Finals

Question 1

The process of deciding whether or not to commit resources to projects, whose costs and benefits are spread over several time periods

Answer 1

Capital budgeting

Question 2

The process of identifying, evaluating, planning, and financing capital investment projects of an organization

Answer 2

Capital budgeting

Question 3

It involves the preparation of annual budget for capital investment

Answer 3

Capital budgeting

Question 4

It involves assessment of funding capacities

Answer 4

Capital budgeting

Question 5

It involves the allocation of resources, the renewal and expansion projects, which most clearly conform with the company’s priorities

Answer 5

Capital budgeting

Question 6

Judgment about which assets to acquire to achieve the company’s stated objectives

Answer 6

Investment decision

Question 7

Judgment regarding the method of racing capital to fund an investment

Answer 7

Financing decision

Question 8

True or false
Capital investment decisions does not usually require large commitments of resources

Answer 8

False, usually require

Question 9

True or false
Most capital investment decisions, involve long-term commitments

Answer 9

True

Question 10

True or false
Capital investment decisions are easier to reverse than short term decisions

Answer 10

False, more difficult to reverse

Question 11

True or false
Capital investment decisions involves so much risk and uncertainty

Answer 11

True

Question 12

These are projects which are evaluating individually, and reviewed against redetermine corporate standards of acceptability resulting in an “accept” or “reject” decisions

Answer 12

Independent capital investment projects or screening decisions

Question 13

These are projects which require the company to choose from among specific alternatives

Answer 13

Mutually exclusive capital investment projects or reference decisions

Question 14

It represents the initial cash outlay that is required to obtain future returns or the net cash outflow to support a capital investment project

Answer 14

Net initial investment or project cost

Question 15

These are the inflows of cash expected from a project, reduced by the cash cost that can be directly attributed to the project

Answer 15

Net cash returns

Question 16

Opportunity cost may equal the average rate of return that the company will earn from alternative investment opportunities, or the cost of capital, which is the average rate of return that the firm must pay to attract investment fund

Answer 16

Minimum or lowest acceptable rate of return

Question 17

Cost of debt formula

Answer 17

Cost of debt
= interest rate x (1-corporate tax rate)

Question 18

Cost of preference shares formula

Answer 18

Cost of preference shares
= dividends per share / market value per share of preference shares

Question 19

Cost of ordinary shares formula (stock price based)

Answer 19

Stock price based
= expected cash dividends per share / current price per share of ordinary shares
+ dividend growth rate

Question 20

Cost of ordinary shares formula (book value based)
— this is used when dividend growth rate is not known

Answer 20

Book value based
= next year’s projected earnings per share / current price per share of ordinary shares

Question 21

Cost of retained earnings formula

Answer 21

—the same as the cost of ordinary equity

Question 22

Since the long-term profitability of most companies depends on the nature and quality of their capital investments, these investment opportunities should be carefully analyzed and evaluated

Answer 22

Finding investment opportunities

Question 23

To effectively evaluate any investment opportunity, the expected cash flows from the project must be estimated and the total cash outlay necessary to place the investment in operative form must be determined.

Answer 23

Collect relevant information about opportunities

Question 24

Before the cash flow can be evaluated, the discounted (cost of capital) must be established if the discounted cash flow approach is to be applied

Answer 24

Select discount rate

Question 25

The techniques of capital budgeting are applied to the estimated cash flows developed in the second phase

Answer 25

Financial analysis of cash flows

Question 26

Many factors, quantitative as well as qualitative, should be given consideration before the final decision is made as to the selection of a particular investment

Answer 26

Decision

Question 27

Once the decision has been made to invest funds, more detailed plans for making the project operational are developed

Answer 27

Project implementation

Question 28

It involves the assessment of how effective investment actually is. The evaluation may be in the form of continuous monitoring of the project.

Answer 28

Project evaluation and appraisal

Question 29

The end of a project’s life will usually result in some cash flows. These cash flows are referred to as

Answer 29

Disinvestment flows

Question 30

These are outlays (expenditures) that are expected to yield benefits to the firm over a period greater than one year

Answer 30

Capital investment decisions

Question 31

A successful capital investment program starts with — for promising investment projects

Answer 31

Proposals

Question 32

The basic concepts, underlying capital investment decision making is —

Answer 32

Cost-benefit analysis

Question 33

The cost–benefit concept strives to accomplish the general goal of —

Answer 33

Maximizing the value of the firm

Question 34

It is also known as payoff and pay out period

Answer 34

Payback period

Question 35

It measures the length of time required to recover the amount of initial investment

Answer 35

Payback period

Question 36

It is an approach which incorporates the salvage value in payback competitions

Answer 36

Bail-out period

Question 37

It is reached when the cumulative cash earnings plus the salvage value at the end of a particular year equals the original investments

Answer 37

Bail-out period

Question 38

It is also known as book value rate of return

Answer 38

Accounting rate of return, or simple rate of return

Question 39

It measures profitability from the conventional accounting standpoint by relating the required investment to the future annual net income

Answer 39

Accounting rate of return

Question 40

Under this method, you choose the project with the highest rate of return

Answer 40

Accounting rate of return

Question 41

It is the rate of recovery of investment during the payback period

Answer 41

Payback reciprocal

Question 42

It is also known as discounted rate of return and time–adjusted rate of return

Answer 42

Internal rate of return

Question 43

It is the rate which equates the present value of the future cash inflows with the cost of the investment which produces them

Answer 43

Internal rate of return

Question 44

It is also the equivalent maximum rate of interest that could be paid each year for the capital employed over the life of an investment without loss on the project

Answer 44

Internal rate of return

Question 45

It is also known as present value index, benefit–cost rate, desirability index

Answer 45

Profitability index

Question 46

It is the ratio of the total present value of future cash inflows to the initial investment

Answer 46

Profitability index

Question 47

The index expresses the present value of cash benefits asked to an amount per peso of investment in a project, and is used as a measure of ranking projects in a descending order of desirability

Answer 47

Profitability index

Question 48

It is a method that recognizes the time value of money in a payback context

Answer 48

Discounted payback period

Question 49

It is used to compute the payback in terms of discounted, cash flow’s received in the future. That is, the periodic cash flow’s are discounted using an appropriate cost of capital rate.

Answer 49

Discounted payback period

Question 50

The payback period is computed using the discounted cash flow values rather than the actual cash flows

Answer 50

Discounted payback period