FIN-515 Test #4 JSU (Dr. Boozer)

Companies often use several methods to evaluate the project's cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? (Check all that apply) A) The NPV shows how much value the company is creating for its shareholders B) For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR C) Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp

A & B

Which of the following are examples of a capital budgeting project? (Check all that apply) A) Universal Computer Corp.'s purchase of a competitor's subsidiary B) Atlanta Aeronautics Co.'s purchase of a new piece of equipment C) Fort Worth Cattle Co.'s purchase of its normal stock of raw materials inventory

A & B

Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. A) The payback period does not take the project's entire life into account B) The payback period is calculated using net income instead of cash flows C) The payback period does not take the time value of money into account

A & C

Which of the following statements is correct? A) A company needs to adjust the cost of debt for taxes, because interest payments are tax deductible B) If a firm wants to lower its cost of debt, it can simply issue debt with a lower coupon rate C) The cost of raising funds from retained earnings is usually a lot cheaper than the cost of debt financing, because the firm already possesses the funds in retained earnings

A) A company needs to adjust the cost of debt for taxes, because interest payments are tax deductible

Which of the following statements is correct? A) A firm's weighted average cost of capital should decrease if its tax rate increases, but the yield to maturity of its noncallable bonds remains the same and all other factors are held constant B) A firm's after-tax cost of preferred stock may be significantly less than its before-tax cost, because issuing preferred stock dividends creates a tax shelter C) The market value of a firm's debt and equity will continuously change throughout the day, but the book value of debt and equity tends to stay more stable over time. Consequently, the firm should use the book-value weight to define its optimal capital structure

A) A firm's weighted average cost of capital should decrease if its tax rate increases, but the yield to maturity of its noncallable bonds remains the same and all other factors are held constant

Which of the following statements about the relationship between the IRR and the MIRR is correct? A) A typical firm's IRR will be greater than its MIRR B) A typical firm's IRR will be equal to its MIRR C) A typical firm's IRR will be less than its MIRR

A) A typical firm's IRR will be greater than its MIRR

Unsecured, short-term promissory notes issued by large firms in denominations of $100,000 or more. Which of the following short-term financing source describes the above statement? A) Commercial paper B) Revolving credit agreement C) Secured loan D) Trade credit E) Accruals

A) Commercial paper

"Rs" represents what? A) Cost of retained earnings B) Cost of preferred stock C) Cost of new stock issuance D) None of the answers are correct

A) Cost of retained earnings

The accountant at Graham Home Goods prints checks on Thursdays and mails the checks the same day. If the checks are mailed on Friday, this causes a one-day delay. What type of float does this scenario describe? A) Disbursement float B) Collection float C) Net float

A) Disbursement float

What is a big difference between regular and discounted payback? A) Discounted payback considers time value of money B) Regular payback considers time value of money C) Discounted payback shows how much wealth is added D) Two of the answers are correct

A) Discounted payback considers time value of money

_____ is the best capital budgeting technique. A) NPV B) IRR C) MIRR D) Payback

A) NPV

IRR represents the interest rate where _____. A) NPV = $0 B) IRR > WACC C) IRR = NPV D) None of the answers

A) NPV = $0

Suppose your boss has asked you to analyze two mutually exclusive projects—project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker's statement? A) No, the NPV calculation will take into account not only the projects' cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows B) No, the NPV calculation is based on percentage returns, so the size of a project's cash flows does not affect a project's NPV C) Yes, project A will always have the largest NPV, because its cash inflows are greater than project B's cash inflows

A) No, the NPV calculation will take into account not only the projects' cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows

What are the two types of projects which involve capital budgeting? A) Replacement and expansion B) Replacement and stocks C) Expansion and international D) None of the answers

A) Replacement and expansion

Which usually costs less—short-term or long-term debt? A) Short-term debt B) Long-term debt

