Financial Management Exam |
Questions and Correct answers
what not to include in estimating project cash flows - Ans sunk costs, financing costs as cfs
what to include in estimating project cash flows - Ans opportunity costs
side effects (externalities)
changes in net working capital
tax effects
internal rate of return - Ans discount rate that makes the pv of the future cfs=initial
investment to calc. set NPV=0 and solve for r
rule of irr - Ans accept if irr> required return
npv profile - Ans plot of an investments npv at various discount rates
shows ranges of "r" where you would accept, reject or be indifferent
when to accept npv - Ans higher than 0 and r is lower than IRR
when to reject npv - Ans less than 0 and r is higher than IRR
problems with irr - Ans 1. unconventional CF => multiple IRRS possible
, 2. mutually exclusive investments=> the project with the highest IRR may not have highest NPV
when can you not use IRR - Ans if unconventional cfs
calculating irr doesn't directly depend on required return estimate and some managers
prefer to deal with rate of return to evaluate projects
cross over rate - Ans discount rate that equates NPVs of 2 projects
IRR of differences between cfs
forecasting risk - Ans risk that errors in projected cfs will lead to incorrect decisions
measuring/ reducing forecasting risk - Ans scenario, sensitivity, and simulation analysis
real options - Ans flexibility to make decisions in future to alter a projects expected CF's, life, or
future acceptance
capital rationing - Ans limited funds prevent from taking all positive npv projects
real options examples - Ans option to expand, abandon, or postpone
percent of firms that use npv and irr, payback rate, sensitivity/ scenario analysis, real
options analysis - Ans majority
over 1/2
1/2
1/4
how do we measure/ define a firms capital structure - Ans with leverage rations: D/E, D/A, LT
debt/ A, A/E etc
Questions and Correct answers
what not to include in estimating project cash flows - Ans sunk costs, financing costs as cfs
what to include in estimating project cash flows - Ans opportunity costs
side effects (externalities)
changes in net working capital
tax effects
internal rate of return - Ans discount rate that makes the pv of the future cfs=initial
investment to calc. set NPV=0 and solve for r
rule of irr - Ans accept if irr> required return
npv profile - Ans plot of an investments npv at various discount rates
shows ranges of "r" where you would accept, reject or be indifferent
when to accept npv - Ans higher than 0 and r is lower than IRR
when to reject npv - Ans less than 0 and r is higher than IRR
problems with irr - Ans 1. unconventional CF => multiple IRRS possible
, 2. mutually exclusive investments=> the project with the highest IRR may not have highest NPV
when can you not use IRR - Ans if unconventional cfs
calculating irr doesn't directly depend on required return estimate and some managers
prefer to deal with rate of return to evaluate projects
cross over rate - Ans discount rate that equates NPVs of 2 projects
IRR of differences between cfs
forecasting risk - Ans risk that errors in projected cfs will lead to incorrect decisions
measuring/ reducing forecasting risk - Ans scenario, sensitivity, and simulation analysis
real options - Ans flexibility to make decisions in future to alter a projects expected CF's, life, or
future acceptance
capital rationing - Ans limited funds prevent from taking all positive npv projects
real options examples - Ans option to expand, abandon, or postpone
percent of firms that use npv and irr, payback rate, sensitivity/ scenario analysis, real
options analysis - Ans majority
over 1/2
1/2
1/4
how do we measure/ define a firms capital structure - Ans with leverage rations: D/E, D/A, LT
debt/ A, A/E etc
