Accounting Final Exam
If a project's net present value is positive the project is ___ if negative the project is ____
+ acceptable - unacceptable
Why is external common equity capital more expensive then internal common equity capital?
Because the cost of external must take into account flotation costs, internal does not.
Which of the following is a basic principle when estimating a project's cash flows?
Cash flows should be measured on an incremental basis.
A capital budgeting project's internal rate of return is the rate of return causing
Causing NPV to equal 0
A project's net present value is the sum of the PRESENT values of the net cash flows
Compounded at the required rate of return minus the net investment
The net present value
Difference between a projects benefits and costs
Why is the cost of raising capital with debt typically less costly for a firm than raising capital with preferred stock?
Interest is a tax-deductible cost, preferred dividends are not.
Which of the following is true for 5-year project with a 3-year payback period?
Not enough information to determine anything about the project's net present value.
A capital budgeting project's
Opportunity cost not sunk are relevant to the projects investment decision
If a capital budgeting project's cash flows are not normal
Payback period should be used
Profitability index
Ratio of benefits and costs
If a depreciable asset is sold for MORE than its book value, then
Taxes must be paid on the difference
The weights in a firm's weighted average cost of capital should be
a measure of the firm's target capital structure.
If a project's internal rate of return is greater than R.R.R the project is _____ if less than ------
acceptable internal rate> R.R.R unacceptable internal rate < R.R.R
Taxes are a relevant cost that should be
accounted for in the firm's weighted average cost of capital.
When making a capital budgeting decision, cash flows should be estimated on
an incremental basis, not a total basis.
Which one of the following would NOT typically be considered a capital budgeting project for a restaurant?
buying toilet paper for both the ladies' and men's restrooms
net cash flows are typically
cash inflows
net investment is typically
cash outflow
seniority of bonds
common stock Preferred Stock Bonds
What will an increase in depreciation have upon a firm?
decrease profit and increase cash flow
The estimation of a project's net cash flows (NCF) should include changes in
depreciation cash of operating costs sales revenue
profitability index for an acceptable capital budgeting project
greater than 1.0
The estimation of a project's net cash flows (NCF) should NOT include changes in
interest expense
The payback period is a useful measure of a project's
liquidity risk
treated as components of capital in cost of capital schedule calculations
long term debt common equity preferred stock
payback period measures
measures how long it takes for a project's benefits to recover the project's cost
your university is considering what to do with the current football stadium. They plan to invest to upgrade the current football stadium or invest to build a new one closer to campus. What kind of projects are these?
mutually exclusive projects
provides consistent investment decisions for independent projects with normal cash flows
net present value, profitability index, internal rate of return, and modified internal rate of return methods
Which one of the following would typically be considered a capital budgeting project for a restaurant?
renovating the ladies' restroom installing a new fire suppression and alarm system buying a new dishwashing system
capital structure
represents the long-term or permanent sources of the firm's financing
The discounted payback period
takes into account the time value of money.
A project's payback period is
the amount of time required for the project's net cash flows to recover or pay back the net investment
A project's net present value is
the best single measure of a projects profitability it is a measure of a project's contribution to firm value
A project's net investment is compared to
the project's net cash flows in order to make a decision.
Issuance or flotation costs are the costs investors pay to
to INVESTORS when they purchase common stock
The cost of capital raised by the issuance of bonds is
typically lower than the cost of capital raised from the issuance of preferred stock or common stock.
short-term debt
typically not treated as one of the components of capital in cost of capital schedule calculations
dividend valuation model
typically used to estimate the cost of using external equity capital
Capital budgeting decisions are based
upon cost-benefit analysis.
