finance final- keen
4 components of projects incremental cash flows
- capital expenditures -changes in net work capital -operating cash flows -cash flow from salvage or disposal
consider when estimating a projects incremental cash flows
- erosion costs - opportunity costs -sunk cost - synergy gains
the capital budgeting is to accept a project if
IRR> WACC
Net Present Value (NPV)
a benefit cost measure, pv of all of a project's estimated cash flows
erosion cost
a new product or service competes with revenue generated by a current product or service offered by a firm
an unlettered firm is an
all-equity firm
________ capital structure refers to a combination of debt and equity that maximizes the value of the firm.
an optimal
in deriving the WACC, market values are preferred over
book values
Financial leverage is the degree to which a firm or individual utilizes ________.
borrowed money to magnify equity earnings
how does cash flows differ from net income
cashflow measure the actual inflow and outflow of cash while profits represent accounting measure of periodic performance - you can spend operating cash flows but not its net income -cash flows area broader
two ways of estimating a firm's cost of equity
constant dividend growth model and CAPM
The return to the investor is the ________.
cost to the borrower
the cost of capital uses the amounts of
equity, preferred stock, and debt as the capital structure of weights
the NPV tells us the ------- of a proposed project on the value of a firm
expected dollar impact
sunk costs
expenses that have or will be incurred, regardless of the decision to accept or reject a project
Internal Rate of Return (IRR)
finance name of the expected rate of return on a project discount rate that produces an NPV of zero
two names of are used fro a firm's cost of capital
hurdle rate and WACC
to be considered acceptable, a project must have an NPV
is greater than 0
financial leverage
is the degree to which a firm or individual utilities borrowed money (debt) to make money (equity)
opportunity cost
lost opportunity to generate revenue from an owned assets because it be used in a new project
investors ____________ for estimating the WACC
prefer market value to book value
A rising WACC ________ the values of the firm's future cash flows.
reduces
synergy gains
sales increase for other existing products related to the introduction of a new product
when the IRR exceeds the cost of capital
the NPV will be positive
the before tax cost of debt is higher than
the after-tax cost of debt
when calculating the after tax average cost of capital (Acc), which of the following costs is adjusted for taxes in the equation?
the before- tax cost of debt
of an asset or liability is its cost carried on the balance sheet
the book value
the cost of capital is
the cost of each financing component multiplied by that component's percent of the total borrowed
At the optimal debt−to−equity ratio, the cost of capital (WACC) is ________ for the firm. This point reflects the maximum benefit of leverage.
the lowest
If earnings reflect a return greater than the cost of debt, then ________.
the more debt the company has sold, the better off the shareholders are
estimating a project's incremental cash flows
the timing and magnitude of incremental cash flows is critical
One way of measuring the advantage of financial leverage to the owners of the company is ________.
to examine the earnings per share (EPS) of a company before and after borrowing from debt lenders
cost of capital
weighted average of the cost of a firm's sources of financing debt, preferred stock, and common stock ("equity")
