Understanding coporate finance | Business & Finance homework help

1. It is likely that:

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A) prudent managers have a detailed knowledge of the composition of their shareholders.

B) mixing asset purchase and financing decisions could cause managers to make good decisions.

C) none of the above.

D) A and B.

 

2. The present value of a cash flow allows an investor to assess:

A) the present value of a future cash flow.

B) the value of a stream of cash flows in terms of the best and most certain alternative.

C) what equivalent present payment would be equally acceptable in lieu of the investment under consideration.

D) A and B.

E) A, B, and C.

 

3. In a stable, predictable industry, an average of the previous ten years’ sales growth figures probably provides a less accurate forecast than assuming the same level of sales next year as in the current year.

True

False

 

4. Which of the following would be included among the investment numbers of a capital budget?

A) Purchase price of the asset.

B) Trade-in value of an asset being replaced.

C) Investment tax credit from acquisition.

D) Installation costs of the machinery.

E) All of the above.

 

5. If projected assets exceed liabilities and owners’ equity, it is assumed that the difference is funded through short-term or long-term debt.

True

False

 

6. For capital budgeting purposes, an asset’s depreciable life is:

A) always equal to the time horizon of an evaluation.

B) equal to the asset’s useful life.

C) equal to the asset’s economic life.

D) an arbitrary period dictated by GAAP.

E) none of the above.

 

7.  The most accurate pro formas do not necessarily contain the most detail.

True… pg 23

False

 

8.  Analysts within a company are less likely to fall into the ‘false accuracy trap’ when they develop pro formas than would external analysts because insiders have access to more detailed information.

True

False

 

9.  Which of the following statements record a firm’s financial situation on a single day?

A) Statement of financial position.

B) Income statement.

C) Statement of cash flows.

D) All of the above.

E) Both A and B.

 

10.  Residual cash flows are estimated when:

A) the useful lives of alternatives are different.

B) one asset has a shorter economic life than its alternatives.

C) one asset has a longer economic life than its alternatives.

D) A and B.

E) A, B, and C.

 

11. The cost of capital can be defined as:

A) the weighted average cost of attracting investors to the firm.

B) the price of obtaining funding for the firm, weighted according to target ratios in the capital structure.

C) less than the weighted average return that investors in the firm require.

D) A and B.

E) A, B, and C.

 

12. It is not possible for stock appreciation to offset a dividend reduction and create value for shareholders.

True

False

 

13.  Dividends are not the sole source of returns for shareholders.

True

False

 

14. If managers do not foresee investment opportunities in the coming year that are as attractive as they have seen in the past, it is not necessarily appropriate to raise the dividend to the level that mature companies pay.

True

False

 

15. If an investment’s IRR is higher than the firm’s chosen hurdle rate, then the investment:

A) has a positive NPV.

B) is of greater risk than the overall risk of the firm.

C) should be qualitatively considered before selection.

D) A and C.

E) A, B, and C.

 

16. A differential analysis:

A) can be used to compare an alternative to the status quo.

B) can be used to compare any set of alternatives.

C) is easier to comprehend if a consistent frame of reference is employed.

D) B and C.

E) A, B, and C.

 

17. Flexibility issues are those which:

A) deal with a company’s financing reserves.

B) impact the debt capacity that a firm should maintain.

C) All of the above.

 

18. As the interest rate used to discount future cash flows is decreased, present value of the future cash inflows:

A) increases.

B) decreases.

C) stays the same.

 

19. A firm with substantial fixed costs such as a manufacturing overhead will have a lower degree of risk in the trough of a business cycle than will a firm with high variable costs and limited fixed costs.

True

False

 

20. The qualitative portion of a financial analysis is analogous to the hypothesis-forming stage of scientific investigation because:

A) assumptions are not tested until the numbers are run.

B) false hypotheses (assumptions) may be formed.

C) empirical measurement is not performed later.

D) A and B.

E) A, B, and C.

 

21.  ‘Other’ issues normally do not cause managers to assign more importance to one FRICTO element than the others.

True

False

 

22.  The risk-free rate of return used to determine a firm’s cost of capital will not vary depending upon the financial and operating risk level of the firm.

True

False

 

23. Timing issues involve:

A) the costs of the alternative forms of capital.

B) sequencing the alternatives, once funding amounts are known.

C) none of the above.

D) A and B.

 

24. If a company consistently uses hurdle rates that are higher than its marginal cost of capital, then:

A) it will certainly increase its earnings.

B) it may have fewer and fewer investment alternatives.

C) the risk of the firm will decrease.

D) A and C.

E) B and C.

 

25. The risk of illiquidity is more pronounced for share owners than it is for debt holders in a public company.

True

False

 

26. FRICTO analysis does not point out poor investments.

True

False

 

27. A valuation determines whether a merger should occur; legalities determine what form the business combination should be.

True

False

 

28. The ‘efficient market’ theory seems to be reasonable because:

A) there are fewer financial analysts valuing securities.

B) there are hundreds of investors trying to make money from improperly valued securities, and the market forces which result drive stock prices to a fair value – pg. 47 verified

C) statistical assessments are becoming increasingly important in financial analysis.

