SB finance final
If cash-forecasts are prepared properly then which of the following are true?
It cannot be fudged for forecasting errors. The discount rate should reflect only the market risk of the project.
Which of the following statements regarding the company cost of capital are true?
It is the minimum rate of return that the firm must earn on its average risk investments. It is an opportunity cost. It is used to value new assets that have the same risk as the existing ones.
The term incremental cash flow can best be defined as:
additional cash flows that will only be earned if the firm proceeds with an investment
The WACC is the appropriate discount rate for use with ______ projects but should be adjusted ______ for higher risk ones
average; upward;
The measure of market risk for a security is its _________.
beta
Incremental cash flow is equal to:
cash flow with project - cash flow without project
To calculate net present value, you need to discount _________.
cash flows
If the corporate tax rate is not zero, increasing the proportion of debt in the capital structure causes the WACC to _______.
change
Another name for the WACC is the ___________.
company cost of capital
Firms may use a ____________ to discount the cash flows of their average risk projects.
company cost of capital
The company cost of capital is calculated as a weighted average of the firm's _______ and _______.
debt; equity
If the market portfolio return decreases by 2%, then each firm's stock return will ________ by about _______ percent.
decrease; 2xbeta
A firm can have high total risk but a low beta if its _______ is high.
diversifiable risk firm specific risk
The difference between the nominal discount rate and the real discount rate is ________.
expected inflation
The increase in the rate that bondholders demand as the amount of debt borrowed increases is called the _______ cost of debt.
explicit
True or false: A sensible way for a manager to account for overoptimistic cash-flow forecasts is to adjust the discount rate.
false
True or false: Financing costs like interest and principal payments on borrowed funds must be included in the incremental cash flows for the project.
false
Projects with high fixed costs will tend to have _______ betas than other projects.
higher
The ______ cost of debt is the increase in the required return on common equity as the amount of debt borrowed increases.
implicit
If the market portfolio return increases by 1%, then each firm's stock return will ________ by about ________ percent.
increase; beta
Some examples of indirect effects that could affect incremental cash flows would be:
loss of existing store sales by locating a new store too close by
The total risk of a security investment consists of _______ plus _______.
market risk; diversifiable risk market risk; firm specific risk
Projects with high fixed costs will tend to have earnings that vary _______ with any change in revenues
more
Land that is used for a manufacturing facility could also be sold. The what cost equals the cash that could be realized from selling the land now instead of using it for the manufacturing facility.
opportunity cost
The average of the betas of the individual securities in a portfolio, weighted by the investment in each security, is called the:
portfolio beta
The total risk of a well-diversified portfolio of stocks can be calculated as the product of the ________ times the _________.
portfolio beta; standard deviation of the market portfolio
The minimum acceptable expected rate of return for a project is called the ________________.
project cost of capital
The ________ is usually accepted as a firm's cost of debt capital for WACC calculations.
promised yield to maturity on the firm's existing bonds
The measure of total risk for a security is its ________.
standard rate of returns
An opportunity cost arises in a project whenever:
the project uses an existing asset that could have been sold or put to productive use elsewhere
According to the CAPM, what is the expected return on a stock if its beta is equal to zero?
the risk free rate
Indirect effects on cash flows may be positive or negative.t/f
true