D076 Unit 6
Finance Skills for Managers -
QUESTION AND AMSWER PASSED
A bond becomes "premium" or "discount" once it - ✔✔✔begins trading on the secondary market.
A company called Bobby's Books is considering purchasing a new bookbinding machine. The company
calculates the hurdle rate of the project to be 9% and the IRR to be 11%. Should the company purchase
the bookbinding machine? - ✔✔✔Yes, because the IRR exceeds the cost of capital.
A company is considering five projects that are not mutually exclusive. However, the company does not
have enough money to do all of them. In order to prioritize projects that fit within the company's
budget, which capital budgeting method should be used? - ✔✔✔Profitability index (PI)
Correct! The PI should be used first to compare the projects and then to rank them to maximize the
value of the firm.
A PI of 1 is the break-even point.The decision rule is as follows: - ✔✔✔you should accept a project with
a PI greater than 1, and you should reject a project with a PI less than 1. If the profitability index is
exactly equal to 1, then you would be indifferent about whether you did the project or not.
A potential project to expand the size of an apartment complex will cost $100,000. Its calculated net
present value is $5,000. Given this information, which statement is correct? - ✔✔✔The project should
be accepted because it has a positive NPV.
A share repurchase - ✔✔✔where the firm buys back its own shares
Affirmative covenants - ✔✔✔describe things the company pledges itself to do. Examples include
paying taxes on time, maintaining a certain level of working capital, and maintaining a certain debt ratio.
aggressive assets - ✔✔✔Companies or securities with high betas (beta > 1)
,Alphabet Co. has $50,000 to spend on capital investment projects for the next year. It will do as many
projects as it has cash for. Alphabet Co. calculates the potential incremental cash flows and costs of the
projects as well as the NPV, IRR, and PI for each project. How should the company decide which projects
to invest in if it wants to maximize the total amount of value created? - ✔✔✔It should choose the
projects with the highest PIs until all capital has been used.
Correct! By choosing the projects with the highest PI, Alphabet Co. will be able to use its limited capital
effectively to create the most overall value for the firm.
An ideal evaluation method for capital investment includes three key attributes: - ✔✔✔It includes all
cash flows that occur during the life of the project.
It considers the time value of money.
It incorporates the cost of capital—or in other words, the required rate of return on the project.
An investor just purchased a bond for $973 that has a par value of $1,000. What type of bond is this? -
✔✔✔A discount bond
Another advantage of the NPV method is that it tells you how much value is.... - ✔✔✔added to the
firm with the investment project. The NPV is a dollar amount, so if you calculate the NPV of $15,000, you
are adding $15,000 to the firm's value by doing the project at today's value.
Beta - ✔✔✔describes how the price of a security varies with the market. By definition, the market has
a beta of 1. A riskless asset has a beta of 0. If the market goes up by 10%, the value of the riskless asset
does not change.
bond cash flows comprise two distinct parts: - ✔✔✔A stream of semi-annual interest payments (an
annuity)
A final principal repayment (a lump sum)
bond indenture - ✔✔✔governs the relationship between the firm and the bondholders.
, Bonds - ✔✔✔the vehicles by which corporations raise debt capital. While individuals go to a bank to
borrow money, bonds are the primary means of borrowing money in the corporate world. a debt
agreement between borrowers and savers that obligates the borrower (or corporation) to make certain
payments to the bondholder as repayment of the loan. It is like an IOU from a corporation to the holder
of the bond. The IOU promises that if the bondholder gives the corporation a certain sum of money
today, the corporation will not only return that sum in the future (at the bond's expiration) but also pay
interest to the bondholder on that sum each year until the bond matures.
Bonds are often called fixed-income securities, meaning - ✔✔✔that the borrower pays a fixed interest
payment to bondholders each year. Contrast these with stocks, which have dividends that may vary
from year to year.
capital asset pricing model (CAPM), - ✔✔✔which helps you understand the return required by
investors based on the risk associated with the stock.
Capital budgeting - ✔✔✔the process of evaluating and planning for purchases of long-term assets. As
the name implies, it entails budgeting a firm's capital in a way that will increase firm value.
capital budgeting criteria - ✔✔✔Metrics and calculations used to determine whether a project or asset
will add value and be a worthwhile investment.
Capital investment - ✔✔✔the sum of money invested in a business to purchase long-term assets to
further its objective of maximizing owner wealth. are needed to develop new products, increase
operating capacity, invest in new technology that will cut costs, replace existing assets that are at the
end of their lives, and capture a larger share in the market.
capital raised by debt, such as mortgages and bonds, have tax shields, but - ✔✔✔they do not produce
an optimal capital structure for the firm.
capital-constrained environment - ✔✔✔when limited amount of funds are available
Finance Skills for Managers -
QUESTION AND AMSWER PASSED
A bond becomes "premium" or "discount" once it - ✔✔✔begins trading on the secondary market.
