FI 302 | EXAM 3 | WHALEY, FI302 Whaley Exam 3_____

Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and a market value of $25,000, ignoring taxes, what is the opportutnity cost of using this machine?

25,000

The internal rate of return is most reliable when evaluating

A single project with only cash inflows following the initial cash outflow

If markets are efficient, when new information about a stock becomes available, the price will:

Accurately and rapidly adjust to include this new information

Which one of the following would not be expected to affect the decision of whether to undertake an investment?

Cost of a previous feasibility study that was conducted for this project.

in capital budgeting, the appropriate decision rule for an average-risk project is to accept if the _______ is greater than the WACC

IRR

Which one of the following is least likely to account for an excess of market value over book value of equity?

Inaccurate depreciation methods

Which one of these represents a cash outflow for a project?

Increase in accounts receivable.

the advantage of ______ over ______ depreciation is that you can write off more of your capital costs in the earlier years

MACRS; straight-line depreciation

the best rule for choosing projects when a firm has a limited ams of funds is to accept the group of projects with the greatest combined _________

NPV

The "gold standard" of investment criteria refers to the

Net present value rule

The ________ model answers one basic question: How soon will I recover my initial investment?

Payback period

The value of a financial asset is the ____.

Present value of all the future cash flows that will be received.

The semi-strong form of the efficient market hypothesis states that

Prices reflect all publicly available information

The ____ is the market of first sale in which companies first sell authorized shares to the public.

Primary Market

The ______ method of capital budgeting is a ratio of the net present value divided to the initial investment cost

Profitability index

If a project's expected rate of return exceeds its opportunity cost of capital, one would expect the:

Project to have a positive NPV

which of the following is the proper way to adjust the cost of debt to estimate the after-tax cost of debt?

Rd x (1-Tc)

Which one of the following statements is correct for a project with a positive NPV?

The IRR must be greater than 0.

Which of the following statements is true?

The profits for common stock owner's come after payments to employees, suppliers, government, and creditors.

When evaluating mutually exclusive projects, remember

The project with the higher IRR may have the higher NPV at one discount rate and lower NPV at another.

For corporate financial managers an important lesson of market efficiency is to:

Trust market prices unless you have a clear advantage that ensures the odds are in your favor.

in capital budgeting, the _______ is the appropriate discount rate to use when calculating the NPV of an average risk project

WACC

Pricing preferred stock is most similar to pricing________

a perpetuity

the best rule for choosing projects when a firm has a limited amount of funds is to accept the group of projects with the greatest combined _______ a. NPV b. time to completion c. IRR d. number of projects

a. NPV

in capital budgeting, the ______ is the appropriate discount rate to use when calculating the NPV of an average risk project a. WACC b. cost of debt c. cost of equity d. IRR

a. WACC

the IRR is the discount rate that produces a. an NPV equal to zero b. an NPV equal to 1 c. the smallest possible NPV d. the largest possible NPV

a. an NPV equal to zero

an investment banker's fees are part of the _______ associated with issuing new debt or equity a. flotation costs b. revenues c. opportunity costs d. benefits

a. flotation costs

_______ of a project are those that have already been incurred and are irrelevant to our current financing decisions a. sunk costs b. working capital costs c. erosion costs d. opportunity costs

a. sunk costs

the IRR is the discount rate that produces

an NPV equal to zero

which of the statements below is TRUE?

an increase in working capital can be brought about by an increase in inventory

in capital budgeting, the appropriate decision rule for an average-risk project is to accept if the ______ is greater than the WACC a. NPV b. IRR c. cost of debt d. cost of equity

b. IRR

the advantage of ______ over _______ depreciation is that you can write off more of your capital costs in the earlier years a. MACRS; straight-line deduction b. MACRS; straight-line depreciation c. straight-line depreciation; the modified accelerated cost recovery system d. straight-line depreciation; straight-line deduction

b. MACRS; straight-line depreciation

generally speaking, when the information is available, investors prefer to use ______ rather than ______ when evaluating a firm a. past date; current data b. market values; book values c. current data; market values d. book values; market values

b. market values; book values

________ involve(s) a cash flow that never occurs, but we need to add it as a cost or outflow since we are foregoing another alternative a. capital expenditures b. opportunity costs c. sunk costs d. cost recovery of divested assets

b. opportunity costs

which of the following is the proper way to adjust the cost of debt to estimate the after tax cost of debt? a. Rd x (1+Tc) b. Rd / (1-Tc) c. Rd x (1-Tc) d. Rd / (1+Tc)

c. Rd x (1-Tc)