A) Short-term debt

Which version of a project's payback period should the CFO use when evaluating a project, given its theoretical superiority? A) The discounted payback period B) The regular payback period

A) The discounted payback period

Choose the answer that best evaluates the following statement: A bank loan officer has been approached by a start-up company that needs a five-year loan to purchase the equipment for its first project. The project will have a life of five years. At the end of five years, the equipment will be worthless. The founders of the company told the loan officer that they would be willing to pay a much higher interest rate on a simple interest loan rather than contracting to an add-on interest loan. A) The loan officer should offer the company an add-on interest loan because there is a high risk that the company will not be able to repay the principal on the loan at the end of the project's life B) The loan officer should offer the company a simple interest loan. The bank will make more money in the long run, because it can charge a much higher interest rate

A) The loan officer should offer the company an add-on interest loan because there is a high risk that the company will not be able to repay the principal on the loan at the end of the project's life

Which of the following statements is correct? A) When all other factors are held constant, a higher tax rate will lower a firm's weighted average cost of capital only if the firm uses debt financing B) The market value of a firm's debt and equity will continuously change throughout the day, but the book value of debt and equity tends to stay more stable over time. Consequently, the firm should use the book-value weight to define its optimal capital structure C) If a firm wants to lower its cost of debt, it can simply issue debt with a lower coupon rate

A) When all other factors are held constant, a higher tax rate will lower a firm's weighted average cost of capital only if the firm uses debt financing

When should a firm take the trade discount and pay sooner? A) When the cost of the loan is < the cost of trade credit B) When the cost of the loan is > the cost of trade credit C) When a firm has limited liquidity or weak financials D) Two of the answers are correct

A) When the cost of the loan is < the cost of trade credit

Is it possible for a firm to have a negative CCC? A) Yes B) No

A) Yes

If the credit terms as published by a firm were 2/15, net 60, this means the firm will _____. A) allow a 2% discount if payment is received within 15 days of the purchase, and if the discount is not taken the full amount is due in 60 days B) allow a 15% discount if payment is received within 2 days of the purchase, and if the discount is not taken the full amount is due in 60 days

A) allow a 2% discount if payment is received within 15 days of the purchase, and if the discount is not taken the full amount is due in 60 days

For reinvestment, a major weakness of IRR is _____, while a major strength of NPV is _____. A) assumes reinvest at IRR; assumes reinvests at WACC B) assumes reinvest at WACC; assumes reinvest at NPV C) falling interest rates; increasing interest rates D) None of the answers

A) assumes reinvest at IRR; assumes reinvest at WACC

A project's IRR will _____ if the project's cash inflows increase, and everything else is unaffected. A) increase B) decrease C) stay the same

A) increase

An increase in beta will _____. A) increase rs and lower price B) decrease rs and lower price C) not change rs but raise price D) None of the answers are correct

A) increase rs and lower price [NOTE: Think about CAPM, where rs = Rf + b(MRP)]

If a project has a negative NPV, this is saying that _____. A) initial costs are higher than the PV of expected cash flows B) initial costs are lower than the PV of expected cash flows C) the project should be accepted D) None of the answers are correct

A) initial costs are higher than the PV of expected cash flows

A key to resolving the conflict between NPV and IRR is the assumed reinvestment rate. The IRR calculation assumes that intermediate cash flows are reinvested at the _____. A) internal rate of return (IRR) B) modified rate of return (MIRR) C) required rate of return The NPV calculation implicitly assumes that the rate at which cash flows can be reinvested is the _____. A) internal rate of return (IRR) B) modified rate of return (MIRR) C) required rate of return As a result, when evaluating mutually exclusive projects, the _____ (NPV method/IRR method) is usually the better decision criterion.

