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- L-9. Risk Analysis in Capital Investment Decisions
- Lecture No. 1-A
- Wriston Case Memo Gabriel Lim
- ROICALCULATE
- Strategic Management notes
- Capital Investment Appraisal
- Solar Energy Cash Flow Canadian Solar Share XLS Stripped 01
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- 201010011228450.IRMS Review - Final_Format 270910
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- Sample Cash Flow Template
- Four Golden Rules in NPV calculations.ppt
- finanzas VALOR
- Finance Ch 6
- Bridge Planning
- Time Value of Money
- Valuation Discounted Cash Flow Analysis

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controls, this ratio will increase to 8%; however, she expects sales to increase by 10% as a result. The cost of

goods

sold is 80% of the selling price. Per $100 of current sales, what is Terry's expected profit under the proposed

credit

standards?

C. $13.2

Given the following data:

FCF1 = $20 million; FCF2 = $20 million; FCF3 = $20 million; free cash flow grows at a rate of 5% for year 4

and beyond. If the weighted average cost of capital is 12%, calculate the value of the firm.

B. $261.57 million

The real rate of interest is 3% and the inflation is 4%.What is the nominal rate of interest?

C. 7.12%

Which of the following statements regarding the discounted payback period rule is true?

A. The discounted payback rule uses the time value of money concept.

If the NPV of project A is +$100, and that of project B is -$60 and that of project C is +$30, what is the

NPV of the combined project?

C. $70

Net working capital (NWC) is calculated as:

C. Current assets current liabilities

Proper treatment of inflation in the NPV calculation involves:

(I) Discounting nominal cash flows using the nominal discount rate

(II) Discounting real cash flows using the real discount rate

D. I and II only

Generally, banks lend up to the following amount when a firm provides receivables as collateral:

C. 80% of the value of the receivables

NetWorking Capital is the:

(I) short-term assets

(II) short term liabilities

B. (I - II)

When banks have to make large loans, they form a group of banks for the purpose of making the loan. The

group is called

B. Syndicate

Given the following cash flows for Project M: C0= -2,000, C1= +500, C2= +1,500, C3= +1455, calculate the

IRR for the project.

A. 28%

The default rate of Demurrage Associates' new customers has been running at 10%. The average sale for

each new customer amounts to $800, generating a profit of $100 and a 40% chance of a repeat order next year.

The default rate on repeat orders is only 2%. If the interest rate is 9%, what is the expected profit from each new

customer?

D. $50.83

(I) Shareholders

(II) The government

(III) Suppliers

(IV) Employees

(V) Bondholders

(VI) Management

D. I, II, III, IV, V, and VI

Given the following data: Earnings per share = $5; Dividends per share = $3; Price per share = $50.

Calculate the payout ratio:

C. 60%

Inventory may consist of:

D. All of the above

Negotiable CDs are issued by:

C. Banks

The firm's internal growth rate is defined as:

B. Return on equity times the ratio of equity to total assets

Which of the following trade credit terms is not valid?

a. 3/10, net 50

b. 8/10 EOM, net 60

c. 2/10, net 30

D. All of the above are valid credit terms

For project A in year - 2, inventories increase by $14,000 and accounts payable by $4,000. Calculate the

increase or decrease in net working capital for year-2.

D. Increases by $10,000

Which of the following investment rules has value additivity property?

B. Net present value method

Free cash flow (FCF) is calculated as:

(I) Profit after tax

(II) Depreciation

(III) Investment in fixed assets

(IV) Investment in working capital

C. FCF = I + II + III + IV

A reduction in the sales of existing products caused by the introduction of a new product is an example of:

A. incidental effects

If the depreciation amount is $100,000 and the marginal tax rate is 28%, then the tax shield due to

depreciation is:

A. $28,000

If the NPV of project A is +$40 and that of project B is -$50, then the NPV of the combined project is:

C. -$10

The cash cycle is represented by the following sequence:

A. Cash, raw materials, finished goods, and receivables, cash

(I) Trade credit

(II) Consumer credit

D. I and II only

Preferably, cash flows for a project are estimated as:

A. Cash flows after taxes

Given the following data: EBIT = 400; NI = 100; Average Equity = 1000, calculate the ROE (Return on

Equity):

A. 10%

The most common way to finance a temporary cash deficit is the use of:

D. Unsecured bank loans

C. Capital rationing at t = 0

A project requires an initial investment of $200,000 and is expected to produce a cash flow before taxes of

120,000 peryear for two years. [i.e. cash flows will occur at t = 1 and t = 2]. The corporate tax rate is 30%. The

assets will be depreciatedusing MACRS 3 year schedule : (t=1, 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%).

