UGA FINA 3000 POPE: TEST 2 T/F
QUESTIONS AND ANSWERS 100%
SOLVED.
Firms favor straight-line depreciation over accelerated depreciation because it leads to
higher NPVs for a capital budgeting project. - ANSWERfalse
We value a share of preferred stock using the present value of a perpetuity formula. -
ANSWERtrue
Using the Security Market Line, if the Federal Reserve reduces the risk free rate, we
should see an increase in stock prices. - ANSWERtrue
If we increase the accounts payable for the firm, we will increase the FCF for the current
year (everything else held constant). - ANSWERtrue
In class, we identified one strength of the multiples model is that it uses the cost of
capital. - ANSWERfalse
The IRR rules is better to use than the NPV rule because the NPV rule can be biased
based on the scale of the project. - ANSWERfalse
The security market line shows the required return of an investment as a function of its
beta. - ANSWERtrue
The interest rate used in the NPV calculation for a capital budgeting project only
represents that required return for shareholders in the firm. - ANSWERfalse
The market portfolio risk premium is smaller for larger firms than smaller firms. -
ANSWERfalse
A project with a shorter payback period will always have a larger NPV than a project
with a longer payback period. - ANSWERfalse
A company decides to enter a business that is outside their normal scope of business
activity and risk. The new business is riskier than the typical project considered by the
firm. If the firm uses its cost of capital, there is a chance that the firm may accept a
project that should be rejected. - ANSWERtrue
An analyst is trying to estimate the cost of capital for Uber. The analyst observes that
Uber has existing debt on its balance sheet that pays a 4% annual coupon rate. The
analyst decides to use 4% as the cost of debt in the WACC calculation. Is this correct
reasoning? - ANSWERfalse
, Free cash flow measures the cash created by the firm after all investments are made
and after all dividends and interest are paid. - ANSWERfalse
Another name for relevant risk is diversifiable risk. - ANSWERfalse
In Modigliani and Miller's proposition related to taxes, the optimal capital structure is to
use as much leverage as possible. - ANSWERtrue
The term "i-flipping" refers to the practice of short selling a stock and profiting with the
price of the stock falls. - ANSWERfalse
In class, we discussed Coca-Cola acquiring BodyArmor. This deal is unusual in that
Coke is using all debt to finance the deal. - ANSWERfalse
Monte-Carlo Simulation can give you a usable result with one trial. - ANSWERfalse
All else equal, a firm with more cyclical revenues will have a higher beta than a firm with
non-cyclical revenues. - ANSWERtrue
In our personal finance lecture, Dr. Pope suggested that most students would want to
have an income fund as part of their 401K when starting work. - ANSWERfalse
If projects are mutually exclusive, we favor the NPV rule over the IRR rule. -
ANSWERtrue
The weighted average cost of capital (WACC) only includes the required return for
common shareholders (for all capital structures). - ANSWERfalse
For capital budgeting, the NPV will be higher if you can take more depreciation earlier in
the life of the project. - ANSWERtrue
When the Federal Reserve announced the interest rate increase, the stock market
rallied for a gain. This goes against conventional wisdom and our security market line
graph. - ANSWERtrue
For a student just graduating Terry and starting a 401k plan, Dr. Pope would likely favor
a mid-cap fund over an income fund. - ANSWERtrue
All else equal, a firm with cyclical revenues would have a higher beta than a firm with
non-cyclical revenues. - ANSWERtrue
Preferred stock dividends most closely resemble our time value of money growing
annuity formula. - ANSWERfalse
QUESTIONS AND ANSWERS 100%
SOLVED.
Firms favor straight-line depreciation over accelerated depreciation because it leads to
higher NPVs for a capital budgeting project. - ANSWERfalse
We value a share of preferred stock using the present value of a perpetuity formula. -
ANSWERtrue
Using the Security Market Line, if the Federal Reserve reduces the risk free rate, we
should see an increase in stock prices. - ANSWERtrue
If we increase the accounts payable for the firm, we will increase the FCF for the current
year (everything else held constant). - ANSWERtrue
In class, we identified one strength of the multiples model is that it uses the cost of
capital. - ANSWERfalse
The IRR rules is better to use than the NPV rule because the NPV rule can be biased
based on the scale of the project. - ANSWERfalse
The security market line shows the required return of an investment as a function of its
beta. - ANSWERtrue
The interest rate used in the NPV calculation for a capital budgeting project only
represents that required return for shareholders in the firm. - ANSWERfalse
The market portfolio risk premium is smaller for larger firms than smaller firms. -
ANSWERfalse
A project with a shorter payback period will always have a larger NPV than a project
with a longer payback period. - ANSWERfalse
A company decides to enter a business that is outside their normal scope of business
activity and risk. The new business is riskier than the typical project considered by the
firm. If the firm uses its cost of capital, there is a chance that the firm may accept a
project that should be rejected. - ANSWERtrue
An analyst is trying to estimate the cost of capital for Uber. The analyst observes that
Uber has existing debt on its balance sheet that pays a 4% annual coupon rate. The
analyst decides to use 4% as the cost of debt in the WACC calculation. Is this correct
reasoning? - ANSWERfalse
, Free cash flow measures the cash created by the firm after all investments are made
and after all dividends and interest are paid. - ANSWERfalse
Another name for relevant risk is diversifiable risk. - ANSWERfalse
In Modigliani and Miller's proposition related to taxes, the optimal capital structure is to
use as much leverage as possible. - ANSWERtrue
The term "i-flipping" refers to the practice of short selling a stock and profiting with the
price of the stock falls. - ANSWERfalse
In class, we discussed Coca-Cola acquiring BodyArmor. This deal is unusual in that
Coke is using all debt to finance the deal. - ANSWERfalse
Monte-Carlo Simulation can give you a usable result with one trial. - ANSWERfalse
All else equal, a firm with more cyclical revenues will have a higher beta than a firm with
non-cyclical revenues. - ANSWERtrue
In our personal finance lecture, Dr. Pope suggested that most students would want to
have an income fund as part of their 401K when starting work. - ANSWERfalse
If projects are mutually exclusive, we favor the NPV rule over the IRR rule. -
ANSWERtrue
The weighted average cost of capital (WACC) only includes the required return for
common shareholders (for all capital structures). - ANSWERfalse
For capital budgeting, the NPV will be higher if you can take more depreciation earlier in
the life of the project. - ANSWERtrue
When the Federal Reserve announced the interest rate increase, the stock market
rallied for a gain. This goes against conventional wisdom and our security market line
graph. - ANSWERtrue
For a student just graduating Terry and starting a 401k plan, Dr. Pope would likely favor
a mid-cap fund over an income fund. - ANSWERtrue
All else equal, a firm with cyclical revenues would have a higher beta than a firm with
non-cyclical revenues. - ANSWERtrue
Preferred stock dividends most closely resemble our time value of money growing
annuity formula. - ANSWERfalse
