MGT 8803 BUSINESS FUNDAMENTALS FOR
ANALYTICS EXAM 2 COMPREHENSIVE
REVIEW GUIDE AND TEST BANK WITH
VERIFIED FINANCE ANSWERS
⩥ Relevant Cash Flows Principle #2. Answer: Imagine 2 worlds: one in
which he investment is made and one in which it is rejected, All cash
flows that are different in these two worlds are relevant to the decision,
and those that are the same are irrelevant.
⩥ Working capital. Answer: changes that are the result of an investment
decision are relevant to the decision. At the beginning of the project life,
working capital would be treated as cash flows. At the end of the project
life, working capital would be treated as cash inflows.
⩥ Depreciation. Answer: A noncash expense. Add depreciation back to
income after tax to calculate the after tax cash flow (ATCF)
⩥ After Tax Cash Flow (ATCF). Answer: (revenue - costs - depreciation)
(1-tax)+depreciation
⩥ Inflation and Returns: Real Return. Answer: The percentage change in
the amount of stuff ypu can actually buy
,⩥ Inflation and Returns: Nominal Return. Answer: The percentage
change in the amount of money you have.
⩥ Inflation and Returns: The Fisher Effect. Answer: The relationship
between real and nominal returns.
The equation is: 1+R = (1-r) x (1+h)
where R=nominal, r=real, h=inflation
⩥ Capital Budgeting & Inflation (2 methods). Answer: 2 methods:
1. express cash flows in real terms and discount them at the real interest
rate OR
2. Convert real cash flows to nominal cash flows by allowing them to
grow at rate of inflation and discount them at a nominal rate (prof
recommends this method)
⩥ Capital Budgeting & Inflation (why is it important). Answer: Issue is
important when dealing with
1. long horizons
2. high inflationary times
(note that depreciation is always expressed in nominal terms)
⩥ Capital Investment General Summary:. Answer: 1. Net Present Value
(NPV) is the most preferred technique
, 2. Capital budgeting must be done on an incremental basis. This means
that sunk costs must be ignored, while opportunity costs and side effects
must be considered.
3. Inflation must be correctly handled. The first approach is to express
both cash flows and discount rate in nominal terms. The second
approach is to express both cash flow and discount rate in real terms
4. Uncertainty in the forecasts can be addressed by conducting
sensitivity analysis or simulation
⩥ The Present Value (PV) of Common Stocks. Answer: The value of any
asset is the present value of its expected future cash flows
⩥ Stock ownership produces cash flows from:. Answer: 1. Dividends
2. Capital gains
⩥ Valuation of different types of stocks (3 types). Answer: 1. Zero
growth
2. Constant growth
3. Differential growth
⩥ Zero Growth Stock Valuation. Answer: Assume that dividends will
remain at the same level forever. Since future cash flows are constant,
the value of a zero growth stock is the present value of a perpetuity.
ANALYTICS EXAM 2 COMPREHENSIVE
REVIEW GUIDE AND TEST BANK WITH
VERIFIED FINANCE ANSWERS
⩥ Relevant Cash Flows Principle #2. Answer: Imagine 2 worlds: one in
which he investment is made and one in which it is rejected, All cash
flows that are different in these two worlds are relevant to the decision,
and those that are the same are irrelevant.
⩥ Working capital. Answer: changes that are the result of an investment
decision are relevant to the decision. At the beginning of the project life,
working capital would be treated as cash flows. At the end of the project
life, working capital would be treated as cash inflows.
⩥ Depreciation. Answer: A noncash expense. Add depreciation back to
income after tax to calculate the after tax cash flow (ATCF)
⩥ After Tax Cash Flow (ATCF). Answer: (revenue - costs - depreciation)
(1-tax)+depreciation
⩥ Inflation and Returns: Real Return. Answer: The percentage change in
the amount of stuff ypu can actually buy
,⩥ Inflation and Returns: Nominal Return. Answer: The percentage
change in the amount of money you have.
⩥ Inflation and Returns: The Fisher Effect. Answer: The relationship
between real and nominal returns.
The equation is: 1+R = (1-r) x (1+h)
where R=nominal, r=real, h=inflation
⩥ Capital Budgeting & Inflation (2 methods). Answer: 2 methods:
1. express cash flows in real terms and discount them at the real interest
rate OR
2. Convert real cash flows to nominal cash flows by allowing them to
grow at rate of inflation and discount them at a nominal rate (prof
recommends this method)
⩥ Capital Budgeting & Inflation (why is it important). Answer: Issue is
important when dealing with
1. long horizons
2. high inflationary times
(note that depreciation is always expressed in nominal terms)
⩥ Capital Investment General Summary:. Answer: 1. Net Present Value
(NPV) is the most preferred technique
, 2. Capital budgeting must be done on an incremental basis. This means
that sunk costs must be ignored, while opportunity costs and side effects
must be considered.
3. Inflation must be correctly handled. The first approach is to express
both cash flows and discount rate in nominal terms. The second
approach is to express both cash flow and discount rate in real terms
4. Uncertainty in the forecasts can be addressed by conducting
sensitivity analysis or simulation
⩥ The Present Value (PV) of Common Stocks. Answer: The value of any
asset is the present value of its expected future cash flows
⩥ Stock ownership produces cash flows from:. Answer: 1. Dividends
2. Capital gains
⩥ Valuation of different types of stocks (3 types). Answer: 1. Zero
growth
2. Constant growth
3. Differential growth
⩥ Zero Growth Stock Valuation. Answer: Assume that dividends will
remain at the same level forever. Since future cash flows are constant,
the value of a zero growth stock is the present value of a perpetuity.