pricing preferred stock is most similar to pricing _____ a. a three-month treasury bill b. a zero-coupon bond c. a perpetuity d. constant growth common stock

c. a perpetuity

which of these statements is true? a. decreases in accounts payable constitute a source of cash flow because you are using your suppliers to help finance your business operations b. the increase in working capital accounts necessary to support a project also provides for cost increases at the end of the project c. an increase in working capital can be brought about by an increase in inventory d. decreases in accounts receivables constitute a use of cash flow because you are helping your customers finance their purchases

c. an increase in working capital can be brought about by an increase in inventory

the ______ of an asset or liability is its cost carried on the balance sheet a. theoretical value b. market value c. book value d. hybrid value

c. book value

whenever a new product competes against a company's already existing products and reduces the sales of those products, _____ occur a. working capital costs b. opportunity costs c. erosion costs d. sunk costs

c. erosion costs

which of the following statements is true of the payback period method? a. it focuses on cash flows after the initial outflow has been recovered b. it incorporates time-value-of-money principles c. it ignores the cash flow after the initial outflow has been removed d. it is biased against projects with early-term payouts

c. it ignores the cash flow after the initial outflow has been removed

the ______ model determines at what point in time cash outflow is recovered by the corresponding future cash inflow a. net present value b. NPV c. payback period d. buyback

c. payback period

to get the operating cash flow, given the net income, we add back a. EBIT b. taxes c. cost of goods sold d. depreciation

d. depreciation

the ______ model is usually considered the best of the capital budgeting decision-making models a. internal rate of return (IRR) b. profitability index (PI) c. discounted payback period d. net present value (NPV)

d. net present value (NPV)

the _____ method of capital budgeting is a ratio of the present value of benefits divided to the initial investment cost a. internal rate of return b. net present value c. payback period d. probability index

d. probability index

________ are an accounting measure of performance during a specific period of time, while _______ is the actual inflow or outflow of money a. cash flows; profit b. dividends; cash flow c. profits; a dividend d. profits; cash flow

d. profits; cash flow

the net present value of an investment is a. the present value of all costs (cash outflow) minus the present value of all benefits (cash inflow) of the project b. the present value of all benefits (cash inflows) c. the present value of all costs (cash outflows) of the project d. the present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project

d. the present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project

which of the statements below is false? a. if a company has constrained capital, then it can only take on a limited number of projects b. projects are mutually exclusive if picking one project eliminates the ability to pick the other project c. the NPV decision criterion is true when all projects are independent and the company has a sufficient source of funds to accept all positive NPV projects d. two projects are mutually exclusive if the acceptance of one project has no bearing on the acceptance or rejection of the other project

d. two projects are mutually exclusive if the acceptance of one project has no bearing on the acceptance or rejection of the other project

to get the operating ash flow, given the net income, we add back ______

depreciation

whenever a new product competes against a company's already existing products and reduces the sales of those products, ________ occur

erosion costs

an investment banker's fees are part fo the _______ associated with issuing new debt or equity

flotation costs

Other things equal, a firm's sustainable growth ratio could increase as a result of:

increasing the plowback ration

which of the statements below is TRUE of payback period method?

it IGNORES the cash flow after the initial outflow has been recovered

generally speaking, when the info is available, investors prefer to use ______ rather than ______ when evaluating a firm

market values; book values

the _________ model is usually considered the best of the capital budgeting decision making models

net present value (NPV)

______ involve(s) a cash flow that never occurs, but we need to add it as a cost of outflow since we are foregoing another alternative.

opportunity costs

___________ involve(s) a cash flow that never occurs, but we need to add it as a cost or outflow since we are foregoing another alternative

opportunity costs

the _______ model answers one basic question: how soon will i recover my initial investment? a. payback period b. NPV c. IRR d. profitability

payback period

the _____________ model determines what point in time cash outflow is recovered by the corresponding future cash inflow

payback period

the __________ method of capital budgeting is a ratio of the present value of benefits divided to the initial investment cost

profitability index

_________are an accounting measure of performance during a specific period of time, while ________ is the actual inflow or outflow of moeny

profits; cash flow

_______ of a project are those that have already been incurred and are irrelevant to our current financing decisions

sunk costs

__________ of a project are those that have already been incurred and are irrelevant to our current financing decisions

sunk costs

the net present value of an investment is

the present value of all benefits (Cash inflows) minus the present value of all costs (cash outflows) of the project

which of the statements below is FALSE?

two projects are mutually exclusive if the acceptance of one project has no bearing on the acceptance or rejection of the other project