finance
b
1. As new capital budgeting projects arise, we must estimate A. the float costs for financing the project. B. when such projects will require cash flows. C. the cost of the loan for the specific project. D. the cost of the stock being sold for the specific project.
d
1. Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects? A. payback period B. discounted payback period C. modified internal rate of return D. net present value
c
1. When calculating the weighted average cost of capital, weights are based on A. book values. B. book weights. C. market values. D. market betas.
b
10. This is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division. A. Average WACC B. Divisional WACC C. Proxy WACC D. Pure-play WACC
c
10. This is the concept that a unit's sales will follow an approximate bell-shaped curve versus a steady sales life. A. bell curve cycle B. coefficient of variation C. product life cycle D. NWC life cycle
c
10. Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project), rather than the gross return? A. Internal Rate of Return, IRR B. Modified Internal Rate of Return, MIRR C. Profitability Index, PI D. Net Present Value, NPV
a
11. A decrease in net working capital (NWC) is treated as a A. cash inflow B. cash outflow C. sunk cost D. historical cost
c
11. The benchmark for the Profitability Index, PI, is the A. cost of capital B. managers' maximum number of years C. zero or anything larger than zero D. zero or anything less than zero
b
11. Which of these statements is true regarding divisional WACC? A. Using a divisional WACC vs a WACC for the firm's current operations will result in quite a few incorrect decisions. B. Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm's average beta. C. Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present less risk than the firm's average beta. D. Using a firmwide WACC to evaluate new projects would have no impact on projects that present less risk than the firm's average beta.
c
12. An objective approach to calculating divisional WACCs would be done by A. simply considering the project's risk relative to the firm's lines of business and adjusting upward or downward to account for subjective opinions of project risk. B. computing the average beta for the firm, the firm's CAPM formula, and the firm's WACC. C. computing the average beta per division, using these figures for each division in the CAPM formula, and then constructing divisional WACCs. D. simply averaging out all the WACCs for all the firm's projects.
c
12. These are groups or pairs of projects where you can accept one but not all. A. dependent B. independent C. mutually exclusive D. mutually dependent
d
12. 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. A. mid-point convention B. mid-month convention C. mid-quarter convention D. half-year convention
b
13. Accelerated depreciation allows firms to A. receive less of the dollars of depreciation earlier in the asset's life. B. receive more of the dollars of depreciation earlier in the asset's life. C. not pay any taxes during an asset's life. D. receive more of the dollars of depreciation later in the asset's life.
d
13. These are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive. A. expected cash flows B. time line cash flows C. non-normal cash flows D. normal cash flows
a
13. Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock, A. the component cost will need to be integrated to figure project WACCs. B. the component cost will need to be integrated only for the firm's WACC. C. the firm can increase the project's WACC to incorporate the flotation costs' impact. D. the firm can leave the WACC alone and adjust the project's initial investment upwards.
b
14. A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows. A. discounted payback B. net present value C. internal rate of return D. profitability index
b
14. Section 179 allows a business, with certain restrictions, to do which of the following? A. Offset the tax liability with the cost of the asset in the year of purchase. B. Expense the asset immediately in the year of purchase. C. Expense the asset using double declining balance depreciation during the life of the asset. D. Get a government grant to purchase the asset.
c
14. This is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing. A. generally accepted accounting principle B. financing principle C. separation principle D. WACC principle
c
15. 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. A. discounted payback B. net present value C. internal rate of return D. profitability index
c
15. For which situation below would one need to "smooth out" the variation in each set of cash flows so that each becomes a perpetuity? A. choosing between projects with differing risks B. choosing between independent project C. choosing between alternative assets with differing lives D. choosing between alternative assets with equal lives
b
15. Which of these makes this a true statement? The WACC formula A. is not impacted by taxes. B. uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing. C. uses the pre-tax costs of capital to compute the firm's weighted average cost of debt financing. D. focuses on operating costs only to keep them separate from financing costs.
c
16. A capital budgeting technique that converts a project's cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return, IRR, decision rule. A. discounted payback B. net present value C. modified internal rate of return D. profitability index
c
16. The best approach to convert an infinite series of asset purchases into a perpetuity is known as the A. Net working capital approach B. Net present value approach C. Equivalent annual cost approach D. Equivalent annual cash flow approach
b
16. Which of these makes this a true statement? When determining the appropriate weights used in calculating a WACC, it should reflect A. the relative sizes of the total book capitalizations for each kind of security that the firm issues. B. the relative sizes of the total market capitalizations for each kind of security that the firm issues. C. only the market after-tax cost of debt. D. only the market after-tax cost of equity.
b
17. A graph of a project's ______ is a function of cost of capital. A. discounted payback B. net present value C. modified internal rate of return D. profitability index
b
17. One way to account for flotation costs of raising capital is to A. adjust all the project's cash flows so that each year it will reflect the flotation costs. B. adjust the project's initial cash flow so that it will reflect the flotation costs. C. adjust only the project's operating cash flows to account for paying back the shareholders. D. adjust the project's tax burden to account for the tax implications of raising capital.
a
17. These are fees paid by firms to investment bankers for issuing new securities. A. flotation costs B. interest expense C. seller financing charges D. user fees
b
18. With regard to depreciation, the time value of money concept tells us that A. delaying the depreciation expense is always better. B. taking the depreciation expense sooner is always better. C. delaying the depreciation expense is sometimes better. D. taking the depreciation expense sooner is sometimes better.