The company's tax situation is such that it can make use of all applicable tax shields. The opportunity cost of

capital is 11%. Assume that the asset can be sold for book value.

Calculate the NPV of the project at the end of two years. (Approximately)

B. $19,315

Investment in inventories includes investment in:

(I) Raw material

(II) Work-in-progress

(III) Finished goods

C. I, II, and III

Important points to remember while estimating cash flows of projects are:

(I) only cash flow is relevant

(II) always estimate cash flows on an incremental basis

(III) be consistent in the treatment of inflation

C. I,II, and III

(I) New companies must be prepared to incur more bad debts than established businesses as part of the

cost of building up a good customers list

(II) Generally, repeat orders are profitable

D. I and II only

A large firm may hold substantial cash balances because:

a. These balances are required by the bank in the form of compensating balances

b. The company may have accounts in many different banks

c. The company may have a very decentralized organization

D. All of the above

A project will have only one internal rate of return if:

D. There is a one sign change in the cash flows

Which of the following investment rules may not use all possible cash flows in its calculations?

B. Payback period

The cash budget is the primary short-term financial planning tool. The key reasons a cash budget is created are:

(II) To estimate the size and timing of your new cash flows

(III) To prepare for potential financing needs

B. II and III only

The NPV value obtained by discounting nominal cash flows using the nominal discount rate is:

(I) The same as the NPV value obtained by discounting real cash flows using the real discount rate

A. I only

Y ou are given a job to make a decision on project X, which is composed of three independent projects A, B,

and C which have NPVs of +$60, -$30 and +$120, respectively. How would you go about making the decision

about whether to accept or reject the project?

C. Break up the project into its components: accept A and C and reject B

Which of the following cash flows should be treated as incremental flows when deciding whether to go

ahead with an electric car project?

C. The reduction in taxes resulting from the depreciation charges

If a firm grants credit with terms of 3/10 net 30, the creditor:

C. Receives a discount of 3% when payment is made in less than 10 days after the sale

Short-term financial decisions:

(I) Involve short lived assets

(II) Involve short lived liabilities

(III) Are easily reversed

C. I, II, and III

Which of the following investment rules does not use the time value of the money concept?

C. The payback period

A customer has ordered goods with a value of $800. The production cost is $600. Under what conditions

should you extend credit if there is no possibility of repeat orders?

C. If the probability of payment exceeds 0.75

Last year Axle Inc. reported total assets of $400, equity of $200, net income of $50, dividends of $10 and

earnings retained in the period of $40.What is Axle Inc.'s sustainable growth rate?

C. 20.0%

Negotiable CDs are issued by:

C. Banks

A cash flow received in two years is expected to be $10,816. If the real rate of interest is 4% and the

inflation rate is 4%, what is the real cash flow for year-2?

C. $10,000

A capital equipment costing $300,000 today has no (zero) salvage value at the end of 5 years. If straightline

depreciation is used, what is the book value of the equipment at the end of three years?

A. $120,000

MConstruction Company must choose between two types of cranes. Crane A costs $600,000, will last for 5

years, and will require $60,000 in maintenance each year. Crane B costs $750,000 and will last for seven years

and will require $30,000 in maintenance each year.Maintenance costs for cranes A and B are incurred at the end

of each year. The appropriate discount rate is 12%per year. Which machine should OM Construction purchase?

B. Crane B as EAC is $194,336

Given the following cash flows for project Z: C0= -2,000, C1= 1,200, C2= 1,440 and C3= 6000, calculate

the discounted payback period for the project at a discount rate of 20%.

B. 2 years

If an investment project (normal project) has an IRR equal to the cost of capital, the NPV for that project is:

D. Zero

In the United States large-value electronic payments are made by:

(I) Fedwire

(III) CHIPS

D. I and III only

Earnings before interest and taxes is calculated as:

B. Total revenues - costs - depreciation

Muscle Company is investing in a giant crane. It is expected to cost 6.0 million in initial investment and it is

expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the NPV at 12%

(approximately).

B. 1.2. million

The main difference between short-term and long-term finance is:

C. The timing of short-term cash flow being within a year or less

Internal growth rate is calculated as:

C. Internal growth rate = plowback ratio return on equity [equity/net assets]

A commercial draft can be

(I) Sight draft

(II) Time draft

D. I and II only

A repurchase agreement occurs when:

C. An investor buys part of a government security dealer's inventory and simultaneously agrees to sell it

back

Given the following data:

FCF1 = $7 million; FCF2 = $45 million; FCF3 = $55 million; free cash flow grows at a rate of 4% for year 4 and

beyond. If the weighted average cost of capital is 10%, calculate the value of the firm.

