finance exam 3

Whenever a new product competes against a company's already existing products and reduces the sales of those products, ________ occur. A. Erosion costs B. Opportunity costs C. Sunk costs D. Working capital costs

A. Erosion costs

An investment banker's fees are part of the _____ associated with issuing new debt or equity. A. Flotation costs B. benefits C. revenues D. opportunity costs

A. Flotation costs

In capital budgeting, the appropriate decision rule for an average-risk project is to accept if the _____ is greater than the WACC. A. IRR B. NPV C. cost of debt D. cost of equity

A. IRR

_______ are an accounting measure of performance during a specific period of time, while _____ is the actual flow or outflow of money. A. Profits ; cash flow B. Dividends; cash flow C. Cash flows ; profit D. Profits; a dividen

A. Profits ; cash flow

Pricing preferred stock is most similar to pricing ______. A. a perpetuity B. a three-month Treasury bill C. a zero- coupon bond D. constant growth common stock

A. a perpetuity

The IRR is the discount rate that produces ______. A. an NPV equal to zero B. an NPV equal to 1 C. the smallest possible NPV D. the largest possible NPV

A. an NPV equal to zero

Which of the statements below is FALSE? A. If a company has constrained capital, then it can only take on a limited number of projects. B. Two projects are mutually exclusive if the acceptance of one project has no bearing on the acceptance or rejection of the other project. C. the NPV decision criterion is true when all projects are independent and the company has a sufficient source of funds to accept all positive NPV projects. D. Projects are mutually exclusive if picking one project eliminates the ability to pick the other project

B. Two projects are mutually exclusive if the acceptance of one project has no bearing on the acceptance or rejection of the other project.

Which of the statements below is TRUE of the payback period method? A. It focuses on cash flows after the initial outflow has been recovered. B. It is biased against projects with early-term payouts. C. It ignores the cash flow after the initial outflow has been recovered. D. It incorporates time-value-of-money principles.

C. It ignores the cash flow after the initial outflow has been recovered.

The best rule for choosing projects when a firm has a limited amount of funds is to accept the group of projects with the greatest combined ___________. A. time to completion B. number of projects C. NPV D. IRR

C. NPV

The ____ model is usually considered the best of the capital budgeting decision-making models. A. internal rate of return (IRR) B. profitability index (PI) C. net present value (NPV) D. discounted payback period

C. net present value

The ____ model determine at what point in time cash outflow is recovered by the corresponding future cash inflow. A. NPV B. buyback C. payback period D. net present value

C. payback period

The ____ method of capital budgeting is a ratio of the present value of benefits divided to the initial investment cost. A. internal rate of return B. payback period C. profitability index D. net present value

C. profitability index

Which of the statements below is TRUE? A. Decreases in accounts receivables constitute a use of cash flow because you are helping your customers finance their purchases. B. The increase in working capital accounts necessary to support a project also provides for cost increases at the end of the project. C. Decreases in accounts payable constitute a source of cash flow because you are using your suppliers to help finance your business operations D. An increase in working capital can be brought about by an increase inventory.

D. An increase in working capital can be brought about by an increase inventory.

To get the operating cash flow, given the net income, we add back ______ A. EBIT B. Cost of goods sold C. Taxes D. Deprecation

D. Deprecation

The advantage of ___ over ___ depreciation is that you can write off more of your capital costs in the earlier years. A. straight-line depreciation ; straight-line deductions B. MACRS; straight-line deductions C. straight-line deprecation ; the modified accelerated cost recovery system D. MACRS ; straight-line deprecation

D. MACRS ; straight-line deprecation

_______ of a project are those that have already been incurred and are irrelevant to our current decisions. A. Working capital costs B. Opportunity costs C. Erosion costs D. Sunk costs

D. Sunk costs

The net present value of an investment is _______. A. the present value of all costs (cash outflows) of the project. B. the present value of all costs (cash outflows) minus the present value of all benefits (cash inflow) of the project C. the present value of all benefits (cash inflows) D. the present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project

D. the present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project