FI 302

Which of the statements below describes the IRR decision criterion?

-- The decision criterion is to accept a project if the IRR exceeds the desired or required return rate.

The ________ is the cost of each financing component multiplied by that component's percent of the total funding amount.

-- cost of capital

When a company borrows money from a bank or sells bonds, it is called ________.

-- debt financing

When a depreciable asset is sold, a tax gain or tax loss on disposal is calculated, based on the ________ of the asset at the time of disposal.

-- difference in book and market values

The advantage of MACRS over straight-line depreciation is that you can write off more of your capital costs in the ________ years.

-- earlier

Fully depreciated assets ________ , and so any proceeds from sale at disposal are taxable gains.

-- have a book value of zero

________ cash flow is the increase in cash generated by a new project above the current cash flow without the new project.

Incremental

Which of the statements below is FALSE?

The profitability index (PI) method multiplies the Present Value of Benefits by Present Value of Costs.

The ________ of an asset or liability is its cost carried on the balance sheet.

book value

Which of the following would be classified as equity financing for a firm?

-- Preferred shareholders, common shareholders, and retained earnings

Which of the statements below is FALSE? a) Many companies use the payback period for small-dollar decisions because the future cash flows on these smaller projects may be quite difficult to accurately estimate far into the future. b) Firms rarely use the payback period for small-dollar decisions. c)Many companies use the payback period for small-dollar decisions because the time spent gathering the accurate cash flow may be lowered substantially if it is necessary to estimate only through the first few years. d) Many companies use the payback period for small-dollar decisions because it does prevent a serious error when the future cash flow is insufficient to recover the initial cash outlay.

---Firms rarely use the payback period for small-dollar decisions.(false)

Which of the following may be TRUE regarding mutually exclusive capital budgeting projects?

-->All of them There is need for only one project, and both projects can fulfill that current need. By using funds for one project, there are not enough funds available for the other project. There is a scarce resource that both projects would need.

Which of the statements below is TRUE?

--A PI of 1.50 can be interpreted as meaning that for every $1.00 invested today the firm gets back $1.50 in current dollars.

________ is at the heart of corporate finance, because it is concerned with making the best choices about project selection.

--Capital Budgeting

Which of the items below is sometimes termed hybrid equity financing?

--Preferred stock

A major metric of a company's health and its prospects for a long life is how much ________ it can generate.

--cash flow

The ________ is the return that the bank or bondholder demands on new borrowing.

--cost of debt

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

--erosion costs

Generally speaking, when the information 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)

The advantage of straight-line depreciation over MACRS depreciation is that you can write off ________.

--none of these more of your total capital costs a larger percentage of your capital costs earlier your capital costs in fewer years

.) Market values require multiplying the ________ of each component source of capital by the ________.

--price; quantity

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

The accelerated write-off of capital costs in MACRS depreciation provides a taxable expense that reduces taxes at a faster rate than with straight-line depreciation. Therefore, according to ________ concepts, we can surmise that bigger tax cuts in the earlier years and lower tax cuts in the later years are better than a steady tax cut each year.

--time-value of money

In regard to the NPV method, which of the statements below is TRUE?

-In the NPV model, the net present value of an investment is the present value of all benefits (cash inflow) minus the present value of all costs (cash outflow) of the project.