FIN 3414 Exam 2

If the nominal rate is 5 percent and the annual rate of inflation is 2 percent, What is the real rate of return? 3.00% 5.00% 2.94% 3.75%

2.94% Reason: (1.05/1.02) - 1 = 2.94%

Care should be exercised when using the IRR approach with financing type projects because -the IRR rule is reversed for this type of project. -they are always mutually exclusive projects. they are always independent projects. they cannot have more than one rate of return.

the IRR rule is reversed for this type of project.

In a 12-month period, a company is permitted to raise a maximum of ____ through crowdfunding. $1 million $5 million $500,000 $100,000

$5 million

What is the total number of inputs that change while doing sensitivity analysis? All inputs change 0 1

1

The capital budgeting method that allows lower management to make smaller, everyday financial decisions easily is the internal rate of return. the accounting rate of return. net present value. the payback method.

the payback method.

Preferred stock has which of the following features?

Dividend payment preference Preference over common stock in a liquidation

In the context of capital budgeting, what does sensitivity analysis do? -It examines the increase in the cost of a project when the cost of capital increases. -It examines how sensitive a particular NPV calculation is to changes in underlying assumptions. -It examines the sensitivity of profits to changes in market share. -It examines the sensitivity of management to the possibility that a project will be rejected.

It examines how sensitive a particular NPV calculation is to changes in underlying assumptions.

Which of the following is not true of NPV? -It is a superior capital budgeting technique. -It ignores time value of money. -It uses all cash flows. -It uses cash flows rather than profits.

It ignores time value of money.

______________ stock has preference in the payment of dividends and during liquidation.

Preferred

True or false: An important result of the quiet period is that the underwriters' analysts are prohibited from making recommendations to investors. True False

True

Opportunity costs are -the actual expenses of pursuing a specific project. -benefits gained as a result of accepting a particular project. -the actual expenses incurred by a firm to preserve its market share. -benefits lost due to taking on a particular project.

benefits lost due to taking on a particular project.

The term _______________ stock is usually applied to stock that has no special preference in receiving dividends or in bankruptcy.

common

With the ______ method of selecting an underwriter, the issuing firm offers its securities to the highest bidding underwriter. negotiated offer rights offering Dutch auction underwriting competitive offer

competitive offer

A firm may choose to forgo dividends today if growth opportunities are _____. low forgone scarce high

high

Interest expenses incurred on debt financing are ______ when computing cash flows from a project. -treated as cash inflows -spread over the life of the project -treated as cash outflows -ignored

ignored

If the inflation rate increases, the nominal rate of interest will fluctuate randomly. remain unchanged. increase. decrease.

increase.

A(n) ______ project does not rely on the acceptance or rejection of another project. mutually exclusive independent co-dependent dependent

independent

A decision tree involves -mapping the sequential outcomes of various decisions and corresponding probabilities. -mapping a strategy for dealing with the competition. -determining the number of decisions that need to be made before a product can be approved. -depicting the decision-making process in a firm using an organizational chart.

mapping the sequential outcomes of various decisions and corresponding probabilities.

With the ______ method of selecting an underwriter, the issuing firm negotiates directly with an underwriter. Dutch auction underwriting rights offering competitive offer negotiated offer

negotiated offer

The actual dollars to be received or paid out is referred to as a nominal cash flow. capital cash flow. real cash flow. inflation cash flow.

nominal cash flow.

Opportunity costs are classified as ____ costs in project analysis. -irrelevant -sunk -intangible -relevant

relevant

When estimating the growth rate, g, with the constant-growth stock valuation model, it is assumed that the ______ ratio stays the same. debt-to-equity retention equity-to-assets current

retention

We can estimate the anticipated return on current retained earnings by using the historical

return on equity

Financing from wealthy individuals or private investment groups is referred to as ______ capital. hedge stealth venture riskless

venture

What is the difference between nominal cash flow and real cash flow? -Nominal cash flow refers to the cash flow's purchasing power while real cash flow refers to the actual dollars to be received. -There is no difference between nominal and real cash flow. -Nominal cash flow is the actual dollars to be received. Real cash flow refers to the cash flow's purchasing power.

Nominal cash flow is the actual dollars to be received. Real cash flow refers to the cash flow's purchasing power.

A relatively new, unprofitable firm that is currently selling its product but needs additional working capital will seek which stage of venture capital financing? Third-Round financing Start-up financing Fourth-Round financing Second-Round financing

Second-Round financing

Which stage of venture capital financing is generally used to pay for marketing and product development expenditures? Third-Round financing Seed money stage First-Round financing Start-up stage

Start-up stage

True or false: While performing sensitivity analysis, we recompute NPV several times by changing one input variable at a time. True False

True

Which of the following is an example of a timing option? -Building a gas station and waiting to see if that gas station is successful before building additional stations. -Waiting to build a convenience store in an area where several housing developments have been proposed. -Disposing of a piece of property in an area where development prospects have failed to materialize.

Waiting to build a convenience store in an area where several housing developments have been proposed.

A firm will start generating positive accounting profits -beyond the break-even sales point -at the break-even sales point -below the break-even sales point -at the point at which revenues exceed total fixed costs

beyond the break-even sales point

The dividend yield is determined by dividing next year's expected cash dividend by the ____. current stock price discount rate growth rate retained earnings for next year

current stock price Reason: Dividend yield = Div1/P0

Adjustments for debt financing are generally reflected in the ______________________________, not the cash flows

discount rate

Side effects from investing in a project refer to cash flows from sunk costs & opportunity costs. erosion effects &synergy effects.

erosion effects &synergy effects.

For "normal" cash flows (the outflows occur before the inflows), the NPV is ______ if the discount rate is less than the IRR, and it is ______ if the discount rate is greater than the IRR. negative; positive positive; positive positive; negative negative; negative

positive; negative

Corporate managers care about the financial break-even point because it indicates -the level of sales needed to fully offset the depreciation expense. -the level of sales needed for the firm to obtain the maximum tax benefit. -the level of sales needed to obtain an accounting profit. -the level to which sales can fall before a project loses money on a net present value basis.

the level to which sales can fall before a project loses money on a net present value basis.

The IRR is the discount rate that makes the NPV of a project equal to -the payback period -the projects initial cost -the terminal book value of the projects fixed assets -zero

zero