The IRR

Answer

shows the graphical relationship between a project’s NPV and cost of capital.

is the return that causes the NPV to be zero.

is the return that causes the NPV to be positive.

measures the firm and project’s required rate of return.

 

when the net present value is negative, the internal rate of return is __________ the cost of capital.

Answer

greater than

 greater than or equal to

less than

equal to

 

 

Which one of the following capital-budgeting evaluation techniques is based on finding a discount rate which causes the net present value to be zero?

Answer

net present value

internal rate of return

profitability index

payback

 

An examination of a firm’s opportunities, strengths, threats and weaknesses is often referred to by the following acronym:

Answer

  WOTS.

  OSTW.

  SWOT.

  TWOS.

 

Capital budgeting is

Answer

  the process of identifying, evaluating, and implementing a firm’s investment opportunities.

  the process of identifying, evaluating, and implementing a firm’s objectives.

  the process of identifying, evaluating, and implementing a firm’s strategic plans.

  the process of identifying, evaluating, and implementing a firm’s financing requirements.

 

The relevant cash flows of a project do not include which one of the following?

Answer

  incremental after-tax cash flows

  cannibalization effects

  opportunity costs

  sunk costs

 

The stage in the capital budgeting process in which projects that are accepted must be executed in a timely fashion is called the _____________ stage.

Answer

  follow-up.

  selection.

  identification.

  implementation.

 

The capital-budgeting process starts with which one of the following stages:

Answer

  development

  identification

  implementation

  selection

 

The corporate planning tool that develops project plans that fit well with the firm’s plans is often referred to by the following acronym:

Answer

  MOGS.

  SMOG.

  OMGS.

  GOMS.

 

When the net present value for a project is negative, the internal rate of return is _________ the cost of capital.

Answer

  greater than

  greater than or equal to

  less than

  equal to

Corporate debt as a percentage of GDP grew from around ______ in 1970 to nearly ______ in 2007.

Answer

  35%; 50%

  40%; 55%

  45%; 60%

  50%; 60%

 

The internal and sustainable growth rate relationships suggest that there are three measurable influences on growth.  These include all of the following except:

Answer

  asset policy

  dividend policy

  profitability

  the firm’s capital structure

 

The initial impact of increasing the use of debt is to:

Answer

  lower the cost of capital

  lower the weight of the debt component

  increase the cost of capital

  lower the cost of retained earnings

 

Which of the following is a different concept from the other three?

Answer

  required rate of return

  cost of capital

  discount rate

  net profit margin

 

When retained earnings are used up and new common stock is issued, we know that the cost of:

Answer

  equity has increased

  equity has dropped

  equity is unaffected

  both common and preferred stock are affected

 

The firm’s target capital structure is consistent with which of the following?

Answer

  minimum risk

  maximum earnings per share

  minimum weighted average cost of capital

  minimum cost of equity

 

A firm’s degree of combined leverage can be measured as degree of operating leverage __________ the degree of financial leverage:

Answer

  plus

  minus

  times

  divided by

 

What should be the relation between the target capital structure for a firm and the firm’s optimum capital structure?

Answer

  Target and optimum capital structures should be the same.

  Target capital structure is more conservative overall.

  Target capital structure contains more debt.

  Target capital structure excludes preferred stock.

 

The cost of debt:

Answer

  is typically higher than the cost of preferred stock

  must be adjusted to an after-tax cost

  is higher than the cost of retained earnings

  is the lowest component cost because corporations can deduct 70 percent of the interest expense

 

Of the components shown below, which is least likely to be of value in calculating the cost of preferred stock?

Answer

  flotation costs per share

  book value of a preferred share

  dividends per share

  initial market price per share

 

 

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