B. $801.12 million

A company has forecast sales in the first 3 months of the year as follows (figures in millions): January,

$200; February, $140;March, $100. 50% of sales are usually paid for in the month that they take place, 30% in

the following month, and the final 20% in the next month. Receivables at the end of December were $100

million.What are the forecasted collections on accounts receivable in March?

A. $132 million

The interest rate on a loan is set at "1% over LIBOR." If the LIBOR rate is 5% then the interest rate on the

loan is:

C. 6%

The principal short-term assets are:

(I) Cash

(II) Accounts receivable

(III) Inventories

C. I, II, and III

Generally, a line of credit is:

(I) Less costly than stretching accounts payable

(II) Provided by a bank

D. I, II, and III

The present value of free cash flow is $5 million and the present value of the horizon value is $10 million.

Calculate the present value of the business.

C. $15 million

The following are disadvantages of using the payback rule except:

C. The payback period is easy to calculate and use

Which of the following statements regarding "bankers' acceptances" is true?

(I) Bankers' acceptances are used in overseas trading

(II) Bankers' acceptances are bought and sold on a discount basis

(III) Bankers' acceptances are guaranteed by the bank

D. I, II, and III

The net present value of a project depends upon:

C. forecasted cash flows and opportunity cost of capital

A tax-paying corporation would prefer to invest short-term money in:

B. Floating-rate preferred stock

C. Capital rationing at t = 0

Given the following data:

FCF1 = $7 million; FCF2 = $45 million; FCF3 = $55 million; free cash flow grows at a rate of 4% for year 4 and

beyond. If the weighted average cost of capital is 10%, calculate the value of the firm.

B. $801.12 million

If a firm grants credit with terms of 3/10 net 30, the creditor:

C. Receives a discount of 3% when payment is made in less than 10 days after the sale

The payback period rule accepts all projects for which the payback period is:

C. Less than the cut-off value

If the depreciable investment is $1,000,000 and the MACRS 5-Year class schedule is:

Year-1: 20% ; Year-2: 32%; Year-3: 19.2%; Year-4: 11.5%; Year-5: 11.5% and Year-6: 5.8%

Calculate the depreciation tax shield for Year-2 using a tax rate of 30%:

C. $96,000

The most common way to finance a temporary cash deficit is the use of:

D. Unsecured bank loans

The following are electronic funds transfer systems available in the USA except:

D. SWIFT

When credit is granted to another firm this gives rise to a(n):

(I) Accounts receivable

A. I only

The value of a previously purchased machine to be used by a proposed project is an example of:

B. Opportunity cost

Which of the following trade credit terms is not valid?

MConstruction Company must choose between two types of cranes. Crane A costs $600,000, will last for

5 years, and will require $60,000 in maintenance each year. Crane B costs $750,000 and will last for seven years

andwill require $30,000 in maintenance each year.Maintenance costs for cranes A and B are incurred at the end

of each year. The appropriate discount rate is 12%per year. Which machine should OM Construction purchase?

B. Crane B as EAC is $194,336

A firm has a general-purpose machine, which has a book value of $400,000 and is sold for $600,000 in the

market. If the tax rate is 30%, what is the opportunity cost of using the machine in a project?

B. $540,000

(I) Shareholders

(II) The government

(III) Suppliers

(IV) Employees

(V) Bondholders

(VI) Management

D. I, II, III, IV, V, and VI

Market value ratios indicate:

(IV) How highly is the firm valued by investors

D. IV only

If a firm grants credit with terms of 3/10 net 30, the creditor:

C. Receives a discount of 3% when payment is made in less than 10 days after the sale

When banks have to make large loans, they form a group of banks for the purpose ofmaking the loan. The

group is called a:

B. Syndicate

When a firm improves (lowers) its days in inventories it generally:

B. Releases cash locked up in inventory

Proper treatment of inflation in the NPV calculation involves:

(I) Discounting nominal cash flows using the nominal discount rate

(II) Discounting real cash flows using the real discount rate

D. I and II only

When credit is offered with only the invoice as a formal instrument of credit, the credit procedure is called an:

B. Open account

The payback period rule:

C. Requires an arbitrary choice of a cut-off point

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