FINC430 Quiz 3
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If a project holds an 80 per cent probability of high demand and a 20 per cent probability of low demand, then the expected value of the net present value of the two different demand assumptions would give us a weighted average net present value for the project. Such an analysis is called Q a) a sensitivity analysis. @ b) a scenario analysis. O ©) a simulation analysis. O d) none of the above. A synonym for pretax operating cash flow is EBIT. () True (e) False
If a company is interested in the distribution of the NPV for a project that it is considering, then the company should be most interested in O a) 3 sensitivity analysis. Q b) a scenario analysis. @ ©) a simulation analysis. O d) none of the above. Total variable costs for a company do not vary directly with the number of units sold. () True (e) False The discounted payback period calculation calls for the future cash flows to be discounted by the company's cost of capital. (o) True () False An analysis in which a company would like to know the effect of a price change on the NPV of a project, holding all other variables and forecasts constant, is one type of sensitivity analysis. (o) True () False
When two projects are mutually exclusive, accepting one project implicitly eliminates the other. (o) True () False Which ONE of the following statements about the payback method is true? Q a) The payback method is consistent with the goal of shareholder wealth maximisation Q b) The payback method represents the number of years it takes a project to recover its initial investment plus a required rate of return. @ 0 There is no economic rationale that links the payback method to shareholder wealth maximisation. O d) None of the above statements are true. Conceptually, free cash flows are what are left over for distribution to creditors and shareholders after the company has made the necessary investments in working capital and long-term assets. (o) True () False
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The expected cash flows for a project are fixed amounts that have zero variability in the projected values. () True () False The purchase of a factory building for a prospective project is an example of an incremental addition to working capital. () True () False If you are deciding whether to take one project or another, where the projects have different useful lives, then you could utilise O a) @ repeated investment analysis to decide which project is better for the company. Q b) an equivalent annual annuity analysis to decide which project is better for the company. @ ©) either of the above. O d) none of the above.
___________ is a measure of the sensitivity of EBITDA or EBIT to changes in revenue. O a) Total leverage O b) Financial leverage @ <) Operating leverage O d) None of the above A company with a higher proportion of fixed costs will create O a) "o discernible difference of a change in sensitivity of EBITDA to a change in revenues. Q b) a company with a much more stable profit stream as a function of revenues. Q Q2 lower degree of sensitivity of EBITDA to a change in revenues. @ d) 2 higher degree of sensitivity of EBITDA to a change in revenues.
Tax do not enter into the equation for the cash flow degree of operating leverage because both fixed costs and pretax operating cash flows are measured on a pretax basis. (o) True () False Terminal-year free cash flows may differ from the cash flows provided in the typical year of a project for reasons such as the return/repayment of increases/reductions in additional working capital in the prior years. (o) True () False The cost of capital is: @ a) the minimum return that a capital budgeting project must earn for it to be accepted. Q b) the maximum return a project can earn. O 0 the return that a previous project for the company had earned. O d) none of the above.
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Which one of the following statements is NOT true? O a) Managers are indifferent about accepting or rejecting a zero NPV project. Main Content Q b) Accepting a positive-NPV project increases shareholder wealth. @ 0 Accepting a zero NPV project has a negative impact on shareholder wealth. O d) Accepting a negative-NPV project decreases shareholder wealth. Accepting a positive-NPV project increases shareholder wealth. (o) True () False The goal of the capital budgeting decisions is to select capital projects that will increase the value of the company. (o) True () False
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Related Questions
Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
a. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
b. If a project has normal cash flows and its IRR exceeds its cost of capital, then the project's NPV must be positive.
c. The IRR calculation implicitly assumes that all cash flows are reinvested at the cost of capital.
d. If Project A has a higher IRR than Project B, then Project A must have the lower NPV.
e. The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business.