A) internal rate of return (IRR); C) required rate of return; NPV method

Higher levels of accounts receivable this year are associated with _____. A) more relaxed collection efforts B) higher levels of free cash flow C) Two of the answers are correct D) None of the answers is correct

A) more relaxed collection efforts

The capital budgeting process is comprehensive and is based on certain assumptions, models, and benchmarks. This process often begins with a project analysis. Generally, the first step in a capital budgeting project analysis—which occurs before any evaluation method is applied—involves estimating the _____. A) project's expected cash flows B) revenues from all new projects C) company's net income

A) project's expected cash flows

If mutually exclusive projects are proposed that both have an IRR greater than the necessary WACC, the IRR method states that the firm should accept _____. A) the project with the greatest IRR, assuming that both projects have the same risk as the firm's average project B) the project that requires the lowest initial investment, assuming that both projects have the same risk as the firm's average project C) the project with the greater future cash inflows, assuming that both projects have the same risk as the firm's average project

A) the project with the greatest IRR, assuming that both projects have the same risk as the firm's average project

Based on your understanding of the concept of cost of capital, which of the following statements are valid? (Check all that apply) A) The required rate of return for long-term debt capital funding is incorporated separately in project analysis, because it is not included in the weighted average cost of capital (WACC) B) The company's weighted average cost of capital (WACC) incorporates the required rates of return that investors expect as a compensation for the risk C) Companies have free cash flow that is available for distribution, and investors expect to earn a certain required rate of return if it is invested D) The weighted average cost of capital (WACC) is considered the overall rate expected to generate required returns for investors, but companies do not use it while discounting project cash flows

B & C

For which of the following reasons are capital budgeting decisions important to a business organization? (Check all that apply) A) Capital investments are easily and quickly reversed B) Capital investments affect the firm's long-term performance and profitability C) Capital investments tend to be expensive

B & C

Based on your understanding of the concept of cost of capital, which of the following statements are valid? (Check all that apply) A) Preferred stock is not taken into account when considering the costs related to investor-supplied capital B) Companies are financed by several sources of investor-supplied capital, which are called capital components C) Short-term debt such as accounts payable or short-term loans are not considered capital components D) Companies often finance their new projects with capital that comes from retained earnings. This also constitutes investor-supplied capital

B & D

Each of the following factors affects the weighted average cost of capital (WACC) equation. Which are factors that a firm cannot control? (Check all that apply) A) The firm's dividend payout ratio B) Tax rates C) The firm's capital budgeting decision rules D) Interest rates in the economy

B & D

Beta for the market _____. A) is < 1 B) = 1 C) is > 1 D) = risk-free rate

B) = 1

National Petroleum Refiners Corporation (NPR) has two divisions, L and H. Division L is the company's low-risk division and would have a weighted average cost of capital of 8% if it was operated as an independent company. Division H is the company's high-risk division and would have a weighted average cost of capital of 14% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division L is considering a project with an expected return of 9.5%. Should National Petroleum Refiners Corporation (NPR) accept or reject the project? A) Reject the project B) Accept the project since its return is greater than the risk-based cost of capital for the division C) Accept the project because its return is less than the risk-based cost of capital for the division

B) Accept the project since its return is greater than the risk-based cost of capital for the division (NOTE: Division L's return of 9.5% is higher than its WACC of 8%)

Suppose a firm wants to take advantage of an upward-sloping yield curve. If the firm believes that interest rates will stay constant and it wants to use the current yield curve to bolster profits, which approach should the firm follow? A) Maturity matching approach B) Aggressive approach C) Conservative approach

B) Aggressive approach

Destin Industries set up a lockbox arrangement with its bank to reduce float due to mail delays. What type of float does this scenario describe? A) Disbursement float B) Collection float C) Net float

B) Collection float

What are the four key factors in a firm's credit policy? A) Credit TERMS, discounts, credit standards, and collection policy B) Credit PERIOD, discounts, credit standards, and collection policy

B) Credit PERIOD, discounts, credit standards, and collection policy

Dividend yield is expressed as _____. A) D0 / P0 B) D1 / P0 C) g D) None of the answers are correct

