Exam 3 Flashcards
(16 cards)
An annuity is best defined as:
A series of equal payments occurring at equal intervals for a specified number of periods.
As the discount rate increases, the present value of a positive cash flow to be received at a particular time in the future:
Gets closer to zero
As the discount rate decreases (including negative values), the present value of a positive cash flow to be received at a particular time in the future:
Gets larger without limit
Cost of capital can best be defined as:
Compensation demanded by the investor in a firm after taxes and transaction costs of the firm are considered.
The component cost of capital is best described as:
Cost of capital provided by a given creditor or stockholder
All else equal, a firm with low levels of debt may prefer debt financing because:
Of tax advantages and the cost advantage debt has over equity.
After tax cost of debt can be best described as:
AT kd = kd(I-T)
The cost of preferred stock can best be described as:
kp = Dp/(Pp-f)
The cost of retained earnings is:
Rate of return necessary to justify not making dividend payments
The payback period is best defined as:
the time it takes to receive cash flows sufficient to cover your initial investment
A problem associated with the payback method is:
It doesn’t consider cash flows after the payback period
An acceptable net present value has a value:
equal to or greater than zero
The internal rate of returns best described as the discount rate which:
makes the NPV equal zero
If the NPV of a project is $500 and the required rate of return is 8%, the IRR must be:
> 8%
(True or False) Independent projects compete with each other.
False
(True or False) Independent projects do no compete with each other.
True