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Which
of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one cash outflow at t = o followed by a series of positive cash flows.
a. To find a project's MIRR, we compound cash inflows at the regular IRR and then find the discount rate that causes the PV of the terminal value to equal the initial cost.
b. To find a project's MIRR, the textbook procedure compounds cash inflows at the WACC and then finds the discount rate that causes the PV of the terminal value to equal the initial cost.
c. A project's MIRR is always greater than its regular IRR.
d. If a project's IRR is greater than its WACC, then its MIRR will be greater than the IRR.
e. A project's MIRR is always less than its regular IRR.
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Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
O a. If a project's IRR is positive, then its NPV must also be positive.
O b. A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV), then discounting the TV to find the IRR.
O c. A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.
O d. If a project's IRR is smaller than the WACC, then its NPV will be positive.
O e. A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV), then discounting the TV at the WACC.
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Suppose that, for a certain potential investment project, the optimistic, most likely, and pessimistic estimates are as shown in the accompanying table. Solve, a. What is the AW for each of the three estimation conditions? b. It is thought that the most critical factors are useful life and net annual cash flow. Develop a table showing the net AW for all combinations of the estimates forthese two factors, assuming all other factors to be at their most likely values.
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which of the following statement is true>?
1. return on equity is the ratio of total assets to total net income
2. one must know the discount rate to compute the npv of a project but one can compute the IRR without referring to the discount rate.
3. there will always be one IRR regardless of cash flows
4. one must know the discount rate to compute the IRR of a project but one can compute the NPV without referring to the discount rate
5. payback accounts for time value of money
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If a project with conventional cash flows has an IRR equal to the required return, then:
O The profitability index is one.
O The IRR must be zero.
O The project should be accepted, as the NPV is greater than zero.
O The payback period is less than the maximum acceptable period.
The NPV is negative.
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Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
The lower the WACC used to calculate a project's NPV, the lower the calculated NPV will be.
If a project's NPV is less than zero, then its IRR must be less than the WACC.
If a project's NPV is greater than zero, then its IRR must be less than zero.
The NPV of a relatively low-risk project should be found using a relatively high WACC.
A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC.
000o
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For a typical project evaluation with initial investment at time=0 and positive cash flows afterwards, each statement in the following shows possible answers in parenthesis. Choose the answer that shows correct answers for all statements.
Statement 1: When NPV = 0, investors earn (negative/zero/positive) return.
Statement 2: Accept the project when valuation is (higher/the same/lower) than the cost.
Statement 3: When IRR> cost of capital, NPV is (negative/zero/positive).
Statement 4: Cost of capital is determined by the (company/investors) considering the (business risk/systematic) risk)
a. negative, higher, positive, investors and systematic
b. positive, lower, positive, investors and business
c. positive, higher, zero, company and systematic
d. positive, higher, positive, investors and systematic
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Which
of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
a. If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR.
b. If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR.
c. A project's MIRR is always greater than its regular IRR.
d. To find a project's MIRR, we compound cash inflows at the IRR and then discount the terminal value back to t = 0 at the WACC.
e. A project's MIRR is always less than its regular IRR.
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A project's internal rate of return (IRR) is the that forces the PV of its inflows to equal its cost. The IRR is an estimate of the project's rate of return, and it is comparable to the on a bond. The equation for calculating the IRR is:
CFt is the expected cash flow in Period t and cash outflows are treated as negative cash flows. There must be a change in cash flow signs to calculate the IRR. The IRR equation is simply the NPV equation solved for the particular discount rate that causes NPV to equal .
The IRR calculation assumes that cash flows are reinvested at the . If the IRR is than the project's risk-adjusted cost of capital, then the project should be accepted; however, if the IRR is less than the project's risk-adjusted cost of capital, then the project should be . Because of the IRR reinvestment rate assumption, when projects are evaluated the IRR approach can lead to conflicting results from the NPV method. Two basic conditions can lead to conflicts between NPV and…
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Which of the following is CORRECT?