B) D1 / P0

What is the first step in project analysis? A) Analyze level of debt and equity B) Estimate project's expected cash flows C) Analyze where to sell product D) None of the answers

B) Estimate project's expected cash flows

Both the inventory conversion period and payables deferral period use the average daily COGS in their denominators, whereas the average collection period uses average daily SALES in its denominator. Why do these measures use different inputs? A) Current assets should be divided by sales, but current liabilities should be divided by the COGS B) Inventory and accounts payable are carried at cost on the balance sheet, whereas accounts receivable are recorded at the price at which goods are sold

B) Inventory and accounts payable are carried at cost on the balance sheet, whereas accounts receivable are recorded at the price at which goods are sold

Setting and implementing a credit policy is important for three main reasons: A) It has a MINOR effect on sales, it influences the amount of funds tied up in receivables, and it affects bad debt losses B) It has a MAJOR effect on sales, it influences the amount of funds tied up in receivables, and it affects bad debt losses

B) It has a MAJOR effect on sales, it influences the amount of funds tied up in receivables, and it affects bad debt losses

A positive NPV means _____. A) IRR > $0 B) PV of cash flows > initial investment cost C) NPV > IRR D) None of the answers

B) PV of cash flows > initial investment cost

Imagine that Miami Builders Inc. is a manufacturing company. Miami's chief financial officer is concerned about the risk of fluctuations in the latest cash forecast that was prepared for Miami. To mitigate the risk, the CFO has increased the cash balance on hand as a type of safety net if the forecast is not met. What type of cash balance is this? A) Compensating B) Precautionary C) Transactions D) Speculative

B) Precautionary

Which of the following apply if finance managers are good stewards of investor funds when pursuing projects? A) Rate of return < what investors can receive elsewhere B) Rate of return >= what investors can receive elsewhere C) Opportunity cost is maximized D) None of the answers are correct

B) Rate of return >= what investors can receive elsewhere

Lancashire Railway Company (LRC) has two divisions, L and H. Division L is the company's low-risk division and would have a weighted average cost of capital of 8% if it was operated as an independent company. Division H is the company's high-risk division and would have a weighted average cost of capital of 14% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division H is considering a project with an expected return of 12%. Should Lancashire Railway Company (LRC) accept or reject the project? A) Accept the project, as its return is greater than the risk-based cost of capital for the division B) Reject the project since its return is less than the risk-based cost of capital for the division

B) Reject the project since its return is less than the risk-based cost of capital for the division (NOTE: Division H's return of 12% is lower than its WACC of 14%)

A formal, committed line of credit extended by a bank or other lending institution. Which of the following short-term financing source describes the above statement? A) Commercial paper B) Revolving credit agreement C) Secured loan D) Trade credit E) Accruals

B) Revolving credit agreement

Cranked Coffee Company's management plans to finance its operations with bank loans that will be repaid as soon as cash is available. The company's management expects that it will take 60 days to manufacture and sell its products and 50 days to receive payment from its customers. Cranked Coffee Company's CFO has told the rest of the management team that they should expect the length of the bank loans to be approximately 110 days. Which of the following responses to the CFO's statement is most accurate? A) The CFO's approximation of the length of the bank loans should be accurate, because it will take 110 days for the company to manufacture, sell, and collect cash for its goods. All these things must occur for the company to be able to repay its loans from the bank B) The CFO is not taking into account the amount of time the company has to pay its suppliers. Generally, there is a certain length of time between the purchase of materials and labor and the payment of cash for them. The CFO can reduce the estimated length of the bank loan by this amount of time

B) The CFO is not taking into account the amount of time the company has to pay its suppliers. Generally, there is a certain length of time between the purchase of materials and labor and the payment of cash for them. The CFO can reduce the estimated length of the bank loan by this amount of time

