Module 43 Misc.

Question 1

Capital budgeting is generally most accurate when the method used considers the cost of capital, as in the net present value method. The cost of capital used in this analysis should be ________ weighted average cost of capital.

Answer 1

Marginal

The cost of capital used should be the weighted average cost of capital in a marginal sense rather than a historical sense. In other words, the cost of capital should be determined in terms of the cost to issue debt and equity in the current market environment and not based on book value.

Question 2

_______ and required rate of return are synonyms.

Answer 2

Hurdle Rate

Question 3

If the time-adjusted rate of return, or internal rate of return, is higher than the rate of return required by the company, then the net present value of the project is _________ (positive/negative).

Answer 3

Positive

Question 4

The use of an accelerated method instead of the straight-line method of depreciation in computing the net present value of a project has the effect of

Answer 4

increasing the present value of the depreciation tax shield.

Question 5

What is the formula for the accounting rate of return?

Answer 5

Increase in Income / Required Investment

Question 6

T/F

NPV = PV of inflows - PV of Outlows

Answer 6

TRUE

Question 7

_______ is simply “accounting income” from a project divided by the investment cost of the project.

Answer 7

Accounting Rate of Return

Question 8

________ considers the amount and timing of cash inflows and outflows in calculating a “true” (internal) rate of return on a project.

Answer 8

Internal Rate of Return

Question 9

T/F

Both ARR and IRR consider salvage value—ARR in computation of depreciation expense and IRR as a future cash flow.

Answer 9

TRUE

Question 10

T/F

Both ARR & IRR consider Cash Flows

Answer 10

FALSE

Cash Flows are NOT addressed in ARR

Question 11

T/F

Both ARR & IRR consider TVM

Answer 11

FALSE

TVM is not considered in ARR

Question 12

The “true” rate of interest is the same as the ________ rate.

Answer 12

Effective

Question 13

The higher the risk, the ______ the discount rate, and the ______ the present value of the subject company.

Answer 13

Higher

Lower

Question 14

T/F

Market risk/systematic risk includes company risk

Answer 14

FALSE

Company risk is not a component of market risk. It is related to a particular company and is much more specific than market risk. Company risk can be alleviated or avoided through diversification.

Question 15

Usury laws have been developed in order to provide protection for borrowers from usury interest rates. Although these laws were developed for the “general good,” one negative consequence of these regulations from the borrower’s perspective is that:

Answer 15

less creditworthy customers are excluded from the market.

Question 16

The efficient market hypothesis relates to the degree to which past or current information is incorporated in and/or influences the current market prices of securities. The _____ form of the hypothesis states that all available information is incorporated in the current market prices of securities, and thus the investor cannot find undervalued securities and would be unable to make choices that would allow him or her to outperform the market index in the long run.

Answer 16

Strong

Question 17

The efficient market hypothesis relates to the degree to which past or current information is incorporated in and/or influences the current market prices of securities. The ____ form of the hypothesis assumes that all readily available information is incorporated into current market prices of securities and that fundamental analysis would be unlikely to identify inaccurately valued securities.

Answer 17

Semi-Stron

Question 18

The efficient market hypothesis relates to the degree to which past or current information is incorporated in and/or influences the current market prices of securities. The _____ form of the hypothesis assumes that current market prices reflect all past prices and information, and therefore this information cannot be used for predictive purposes.

Answer 18

Weak

Question 19

How do you calculate the Profitability Index?

Answer 19

PV Benefits / Cost