finance exam 3

 Which of these are fees paid by firms to investment bankers for issuing new securities? Flotation costs The ________ approach to computing a divisional weighted average cost of capital (WACC) requires only that WACCs for “risky” and “relatively safe” subjective Which of these is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division? Divisional WACC Which of the following is a true statement? To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm’s existing debt. What is the theoretical minimum for the weighted average cost of capital? The after-tax cost of debt When calculating the weighted average cost of capital, weights are based on: market values Which of the following is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing? Separation principle Any debt and preferred stock components of capital should: use firmwide, not project-specific, WACC figures. When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm’s cash flows as: a weighted average of the capital components costs. Which of these statements is true regarding calculating weights for WACC? 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. With regard to depreciation, the time value of money concept tells us that: taking the depreciation expense sooner is always better. Effects that arise from a new product or service that increase sales of the firm’s existing products or services are referred to as: complementary effects. When calculating operating cash flow for a project, one would calculate it as being mathematically equal to which of the following? EBIT – Taxes + Depreciation 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: sunk cost. Which of these is the concept that a unit’s sales will follow an approximate bell-shaped curve versus a steady sales life? Product life cycle Coke is planning on marketing a new drink called Very Berry Coke which is a mixture of raspberry and blackberry flavors blended to perfection and added to the highly secret Coca-Cola formula. This new product is expected to reduce the sales of their existing product, Cherry Coke, by \$10 million per year. This is an example of a: substitutionary effect. Which of these is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements? Pro forma analysis Accelerated depreciation allows firms to: receive more of the dollars of depreciation earlier in the asset’s life. An asset’s cost plus the amounts you paid for items such as sales tax, freight charges, and installation and testing fees is referred to as the: ________. depreciable basis Which of the following measures the operating cash flow a project produces minus the necessary investment in operating capital, and is as valid for proposed new projects as it is for the firm’s current operations? Free cash flow Which of these is 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? Internal rate of return Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project? Payback All capital budgeting techniques: exclude some crucial information. Which of these are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive? Normal cash flows 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? Profitability index (PI) All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT: IRR. All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT: payback Which of these describe groups or pairs of projects where you can accept one but not all? Mutually exclusive Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates? Discounted payback Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects? Net present value
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