Which of the following statements best describes the difference between the IRR method and the MIRR method? A) The IRR method uses the present value of the initial investment to calculate the IRR. The MIRR method uses the terminal value of the initial investment to calculate the MIRR B) The IRR method assumes that cash flows are reinvested at a rate of return equal to the IRR. The MIRR method assumes that cash flows are reinvested at a rate of return equal to the cost of capital C) The IRR method uses only cash inflows to calculate the IRR. The MIRR method uses both cash inflows and cash outflows to calculate the MIRR

B) The IRR method assumes that cash flows are reinvested at a rate of return equal to the IRR. The MIRR method assumes that cash flows are reinvested at a rate of return equal to the cost of capital

Choose the answer that best evaluates the following statement: Zebra Engineering Corp. always prefers simple interest loans over add-on interest loans because even if the interest rate is higher on the simple interest loan, its monthly payment is lower. A) The company should only accept add-on interest loans when it cannot get simple interest loans B) The company needs to be sensitive to interest rate differences between loan types and take them into consideration when deciding what type of loan to take out

B) The company needs to be sensitive to interest rate differences between loan types and take them into consideration when deciding what type of loan to take out

Is there generally a positive or negative relationship between net working capital and the cash conversion cycle? (In other words, if a firm has a high level of net working capital, is it likely to have a high or low cash conversion cycle?) A) There is a NEGATIVE relationship between net working capital and the cash conversion cycle B) There is a POSITIVE relationship between net working capital and the cash conversion cycle

B) There is a positive relationship between net working capital and the cash conversion cycle

MIRR assumes reinvestment at _____. A) NPV B) WACC C) IRR D) None of the answers

B) WACC

Which of the following represents a maximization of shareholder value? A) Return on equity is maximized B) WACC is minimized C) Return on assets (ROA) is equal to 0 D) Earnings per share (EPS) is maximized

B) WACC is minimized

Which of the following statements best explains what it means when a project has an NPV of $0? A) When a project has an NPV of $0, the project is earning a profit of $0. A firm should reject any project with an NPV of $0, because the project is not profitable B) When a project has an NPV of $0, the project is earning a rate of return equal to the project's weighted average cost of capital. It's OK to accept a project with an NPV of $0, because the project is earning the required minimum rate of return C) When a project has an NPV of $0, the project is earning a rate of return less than the project's weighted average cost of capital. It's OK to accept the project, as long as the project's profit is positive

B) When a project has an NPV of $0, the project is earning a rate of return equal to the project's weighted average cost of capital. It's OK to accept a project with an NPV of $0, because the project is earning the required minimum rate of return

An aggressive approach to financing means _____. A) using more long-term financing B) being more exposed to changes in interest rates C) Two answers are correct D) None of the answers are correct

B) being more exposed to changes in interest rates

How a company handles its credit accounts, including methods of invoicing and collecting past-due accounts, is indicated by the company's _____. A) terms of credit B) collection policy C) credit standards

B) collection policy

A project's IRR will _____ if the project's cash inflows decrease, and everything else is unaffected. A) increase B) decrease C) stay the same

B) decrease

Collection float: $80,000 Disbursement float: $120,000 Net float: $40,000 Given this information, you can deduce that on an average day, Herman Flooring's bank balance is _____ its book balance. A) less than B) greater than C) the same as

B) greater than

Multiple IRRs are possible if cash flows are _____. A) normal B) non-normal C) positive D) negative

B) non-normal

Red Lemon Shipbuilders Inc. has two divisions: one is very risky, and the other exhibits significantly less risk. The company uses its investors' overall required rate of return to evaluate its investment projects. It is most likely that the firm will become _____. A) riskier over time, and its value will increase B) riskier over time, and its value will decrease C) less risky over time, and its value will increase D) less risky over time, and its value will decrease

B) riskier over time, and its value will decrease

Conflicts can occur between NPV and IRR for mutually exclusive projects based on _____ and _____. A) profits; image B) timing; scale differences C) changes in interest rates; marketability D) None of the answers

