Business Finance Evaluation 4 Quiz Q&As

An objective approach to calculating divisional WACCs would be done by:

Calculating the average beta per division and using these figures for each division in the CAPM

A decrease in NWC involves:

Either a reduction in current assets or an increase in current liabilities or both

The best approach to convert an infinite series of asset purchases into a perpetuity is known as the

Equivalent annual cost approach.

Section 179 allows a business, with certain restrictions, to do which of the following?

Expense the asset immediately in the year of purchase

Concerning incremental project cash flow, this is a cost one would never count as an expense of the project:

Financing costs.

Which of the following is NOT included when calculating the depreciable basis for real property?

Financing fees

This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project plus interest at market rates

discounted payback

The benchmark for the profitability index is the:

zero or anything larger than zero

This is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements

Pro forma analysis

This is the IRS convention that requires that all property placed in service during a given period is assumed to be placed in service at the midpoint of that period.

Half-year convention.

Which of these statements is true regarding calculating weights for WACC?

If we are calculating WACC for the firm, market values for equity, preferred stock and debt would be the correct inputs.

Which of the following makes this a true statement? If the new project does significantly increase the firm's overall risk:

Increased risk will be borne disproportionately by common stockholders.

When calculating the weighted average cost of capital, weights are based on:

Market values.

With regard to depreciation, the time value of money concept tells us that:

Taking the depreciation expense sooner is always better.

Which of the following makes this a false statement? When a firm pays commisions to underwriting firms that float the issuance of new stock

The component cost will need to be integrated to calculate project WACCs

Which of the following is true regarding divisional WACC?

Using a simple firm-wide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm's usual projects.

A capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return.

internal rate of return

A graph of a project's ______________ is a function of the cost of capital

net present value

These are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive.

normal cash flows

This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project.

payback

When choosing between two mutually exclusive projects usng the payback period method for evaluating capital projects, one would choose

the project that pays back the soonest if it is equal to or less than mangers' maximum payback period.

The NPV decision technique may not be the only pertinent unit of evaluation if the firm is facing:

time or resource constraints.

Which of these makes this a true statement? The WACC formula:

uses the after-tax costs of capital to derive the firm's weighted average cost of debt.

Effects that arise from a new product or service that increase sale of the firm's exisiting products or services are referred to as:

Complimentary effects.

Of the capital budgeting techniques discussed, which works equally well with normal and non-normal (uneven) cash flows and with independent and mutually exclusive projects?

Net present value

Which of the following makes this a true statement? Ideally, when searching for a beta for a new line of business:

One could find other firms engaged in the proposed new line of business and use their betas as proxies to estimate the project' risk. One would like to find at least three or four pure-play proxies. Two or even one proxy would suffice if the line of business resembles the proposed new project closely enough. Correct! All of these answers make this a true statement.

This is the concept that a unit's sales will follow an approximate bell-shaped curve versus a steady sales life.

Product life cycle.

An average of which of the following will give a fairly accurate estimate of what a project's beta will be?

Proxy beta

Which of the following is a true statement?

To estimate pre-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm's exhisting debt

The term "interest rate cognizant" refers to:

a decision making process that includes the cost of capital calculation.