Finance Skills for Managers - D076 Unit 6 |142
questions with verified answers
A bond becomes "premium" or "discount" once it Ans✓✓✓-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?
Ans✓✓✓-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? Ans✓✓✓-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: Ans✓✓✓-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? Ans✓✓✓-The project should be accepted because it has a
positive NPV.
A share repurchase Ans✓✓✓-where the firm buys back its own shares
,Affirmative covenants Ans✓✓✓-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 Ans✓✓✓-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? Ans✓✓✓-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:
Ans✓✓✓-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? Ans✓✓✓-A discount bond
Another advantage of the NPV method is that it tells you how much value is....
Ans✓✓✓-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 Ans✓✓✓-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: Ans✓✓✓-A stream of semi-annual
interest payments (an annuity)
A final principal repayment (a lump sum)
bond indenture Ans✓✓✓-governs the relationship between the firm and the
bondholders.
Bonds are often called fixed-income securities, meaning Ans✓✓✓-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.
Bonds Ans✓✓✓-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.
capital asset pricing model (CAPM), Ans✓✓✓-which helps you understand the
return required by investors based on the risk associated with the stock.
questions with verified answers
A bond becomes "premium" or "discount" once it Ans✓✓✓-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?
Ans✓✓✓-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? Ans✓✓✓-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: Ans✓✓✓-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? Ans✓✓✓-The project should be accepted because it has a
positive NPV.
A share repurchase Ans✓✓✓-where the firm buys back its own shares
,Affirmative covenants Ans✓✓✓-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 Ans✓✓✓-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? Ans✓✓✓-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:
Ans✓✓✓-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? Ans✓✓✓-A discount bond
Another advantage of the NPV method is that it tells you how much value is....
Ans✓✓✓-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 Ans✓✓✓-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: Ans✓✓✓-A stream of semi-annual
interest payments (an annuity)
A final principal repayment (a lump sum)
bond indenture Ans✓✓✓-governs the relationship between the firm and the
bondholders.
Bonds are often called fixed-income securities, meaning Ans✓✓✓-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.
Bonds Ans✓✓✓-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.
capital asset pricing model (CAPM), Ans✓✓✓-which helps you understand the
return required by investors based on the risk associated with the stock.