B) timing; scale differences

A _____ cash balance is held to take care of the firm's day-to-day operations, such as paying wages and purchasing supplies. A) precautionary B) transactions C) compensating D) speculative

B) transactions

Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? (Check all that apply) A) The discounted payback period is calculated using net income instead of cash flows B) The discounted payback period does not take the time value of money into account C) The discounted payback period does not take the project's entire life into account

C

Based on your understanding of the concept of cost of capital, which of the following statements are valid? (Check all that apply) A) Investors care about the incremental value addition that new projects are making; they are least concerned with the discount rates that the company uses B) Companies always use the weighted average cost of capital (WACC) as the discount rate to analyze the financial viability of projects C) A company's estimate of cost of capital impacts its application in the analysis of new investments that, consequently, affects the value of the firm and shareholders' wealth D) Companies incorporate the required rate of return in the cost of capital to compensate investors for the components' risks

C & D

Each of the following factors affects the weighted average cost of capital (WACC) equation. Which are factors that a firm can control? (Check all that apply) A) The general level of stock prices B) Interest rates in the economy C) The firm's capital budgeting decision rules D) The firm's dividend payout ratio

C & D

Which of the following is a normal cash flow? A) +++++--+++++-- B) +++++++++++-+- C) -------+++++ D) None of the answers

C) -------+++++

What is generally used as a measure of the risk-free rate for CAPM? A) 10 year corporate bond B) Low risk stock from financially strong company C) 10 year Treasury bond D) None of the answers are correct

C) 10 year Treasury bond (These are default risk-free)

If return on market portfolio is 9% and market risk premium (MRP) is 3%, what is the risk-free rate? A) 12% B) 9% C) 6% D) 3%

C) 6% (NOTE: 9% market portfolio return - 3% MRP = 6%)

Hansen Production Inc. is a manufacturing company. Hansen's balance sheet reflects a note payable of $100,000 due in 10 months to U.S. Bank. Which type of financing does the note represent? A) Accrual B) Commercial paper C) Bank loan D) Trade credit

C) Bank loan

Suppose a firm occasionally faces demand for short-term credit but usually has an excess of short-term capital to finance current assets. Which approach is the firm following? A) Aggressive approach B) Maturity matching approach C) Conservative approach

C) Conservative approach

Which is consistent with a good cash conversion cycle? A) Paying your bills sooner B) Receiving payments later C) Quicker inventory conversion D) Two of the answers are correct

C) Quicker inventory conversion

Which of the following is true for risk aversion? A) Requires less return for more risk B) Does not change over time C) Requires more return for more risk D) Two of the answers are correct

C) Requires more return for more risk

An obligation backed by collateral, often inventories or accounts receivable. Which of the following short-term financing source describes the above statement? A) Commercial paper B) Revolving credit agreement C) Secured loan D) Trade credit E) Accruals

C) Secured loan

Unlike the physical life of a project, the economic life focuses on _____. A) maximizing or finding largest NPV B) maximizing shareholder value C) Two answers are correct D) None of answers is correct

C) Two answers are correct (A & B)

A flaw of regular payback is that _____. A) time value of money is ignored B) it does not consider cash flows beyond payback C) Two of the answers are correct D) None of the answers

C) Two of the answers are correct (A & B)

When resources are used and the payment for those resources is delayed, the result is the spontaneous creation of short-term _____. A) bank loans B) trade credit C) accruals D) commercial paper

C) accruals

A _____ cash balance is required by many banks that perform services for the firm. A) precautionary B) transactions C) compensating D) speculative

C) compensating

The minimum financial strength a customer must have to be granted credit is indicated by the company's _____. A) terms of credit B) collection policy C) credit standards

C) credit standards

If a profitability index is _____, then accept the project, simply based on those criteria. A) normal B) non-normal C) greater than 1 D) greater than WACC

C) greater than 1

If two projects are _____, if you accept one, you would not accept the other. A) independent B) replacement C) mutually exclusive D) expansion

