Finance Exam 3 Conceptual

The difference between a company’s future cash flows if it accepts a project and the company’s future cash flows if it does not accept the project is referred to as the project’s: incremental cash flows
The fact that a proposed project is analyzed based on the project’s incremental cash flows is the assumption behind which one of the following principles? stand-alone principal
Kelley’s Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? Hiring additional employees to handle the increased workload should the firm accept the wreath project
Which one of the following costs was incurred in the past and cannot be recouped? sunk
The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following? opportunity cost
Which one of the following is an example of a sunk cost? $1,200 paid to repair a machine last year
GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? Sunk
Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? Selling fewer hot dogs because hamburgers were added to the menu
Which one of the following should not be included in the analysis of a new product? Money already spent for research and development of the new product
Which one of the following best describes the concept of erosion? The cash flows of a new project that come at the expense of a firm’s existing cash flows
Pro forma financial statements can best be described as financial statements: showing projected values for future time periods.
Pro forma statements for a proposed project should generally do all of the following except: include interest expense.
A project’s cash flow is equal to the project’s operating cash flow: minus both the project’s change in net working capital and capital spending.
Which one of the following is a project cash inflow? Ignore any tax effects. decrease in inventory
All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0? Initial investment in inventory to support the project
Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero? Net income + Depreciation
The operating cash flow for a project should exclude which one of the following? interest expense
Shelton Co. purchased a parcel of land six years ago for $874,500. At that time, the firm invested $146,000 in grading the site so that it would be usable. Since the firm wasn’t ready to use the site itself at that time, it decided to lease the land for $54,500 a year. The company is now considering building a warehouse on the site as the rental lease is expiring. The current value of the land is $926,000. What value should be included in the initial cost of the warehouse project for the use of this land? The opportunity cost of the building is what it could be sold for today, or $926,000
You own a house that you rent for $1,450 per month. The maintenance expenses on the house average $270 per month. The house cost $233,000 when you purchased it 4 years ago. A recent appraisal on the house valued it at $255,000. If you sell the house you will incur $20,400 in real estate fees. The annual property taxes are $3,200. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office? Opportunity cost = $255,000 − 20,400Opportunity cost = $234,600
The cost of capital for a new project: depends upon how the funds raised for that project are going to be spent.
Which one of the following is the primary determinant of a firm’s cost of capital? Use of the funds raised
A company’s current cost of capital is based on: both the returns currently required by its debtholders and stockholders.
The discount rate assigned to an individual project should be based on: the risks associated with the use of the funds required by the project.
A firm should select the capital structure that: maximizes the value of the firm.
The optimal capital structure has been achieved when the: debt-equity ratio results in the lowest possible weighted average cost of capital.
You have computed the break-even point between a levered and an unlevered capital structure. Ignore taxes. At the break-even level, the: company is earning just enough to pay for the cost of the debt.
Which one of the following makes the capital structure of a company irrelevant? Homemade leverage
The concept of homemade leverage is most associated with: M&M Proposition I with no tax.
Which one of the following statements is correct in relation to M&M Proposition II, without taxes? The required return on assets is equal to the weighted average cost of capital.
Which one of the following states that the value of a company is unrelated to the company’s capital structure? M&M Proposition I, no tax
Westover Mills reduced its taxes last year by $210 by increasing its interest expense by $1,000. Which one of the following terms is used to describe this tax savings? Interest tax shield
M&M Proposition I with taxes is based on the concept that: the value of a taxable company increases as the level of debt increases.
M&M Proposition II with taxes: has the same general implications as M&M Proposition II without taxes.
The present value of the interest tax shield is expressed as: TxD.
The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs indirect bankruptcy
If a company has the optimal amount of debt, then the value of the levered company will exceed the value of the unlevered company.
The basic lesson of M&M theory is that the value of a company is dependent upon: the total cash flows of that company.
Which form of financing do companies prefer to use first according to the pecking-order theory? Internal funds

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