b
19. When looking at these types of projects, one must consider any cash flows that arise from surrendering old equipment before the end of its useful life. A. incremental B. replacement C. cost-cutting D. new
b
2. The Net Present Value decision technique uses a statistic denominated in A. years. B. currency. C. a percentage. D. time lines.
c
2. 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. A. incremental cash flows B. cash flow analysis C. pro forma analysis D. substitutionary analysis
c
2. Which of these completes this statement to make it true? The constant growth model is A. always going to have assumptions that will hold true. B. able to be adjusted for stocks that don't expect constant growth without sizeable errors. C. only going to be appropriate for the limited number of stocks that just happen to expect constant growth. D. only going to be appropriate for the limited number of stocks that just happen to expect nonconstant growth.
d
3. If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a A. committed cost B. complementary cost C. obligated cost D. sunk cost
a
3. The Net Present Value decision technique may not be the only pertinent unit of measure if the firm is facing A. time or resource constraints. B. a labor union. C. the election of a new board of directors. D. a major investment.
a
3. Which of the following is a true statement? A. To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm's existing debt. B. To estimate the before-tax cost of debt, we need to solve for the Yield to Call (YTC) on the firm's existing debt. C. To estimate the before-tax cost of debt, we use the coupon rate on the firm's existing debt. D. To estimate the before-tax cost of debt, we use the average rate on the firm's existing debt.
d
4. All capital budgeting techniques A. render the same investment decision. B. use the same measurement units. C. include all crucial information. D. exclude some crucial information.
a
4. Effects that arise from a new product or service that increase sales of the firm's existing products or services are referred to as A. complementary effects. B. substitutionary effects. C. sunk effects. D. marginal effects.
c
4. Which of the following is a true statement regarding the appropriate tax rate to be used in the WACC? A. One would use the marginal tax rate that the firm paid the prior year. B. One would use the average tax rate that the firm paid the prior year. C. One would use the weighted average of the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction. D. One would use the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction.
b
5. Effects that arise from a new product or service that decrease sales of the firm's existing products or services are referred to as A. complementary effects. B. substitutionary effects. C. sunk effects. D. marginal effects.
a
5. This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project. A. payback B. internal rate of return C. net present value D. profitability index
b
5. Which of these statements is true regarding calculating weights for WACC? A. If we are calculating WACC for the firm, then equity, preferred stock and debt would be the entire book value of each source of capital. B. If we are calculating WACC for the firm, then equity, preferred stock and debt would be the entire market value of each source of capital. C. If we are calculating WACC for a project, then equity, preferred stock and debt would be the entire book value of each source of capital. D. If we are calculating WACC for a project, then equity, preferred stock and debt would be the entire market value of each source of capital.
d
6. Concerning incremental project cash flow, this is a cost one would never count as an expense of the project. A. initial investment B. taxes paid C. operating expenses of the project D. financing costs
b
6. 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. A. payback B. discounted payback C. net present value D. profitability index
a
6. Which of the following statements is true? A. If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital. B. If the new project is riskier than the firm's existing projects, then it should be charged a lower cost of capital. C. If the new project is riskier than the firm's existing projects, then it should be charged the firm's cost of capital. D. The new project's risk is not a factor in determining its cost of capital.
a
7. This is used as a measure of the total amount of available cash flow from a project. A. free cash flow B. operating cash flow C. investment in operating capital D. sunk cash flow
a
7. This technique for evaluating capital projects is particularly useful when firms face time constraints in repaying investors. A. payback B. internal rate of return. C. net present value D. profitability index
d
7. Which of the following makes this a true statement? If the new project does significantly increase the firm's overall risk, A. the increased risk will be borne equally amongst the bond holders, preferred stockholders, and common stockholders. B. the increased risk will be borne disproportionately by bond holders. C. the increased risk will be borne disproportionately by preferred stockholders. D. the increased risk will be borne disproportionately by common stockholders.
b
8. An average of which of the following will give a fairly accurate estimate of what a project's beta will be? A. flotation beta B. proxy beta C. pure-play proxies D. weighted average beta
c
8. Neither payback period nor discounted payback period techniques for evaluating capital projects account for A. time value of money. B. market rates of return. C. cash flows that occur after payback. D. cash flows that occur during payback.
c
8. Which of the following is NOT included when calculating the depreciable basis for real property? A. freight charges for item B. sales tax paid for item C. financing fees D. installation and testing fees
d
9. When calculating operating cash flow for a project, one would calculate it as being mathematically equal to which of the following? A. EBIT - Interest - Taxes + Depreciation B. EBIT - Taxes C. EBIT + Depreciation D. EBIT - Taxes + Depreciation
d
9. When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose A. either project if they both are more than managers' maximum payback period. B. neither project if they both are less than managers' maximum payback period. C. the project that pays back the soonest. D. the project that pays back the soonest if it is equal to or less than managers' maximum payback period.
d
9. Which of the following makes this a true statement? Ideally, when searching for a beta for a new line of business A. one could find other firms engaged in the proposed new line of business and use their betas as proxies to estimate the project's risk. B. one would like to find at least three or four pure-play proxies. C. two, or even one, proxies might represent a suitable sample if their line of business resembles the proposed new project closely enough. D. All the answers make this a true statement.