A company called Bobby's Books is considering purchasing a new bookbinding machine. The company
calculates the hurdle rate of the project to be 9% and the IRR to be 11%. Should the company purchase
the bookbinding machine? - ✔✔✔Yes, because the IRR exceeds the cost of capital.
A company is considering five projects that are not mutually exclusive. However, the company does not
have enough money to do all of them. In order to prioritize projects that fit within the company's
budget, which capital budgeting method should be used? - ✔✔✔Profitability index (PI)
Correct! The PI should be used first to compare the projects and then to rank them to maximize the
value of the firm.
A PI of 1 is the break-even point.The decision rule is as follows: - ✔✔✔you should accept a project with
a PI greater than 1, and you should reject a project with a PI less than 1. If the profitability index is
exactly equal to 1, then you would be indifferent about whether you did the project or not.
A potential project to expand the size of an apartment complex will cost $100,000. Its calculated net
present value is $5,000. Given this information, which statement is correct? - ✔✔✔The project should
be accepted because it has a positive NPV.
A share repurchase - ✔✔✔where the firm buys back its own shares
Affirmative covenants - ✔✔✔describe things the company pledges itself to do. Examples include
paying taxes on time, maintaining a certain level of working capital, and maintaining a certain debt ratio.
aggressive assets - ✔✔✔Companies or securities with high betas (beta > 1)
,Alphabet Co. has $50,000 to spend on capital investment projects for the next year. It will do as many
projects as it has cash for. Alphabet Co. calculates the potential incremental cash flows and costs of the
projects as well as the NPV, IRR, and PI for each project. How should the company decide which projects
to invest in if it wants to maximize the total amount of value created? - ✔✔✔It should choose the
projects with the highest PIs until all capital has been used.
Correct! By choosing the projects with the highest PI, Alphabet Co. will be able to use its limited capital
effectively to create the most overall value for the firm.
An ideal evaluation method for capital investment includes three key attributes: - ✔✔✔It includes all
cash flows that occur during the life of the project.
It considers the time value of money.
It incorporates the cost of capital—or in other words, the required rate of return on the project.
An investor just purchased a bond for $973 that has a par value of $1,000. What type of bond is this? -
✔✔✔A discount bond
Another advantage of the NPV method is that it tells you how much value is.... - ✔✔✔added to the
firm with the investment project. The NPV is a dollar amount, so if you calculate the NPV of $15,000, you
are adding $15,000 to the firm's value by doing the project at today's value.
Beta - ✔✔✔describes how the price of a security varies with the market. By definition, the market has
a beta of 1. A riskless asset has a beta of 0. If the market goes up by 10%, the value of the riskless asset
does not change.
bond cash flows comprise two distinct parts: - ✔✔✔A stream of semi-annual interest payments (an
annuity)
A final principal repayment (a lump sum)
bond indenture - ✔✔✔governs the relationship between the firm and the bondholders.
, Bonds - ✔✔✔the vehicles by which corporations raise debt capital. While individuals go to a bank to
borrow money, bonds are the primary means of borrowing money in the corporate world. a debt
agreement between borrowers and savers that obligates the borrower (or corporation) to make certain
payments to the bondholder as repayment of the loan. It is like an IOU from a corporation to the holder
of the bond. The IOU promises that if the bondholder gives the corporation a certain sum of money
today, the corporation will not only return that sum in the future (at the bond's expiration) but also pay
interest to the bondholder on that sum each year until the bond matures.
Bonds are often called fixed-income securities, meaning - ✔✔✔that the borrower pays a fixed interest
payment to bondholders each year. Contrast these with stocks, which have dividends that may vary
from year to year.
capital asset pricing model (CAPM), - ✔✔✔which helps you understand the return required by
investors based on the risk associated with the stock.
Capital budgeting - ✔✔✔the process of evaluating and planning for purchases of long-term assets. As
the name implies, it entails budgeting a firm's capital in a way that will increase firm value.
capital budgeting criteria - ✔✔✔Metrics and calculations used to determine whether a project or asset
will add value and be a worthwhile investment.
Capital investment - ✔✔✔the sum of money invested in a business to purchase long-term assets to
further its objective of maximizing owner wealth. are needed to develop new products, increase
operating capacity, invest in new technology that will cut costs, replace existing assets that are at the
end of their lives, and capture a larger share in the market.
capital raised by debt, such as mortgages and bonds, have tax shields, but - ✔✔✔they do not produce
an optimal capital structure for the firm.
capital-constrained environment - ✔✔✔when limited amount of funds are available