C) mutually exclusive

Bond yield plus risk premium is used to value _____. A) after-tax cost of debt B) CAPM C) stock D) None of the answers are correct

C) stock

Collection float: $40,000 Disbursement float: $40,000 Net float: $0 Given this information, you can deduce that on an average day, Herman Flooring's bank balance is _____ its book balance. A) less than B) greater than C) the same as

C) the same as

Which is associated with a restricted current asset holding policy? A) Low level of current assets B) High total asset turnover ratio C) High ROE D) All answers are correct

D) All answers are correct

A 2/10 net 60 payment term _____. A) offers 2% discount if paid within 10 days B) provides a less expensive trade credit than a 2/10 net 40 C) means the cost of trade credit turns over fewer times than net 40 D) All of the answers are correct

D) All of the answers are correct

Using discounted cash flow (DCF), which of the following increases the price of stock? A) An increase in the dividends paid out B) A decrease in the cost of stock C) An increase in the growth rate of earnings D) All of the answers are correct

D) All of the answers are correct

Why do firms not generally issue new shares of stock? A) It's a negative signal that shares are overvalued B) Flotation costs increase cost of stock C) It increases supply of shares, which pushes down price D) All of the answers are correct

D) All of the answers are correct

_____ measures how much wealth a project contributes to shareholders. A) MIRR B) Profitability Index C) IRR D) NPV

D) NPV

For which of the following component costs would the after-tax cost be relevant in calculating WACC? A) Common stock B) Preferred stock C) Marketable securities D) None of the answers are correct

D) None of the answers are correct (Bond is correct answer)

_____ is the symbol that represents the required rate of return on debt in the weighted average cost of capital (WACC) equation. A) Rps B) Rs C) Rstd D) Rd

D) Rd

Imagine that San Jose Fabricators Inc. is a manufacturing company. San Jose's board is looking to expand through acquisition and would like to be able to react quickly if an opportunity presents itself. San Jose's financial managers are making sure that cash is available to use as a down payment to commit to a purchase in the near future. What type of cash balance is this? A) Compensating B) Precautionary C) Transactions D) Speculative

D) Speculative

Liabilities that arise from firms buying materials that they will pay for at a later date. Which of the following short-term financing source describes the above statement? A) Commercial paper B) Revolving credit agreement C) Secured loan D) Trade credit E) Accruals

D) Trade credit

For independent projects, accept all where _____. A) payback is great than $0 B) NPV > $0 C) IRR > WACC D) Two answers are correct

D) Two answers are correct (NPV > $0; IRR > WACC. Payback would need to be greater than $1)

Investor supplied funds include which of the following? A) Preferred Stock B) Bonds C) Delayed payment of spontaneous liabilities D) Two of the answers are correct

D) Two of the answers are correct (Preferred stock and bonds)

A self-liquidating approach to financing is also called _____. A) a bank loan B) accrued liabilities C) common equity D) maturity matching

D) maturity matching

Continually recurring short-term liabilities commonly generated from unpaid wages or taxes. Which of the following short-term financing source describes the above statement? A) Commercial paper B) Revolving credit agreement C) Secured loan D) Trade credit E) Accruals

E) Accruals

T/F) Interest rates on short-term loans are more stable than long-term loans.

False

T/F) Short-term credit agreements are more restrictive than long-term credit agreements.

False

T/F) Sophisticated firms use only the NPV method in capital budgeting decisions.

False

T/F) The coupon rate on a bond issued five years ago would be an appropriate proxy for the cost of debt today.

False

T/F) Capital budgeting is the process of planning and controlling investments in assets that are expected to produce cash flows for one year or less.

False (Planning investments for assets which will last MORE than one year)

T/F) A bigger spread between the number of days credit is outstanding and the discount period means the lower the effective cost of trade credit will be.

True

T/F) Extending the net terms of a trade credit is a way to stimulate sales.

