Flashcards in Deck 7 Deck (20):

1

## What capital budgeting method is used for Capital Rationing?

### Profitability index

2

## Discounted cash flow methods include:

### NPV, IRR, and profitability index

3

## After tax cash flows =

### Annual cash inflows after tax plus depreciation tax shield

4

## Internal rate of return method

### Computes rate of return where NPV equals zero (focuses on discount rate instead of dollars)

5

## The higher the present value factor, the lower the

### Internal rate of return

6

## Present value factor =

### Investment / Cash flows

7

## Annual Operating Cash flow (After-tax CF) =

### Pretax CF x (1 - tax rate) + (Depreciation x tax rate)

8

## The amount of dollars saved =

### Depreciation x tax rate

9

## Discounted Cash flow =

### PV of cash outflow - PV of cash inflow

10

## What happens to NPV when the discount rate is increased?

### Lower NPV

11

## Major advantage of NPV over IRR

### NPV allows for differing rates; IRR - can only use a single rate

12

## Profitability Index (PI) =

### PVFCF / initial investment (cost); PI > 1 = positive NPV

13

## What happens to discount rate when risk increases?

### Increase the discount rate

14

## Financial leverage increases when:

### Debt to equity ratio increases

15

## Operating leverage

### Use of fixed operating costs rather than variable operating costs

16

## Financial leverage

### Firm uses debt rather than equity to finance the company

17

## Cost of debt is most frequently measured as:

### Actual interest rate minus tax savings

18

## What is the least expensive component of a company's capital structure?

### Debt

19

## Does a company want a low or high WACC?

### Lowest possible WACC

20