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