it.

What is meant by the "cost of capital" and why is the "cost of capital" important?

The cost of capital is used to determine the necessary return a company must generate before moving forward on a capital project. Typically, a decision is prudent if a company invests in a project that generates more value than the cost of capital.

How do we common-size the IS

The purpose is to standardize for size Common-sizing the income statement by dividing everything by revenue and it tell us the percentage there is of each section on the income statement.

time series analysis

Time series one company multiple time periods analyze them over a 5-year period

What are two other names for a firm's cost of capital?

WACC & Hurdle rate

What is the relationship between the risk of a proposed project and its WACC and how is the WACC adjusted for risk?

WACC & risk positively related. Higher risk means +% points to WACC Lower risk means -% points to WACC

1. What are the WACC weights for debt and equity for an unlevered firm?

WACCu = Re * (E/E) + Rd * (1-te) * (0/V) = Re + 0

Cross-section analysis

a section of time multiple companies in one time period

How do you compute the book value of an asset at any point in time?

you must subtract any accumulated depreciation, amortization, or impairment expenses from its original cost