Finance 450 Exam 3 Concepts
The accelerated cost ________ system is a depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications.
Recovery
OCF is calculated as net income plus depreciation using the _____ approach.
bottom-up
Accounts receivable and accounts payable are not an issue with project cash flow estimation unless changes in ______________ are overlooked.
net working capital
One of the flaws of the payback period method is that cash flows after the cutoff date are ___.
not considered in the analysis
A stock with dividend priority over common stock is called a ________ stock
Preferred
Net ______ value is a measure of how much value is created or added today by undertaking an investment.
Present
In capital budgeting, the net ______ determines the value of a project to the company.
Present Value
Initial public offerings of stock occur in the ________ market
Primary
Erosion will ______ the sales of existing products. Multiple choice question.
Reduce
Opportunity costs are classified as ______ costs in project analysis.
Relevant
A benchmark PE ratio can be determined using:
a company's own historical PEs the PEs of similar companies
According to the average accounting return rule, a project is acceptable if its average accounting return exceeds _____.
a target average accounting return
A share of common stock is _________ difficult to value in practice than a bond
More
Interest expenses incurred on debt financing are ______ when computing cash flows from a project.
Ignored
The rules for depreciating assets for tax purposes are based upon provisions in the ___.
1986 Tax Reform Act
A project should be __________ if its NPV is greater than zero.
Accepted
Opportunity costs are ____.
Benefits lost due to taking on a particular project
Capital ______ is the decision-making process for accepting and rejecting projects.
Budgeting
NASDAQ has which of these features?
Computer network of securities dealers Multiple market maker system
What is net working capital?
Current assets minus current liabilities
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a _________
Dealer
An NYSE member who acts as a dealer in particular stocks is called a_______ market maker
Designated
Incremental cash flows come about as a(n) ________ consequence of taking a project under consideration.
Direct
While making capital budgeting decisions, which of the following sentence is true regarding the initial investment of net working capital?
It is expected to be recovered by the end of the project's life.
If a project has multiple internal rates of return, which of the following methods should be used?
NPV MIRR
By ignoring time value, the payback period rule may incorrectly accept projects with a (positive/negative) NPV.
Negative
Which of the following occurs in the primary market?
Newly-issued stocks are initially sold
Which one of the following is the equation for estimating operating cash flows using the tax shield approach?
OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation × Tax rate
The trading of existing shares occurs in the ________ market
Secondary
Using the payback period rule will bias toward accepting which type of investment?
Short-Term Investment
The NYSE member who acts as a dealer in a small number of securities is called a
Specialist
According to the _________ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm."
Stand-Alone
The goal of many successful organizations is a(n) _________ rate of growth in dividends
Steady
Investment firms that are active participants in stocks assigned to them are called _______ liquidity providers.
Supplemental
Using the top-down approach, OCF is calculated by subtracting costs and ________ from sales.
Taxes
Which of the following is an example of a sunk cost?
Test marketing expenses
Which of the following entities declares a dividend?
The board of directors
When evaluating cost-cutting proposals, how are operating cash flows affected?
The decrease in costs increases operating income. There is an additional depreciation deduction.
When the stock being valued does not pay dividends.......
The dividend growth model can still be used
Which of the following are reasons why it is more difficult to value common stock than it is to value bonds?
The rate of return required by the market is not easily observed. The life of a common stock is essentially forever. Common stock cash flows are not known in advance
True or false: IRR approach may lead to incorrect decisions in comparison of two mutually exclusive projects.
True
True or false: Cash flows should always be considered on an aftertax basis.
True
The computation of equivalent annual costs is useful when comparing projects with _____ lives.
Unequal
Korporate Classics Corporation (KCC) won a bid to supply widgets to Pacer Corporation but lost money on the deal because they underbid the project. KCC fell victim to the _____.
Winner's Course
When analyzing a proposed investment, we (will/won't) include interest paid or any other financing costs.
Won't
Investment in net working capital arises when ___.
cash is kept for unexpected expenditures credit sales are made inventory is purchased
Common Stock as no special preference either in receiving _______ or bankruptcy
dividends
Sunk costs are costs that ____.
have already occurred and are not affected by accepting or rejecting a project
Preferred stock has preference over common stock in the _____.
payment of dividends distribution of corporate assets
The IRR rule can lead to bad decisions when _____ or _____.
projects are mutually exclusive cash flows are not conventional
The basic NPV investment rule is:
reject a project if its NPV is less than zero. if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference accept a project if the NPV is greater than zero.
Which of the following are fixed costs?
rent on a production facility cost of equipment
When voting for the board of directors, the number of votes a shareholder is entitled to is usually _________ vote per share held.
One
Constant Growth Stock Formula
P0 = D1/(R − g)
The ____________ method differs from NPV because it evaluates a project by determining the time needed to recoup the initial investment.
Payback
According to Graham and Harvey's 1999 survey of 392 CFOs, in addition to IRR and NPV, which were the two most widely used techniques, over half of the respondents always, or almost always, used which of the following methods?
Payback Method
This capital budgeting method allows lower management to make smaller, everyday financial decisions effectively.
Payback Method
The AAR is calculated by taking the average net income and dividing it by the average ________ value.
Book
Which capital budgeting decision method finds the present value of each cash flow before calculating a payback period?
Discounted payback period
A _____________ is a payment by a corporation to shareholders, made in either cash or stock.
Dividend
Which of the following are expected cash flows to investors in stocks?
Dividends Capital Gains
Operating cash flow is a function of _____.
EBIT-earnings before interest and taxes taxes depreciation
The cash flows of a new project that come at the expense of a firm's existing projects is called
Erosion
True or false: The MIRR function eliminates multiple IRRs and should replace NPV.
False
True/False For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.
False
An NYSE member who executes customer buy and sell orders is called a __________
Floor Broker
The profitability index is calculated by dividing the PV of the _________ cash flows by the initial investment. Multiple choice question.
Future
The payback period can lead to incorrect decisions if it is used too literally because it ____.
Ignores cash flows after the cutoff date
With cost-cutting proposals, when costs decrease, operating cash flows (decrease/increase).
Increase
__________ cash flows come about as a direct consequence of taking a project under consideration.
Incremental
The present value of all cash flows (after the initial investment) is divided by the ______ to calculate the profitability index.
Initial Investment
Which of the following are features of common stock?
It has no special preference in receiving dividends It generally has voting rights It has no special preference in bankruptcy
A calculated NPV of $15,000 means that the project is expected to create a positive value for the firm and _____.
should be accepted if there is no capital rationing constraint