Finance Flashcards

Finance Information Practice

WACC Question The relevant WACC can change depending on the amount of funds a firm raises during a given year. Moreover, the WACC at each level of funds raised is a weighted average of the marginal costs of each capital component, with the weights based on the firm’s target capital structure.
If a project has normal cash flows… A project’s NVP increases as the WACC declines.
What can only occur if a cash flow has Multiple IRRs? If the signs of the cash flows change more than once.
If two projects are equally risky and mutually exclusive, if one has IRR 15% and the other has 12%, what is possible with their NVPs? If the WACC is 10%, both projects will have positive NVPs.
True of False, if an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land? True.
Operating Question. Changes in Net Operating working capital should be reflected in a capital budgeting cash flow analysis.
What should be considered when a company estimates the cash flows used to analyze a proposed project? The new project is expected to reduce sales of one of the company’s existing products by 5%.
What would make a company less likely to invest in another market? The investment would preclude the company from being able to make a profitable investment in China.
If the average risk projects have a WACC of 10%, it’s below average risk project is 8%, it’s above average risk projects have a WACC of 12%. Which should the company invest in? The 8% project since it’s below average risk but has a return of 8.5%
What is a Terminal Cash Flow? The cash flow at the end of the life of the project.
What is the Risk Analysis Technique that measures changes in the internal rate of return and net present value? Sensitivity Analysis
What is the risk of a project without factoring in the impact of Diversification? Stand-Alone Risk
What is an example of externality that can have a negative effect on a firm? Cannibalization
What creates value for a company because it gives the company the right, but not obligation to take future action to increase its cash flows? Real Option Marketing Studies are Sunk Costs!
If a company does not risk-adjust its discount rate for projects properly, what is likely to occur over time? The firm’s overall risk level will increase. The firm could potentially reject projects that provide a higher rate of the company than it should require.

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