Financial Management Exam 3

Which of the following statements is CORRECT?

A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?

Accounts Payable

Which of the following statements is(are) true?\ I. The optimal capital budget is the annual investment in long term assets that maximizes the value of the firm II. If a firm can receive financing for all projects, firm should accept all projects with positive NPVs and all mutually exclusive projects with higher NPVs.

Both I and II are correct

The mix of debt and equity that a firm uses to finance new projects is referred to as the ___________ of the firm.

Capital structure

Which of the following statements regarding capital budgeting is(are) correct? I. Capital budgeting is the process of planning expenditures on assets with cash flows that are expected to extend beyond one year. II. Capital budgeting decisions are long-term decisions that often involve large expenditures III. When making capital budgeting decisions, managers do not need to consider if the project will add value to the firm.

I and II only

Which of the following statements is(are) true? I. A sensitivity analysis is one method managers can use to examine the stand-alone risk of a project. II. When performing a scenario analysis, it is never necessary to estimate the cash flows of the base case economic scenario.

I only

Which of the following statements regarding relevant (i.e. incremental) cash flows is(are) true? I. Managers should not consider opportunity costs when making capital budgeting decisions. II. Managers should not consider sunk costs when making capital budgeting decisions. III. An externality is an effect of a project on the firm that is not reflected in the project's cash flows.

II and III only

When you subtract the initial cost of a project from the present value of all future cash flows the project will generate, you are calculating its

NPV

Which of the following is not a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?

Sunk Costs

A project's internal rate of return is the discount rate that forces the present value of its inflows to equal its costs.

True

If a proposed project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land.

True

The cost of common equity obtained by retaining earnings is the rate of return the marginal stockholder requires on the firm's common stock.

True

When making capital budgeting decisions, managers need to only consider cash flows that are relevant to the project.

True