True

T/F) If a firm changes its credit policy and allows customers to pay in 90 days instead of 60 days, and everything else remains the same, the net cash flow in the next quarter is likely to decrease.

True

T/F) If two or more projects are independent, choose all that have a positive NPV and IRR > WACC.

True

T/F) One of the firm's suppliers offers payment terms of 3/10, net 30, and the other offers net 30. If the firm chooses to go with the supplier that offers 3/10, net 30, and everything else remains the same, the firm's net cash flow is likely to increase in a monthly cash budget after a few months.

True

T/F) Short-term loans usually have a lower cost than long-term loans.

True

T/F) The yield to maturity on a bond issued five years ago would be an appropriate proxy for the cost of debt today.

True

If an independent project with conventional, or normal, cash flows is being analyzed, the net present value (NPV) and internal rate of return (IRR) methods _____ agree. A) always B) never C) sometimes

always

If projects are mutually exclusive, only one project can be chosen. The internal rate of return (IRR) and the net present value (NPV) methods will not always choose the same project. If the crossover rate on the NPV profile is below the horizontal axis, the methods will _____ agree. A) always B) never C) sometimes

always

When a project has a PI greater than 1.00, it will exhibit an NPV _____ (equal to $0/greater than $0/less than $0); when it has a PI of 1.00, it will have an NPV equal to $0. Projects with PIs _____ (equal to/less than/greater than) will exhibit negative NPVs.

greater than $0; less than

If a firm cannot invest retained earnings to earn a rate of return _____ (less than/greater than or equal to) the required rate of return on retained earnings, it should return those funds to its stockholders.

greater than or equal to

Considering all else remains constant, if a firm is using a relaxed policy of financing assets, it will have a _____ (high/low) level of assets, a _____ (high/low) assets turnover ratio, and consequently, a _____ (high/low) return on equity.

high; low; low

When raising funds by issuing new preferred stock, the company will incur an underwriting, or flotation, cost that _____ (increases/decreases) the cost of preferred stock. Because the flotation cost is usually expressed as a percentage of price of each share, the difference between the cost of preferred stock with and without flotation cost is _____ (significant/not significant) enough to not ignore.

increases; significant

A firm needs to take flotation costs into account when it is raising capital from _____ (issuing new common stock/retained earnings).

issuing new common stock

Considering all else remains constant, if a firm is using a restricted policy of financing assets, it will have a _____ (high/low) level of assets, a _____ (high/low) assets turnover ratio, and consequently, a _____ (high/low) return on equity.

low; high; high

If a project has less risk than the overall company risk, it should be evaluated with a _____ (lower/higher) discount rate. And if a project is riskier than the overall company risk, it should be evaluated using a discount rate _____ (lower/higher) than the company WACC.

lower; higher

Cash flows expected in the distant future are _____ (more/less) risky than cash flows received in the near-term—which suggests that the payback period can also serve as an indicator of project risk.

more

An analyst will need to use the EAA approach to evaluate projects with unequal lives when the projects are _____ (independent/mutually exclusive).

mutually exclusive

A firm will never have to take flotation costs into account when calculating the cost of raising capital from _____ (new common stock/retained earnings).

retained earnings

In general, firms prefer a _____ (shorter/longer) CCC.

shorter

In general, the _____ (shorter/longer) the payback, other things constant, the greater the project's liquidity.

shorter

Companies _____ (should/should not) make tax adjustments when calculating the (after-tax) cost of preferred stock because preferred dividends _____ (are/are not) tax deductible, so the company bears their full cost.

should not; are not

Purple Lemon's CFO has pointed out that the firm would incur a flotation cost of 1% when initially issuing the bond issue. Remember, the flotation costs will be _____ (added to/subtracted from) the proceeds the firm will receive after issuing its new bonds. The firm's marginal federal-plus-state tax rate is 30%. This is the cost of _____ (new/embedded) debt, and it is different from the average cost of capital raised in the past.

subtracted from; new