Select one:
a. If the NPV of a project is negative, the IRR for the project must also be negative.
b. A project's MIRR can never exceed its IRR.
c. If a project with normal cash flows has an IRR less than WACC, the project must have a positive NPV.
d. If Project 1's IRR exceeds Project 2's IRR, then 1 must have a higher NPV than 2.
e. If a project with normal cash flows has an IRR greater than WACC, the project must have a positive NPV.
You purchase a house for $250,000. After you make your down payment of $50,000, you are financing $200,000 for 30 years at an annual percentage rate of 5.4%. How much are your monthly payments?
Select one:
a. Less than $1,000
b. Between $1,000 and $1,050
c. Between $1,050 and $1,100
d. Between $1,100 and $1,150
e. Greater than $1,200
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What is the difference between CAPM beta and cash-flow beta (from certainty equivalency approach)? Can just use bullet points for this one because it is urgent, I need this by today. Thank you!
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The internal rate of return (IRR):
Group of answer choices
will always lead to the same decision as will NPV.
is a "purer" discount rate because is excludes all external project cash flows.
is the discount rate that produces NPV of zero for a series of cash flows.
None of the above
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Suppose that, for an engineering project, the optimistic, most likely, and pessimistic estimates are as shown in the accompanying table. Develop a spreadsheet to determine the AW for each of the three estimate conditions. It is thought that the most critical elements are useful life and net annual cash flow. Include in your spreadsheet a table showing the AW for all combinations of the estimates for these two factors, assuming that all other factors remain at their most likely values.
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If you have a project combined with above-average market risk, which one of the following decisions should you make?
Accept if the IRR is greater than the WACC.
Use a higher discount rate than the WACC to reflect the project's risk and accept if NPV is positive at this higher discount rate.
Accept if the cash flows discounted at the WACC have a positive NPV.
Discount the cash flows at the IRR and accept if NPV is positive.
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Which one of the following statements is correct concerning the payback rule?
a. The payback period is computed using the present value of each of the cash flows.
b. The rule says that you should accept a project if the payback period is greater than 1.0.
c. The rule is biased in favour of long-term projects.
d. The rule is flawed because it ignores all cash flows after some arbitrary point in time.
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Which of the following statements is CORRECT? Assume that the project being considered has normal
cash flows, with one outflow followed by a series of inflows.
I. One defect of the IRR method is that it does not take account of the time value of money.
II. One defect of the IRR method is that it does not take account of the cost of capital.
III. A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.
O I and III only
SO I only
O I, II and III
O II and III only
O III only
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This is a multiple choice question.
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May I know the answer ?
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need answer step by step
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Related Questions
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- Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. The lower the WACC used to calculate a project's NPV, the lower the calculated NPV will be. If a project's NPV is less than zero, then its IRR must be less than the WACC. If a project's NPV is greater than zero, then its IRR must be less than zero. The NPV of a relatively low-risk project should be found using a relatively high WACC. A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. 000oarrow_forwardFor a typical project evaluation with initial investment at time=0 and positive cash flows afterwards, each statement in the following shows possible answers in parenthesis. Choose the answer that shows correct answers for all statements. Statement 1: When NPV = 0, investors earn (negative/zero/positive) return. Statement 2: Accept the project when valuation is (higher/the same/lower) than the cost. Statement 3: When IRR> cost of capital, NPV is (negative/zero/positive). Statement 4: Cost of capital is determined by the (company/investors) considering the (business risk/systematic) risk) a. negative, higher, positive, investors and systematic b. positive, lower, positive, investors and business c. positive, higher, zero, company and systematic d. positive, higher, positive, investors and systematicarrow_forwardWhich of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR. b. If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR. c. A project's MIRR is always greater than its regular IRR. d. To find a project's MIRR, we compound cash inflows at the IRR and then discount the terminal value back to t = 0 at the WACC. e. A project's MIRR is always less than its regular IRR.arrow_forward
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