D) B and C.

E) A, B, and C.

 

29. It is best when evaluating mergers to rely on several quantitative methods.

True

False

 

30. It is not impossible for the acquisition price of a target firm ever to fall below book value.

True

False

31.  Present value calculations allow managers to:

A) choose assets which create the most value, even if their cash flows are timed differently.

B) express present values in terms of future cash flows.

C) create value for the firm.

D) A and C.

E) A, B, and C.

 

32. The final step(s) in using pro formas are to:

A) test the assumptions.

B) compare the results of the sensitivity analysis to the decision maker’s risk tolerance in the current situation.

C) create best- and worst-case scenarios.

D) A and C.

E) A, B, and C.

 

33.  Qualitative comparisons may be as important as the numerical comparisons in financial analysis.

True

False

 

34.  When performing sensitivity analysis:

A) statistical methods should not be employed.

B) electronic spreadsheets can save time.

C) assumptions should be changed one at a time.

D) all of the above.

E) B & C.

 

35. Management can improve its ROA by increasing investments in property, plant, and equipment.

True

False

 

36. A payment of dividends reduces the cash balance.

True

False

 

37. Compound rates are used in an attempt to:

A) screen out weak investments.

B) quantify the firm’s opportunity costs.

C) quantify the firm’s risk.

D) A and B.

E) none of the above.

 

38.  More detail in a pro forma doesn’t necessarily mean greater accuracy.

True

False

 

39.  Synergy between two companies:

A) is the complimentary situation where value is created in the joining of the firms.

B) may result in the improvement of the acquirer’s bottom line.

C) could be defined by purely qualitative benefits.

D) A and C.

E) A, B, and C.

 

40. The utility of sensitivity analysis is as great in merger valuations as it is in capital budgeting.

True

False

 

41.  NPV is the preferred method for ranking investments because:

A) it does not consider the time value of money.

B) it measures the creation of value.

C) it is sensitive to changes in the hurdle rate assumption.

D) A and B.

E) B and C.

 

42.  Value is not added to a firm when earnings are enhanced.

True

False

 

43.  A discount factor:

A) is the same as compounding future cash flows.

B) performs the reverse function of a compounding interest rate.

C) allows investors to quantify a figure which will assist them in comparing alternative investments.

D) B and C. pg 42/43

E) A, B, and C.

 

44.  The claims of a company’s debt holders are nearly always senior to the company’s shareholders.(stockholders)

True

False

 

 

45. Present value calculations:

A) can help the creation of value.

B) can provide managers with a means of identifying the best investment choices.

C) do not help in the creation of value.

D) A and B.

E) B and C.

     

 

 

46. Even though accounting practices vary, comparisons between a firm and its industry as a whole are considered helpful.

True

False

     

 

47. If a sufficient number of stockholders sell their shares, a company will find that its stock price has significantly declined.

True  (due to liquidity generation)

False

 

 

48. Horizontal and vertical percentage trends are not particularly useful in projecting future financial statements.

True

False

 

49. When making financial projections, the most conservative estimates should be used.

True

False– pg 23 verified

 

 

50. A company which is experiencing a low stock price and low trading activity may wish to stimulate the market through a stock issue.

True

False

 

 

51. Many analysts prefer the quick ratio to the current ratio because the former compares only cash equivalents to current liabilities.

True—check for opposite question wording….former / latter  pg 13

False

 

 

52. It is naturally in a company’s best interest to maintain its stocks’ value at the highest level the market will allow.

True

False

 

 

53. Time horizons are frequently selected so that they match the new asset’s depreciable life.

True

False

 

54. To perform a sensitivity analysis of a forecast, you must recall the critical assumptions made to develop the projection.

True  pg 26 verified

False

 

55. Qualitative considerations may be as important as cash flow in investment selection.

True

False

 

 

 

56. The ratio which many observers use to quantify the stock market’s opinion of a firm is the:

A) ROE.

B) EPS.

C) D/E.

D) P/E. pg 12 verified

E) none of the above.

 

 

57. As the discount rate increases, the present value decreases.

True

False  —  not verified, could not find answer

 

58. FRICTO analysis does not point out poor investments.

True  — pg 64

False

 

59. Present value calculations allow managers to:

A) express future cash flows in terms of present value cash flows.

B) express present cash flows in terms of future cash flows.

C) None of the above.

D) Both A and B – pg 37

 

 

60. Financial strength ratios indicate a firm’s capitalization.

True

False – maybe check, pg 10

 

61. The advantage of using the marginal cost of capital as a company’s average hurdle rate is

Capital market estimations of risk are probably more objective than the company’s

It reflects the incremental cost of funding future investments

It is the basis of the market’s assessments of a company’s investment decisions

A and C

A, B and C

 

62. In order to use a cash flow in perpetuity as a residual value for an asset, it must be reasonably assumed that the cash flows from that asset have not leveled off

TRUE   FALSE

 

63. A FRICTO analysis enables prudent mangers to assess investment decisions

TRUE or FALSE

 

64. The most accurate pro formas contain the most detail

TRUE orFASLE

 

 

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