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D076 QUIZ OFFICIAL EXAM QUESTIONS
WITH ANSWERS.
What is an opportunity cost?
The loss of the ability to use an asset toward the next best project
once you have invested it in another project
The difference between the cost of a project and its potential profit
The opportunities a company has and how to rank them
The cost that must be incurred to make a profit - correct answer -
The loss of the ability to use an asset toward the next best project
once you have invested it in another project. The concept of
opportunity cost is that because you use an asset to invest in one
project, you lose the opportunity to use the same asset to do a
different project.
What would an analyst predict for a potential investment with an
NPV of zero?
The profitability index would also be equal to zero.
The project would take away value from the firm, but only a small
amount.
The project would earn exactly the rate of return required by the
firm.
The project would add value to the firm. - correct answer -The
project would earn exactly the rate of return required by the firm.
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An NPV of zero indicates that a project will neither add nor take
away value from a firm.
A financial analyst for the company Bobby's Books has been
asked to evaluate a potential investment using a method that
considers the time value of money. Is there more than one way to
do this?
No, the analyst could only use cash budgeting to evaluate the
project.
Yes, the analyst could use the current ratio and could compare
cost of capital rates.
Yes, the analyst could use both the NPV and the IRR. - correct
answer -Yes, the analyst could use both the NPV and the IRR.
Both NPV and IRR take into account the time value of money.
If two projects are mutually exclusive, which decision-making
criterion will help you make the best decision about which project
to accept?
Profitability index (PI)
Initial outlay (IO)
Internal rate of return (IRR)
Net present value (NPV) - correct answer -Net present value
(NPV). When only one project can be chosen, the PI is not useful
because it does not indicate the dollar value that a project will add
to or take away from a firm.
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Why might a firm prefer to raise debt capital through bonds
instead of stocks?
Bonds take advantage of upside potential.
Bonds do not require the firm to pay back its loan.
Bonds do not require a firm to give up any ownership.
Bonds have no expiration date. - correct answer -Bonds do not
require a firm to give up any ownership! This is attractive to a firm
that needs funds for a project but wishes to maintain control.
Why is it appropriate to calculate the value of a bond in the same
way that the present value of an annuity is calculated?
Even though bonds have a fixed length, the cash flows differ each
year.
Bonds pay a coupon every six months, pay a constant coupon
amount, and have a maturity date.
A bond is a fixed amount paid each period forever to compensate
investors.
The cash flows that come from owning a bond grow at a constant
rate every year, and the payments continue forever. - correct
answer -Bonds pay a coupon every six months, pay a constant
coupon amount, and have a maturity date! Bond cash flows are
an annuity, a constant amount paid every period.
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Why is it important to consider the cost of capital in an ideal
evaluation method of capital investment?
Because cash flows for a project may be uncertain
Because it cannot be determined how a potential project
enhances the firm's value without considering every cash flow of
the project
Because if you can receive money earlier, you can reinvest the
cash into different projects earlier - correct answer -Because cash
flows for a project may be uncertain
What must be determined in order to compare the values of two
projects with differently timed cash flows that does not need to be
determined for projects with similarly timed cash flows?
Positive cash inflows and negative cash outflows
Opportunity cost
Present value of the benefits
Future value of the benefits and future value of the costs - correct
answer -Opportunity cost must be determined to analyze two
such projects.
What is the disadvantage of debt financing?
Debt financing does not actually achieve an optimal capital
structure for a company.
D076 QUIZ OFFICIAL EXAM QUESTIONS
WITH ANSWERS.
What is an opportunity cost?
The loss of the ability to use an asset toward the next best project
once you have invested it in another project
The difference between the cost of a project and its potential profit
The opportunities a company has and how to rank them
The cost that must be incurred to make a profit - correct answer -
The loss of the ability to use an asset toward the next best project
once you have invested it in another project. The concept of
opportunity cost is that because you use an asset to invest in one
project, you lose the opportunity to use the same asset to do a
different project.
What would an analyst predict for a potential investment with an
NPV of zero?
The profitability index would also be equal to zero.
The project would take away value from the firm, but only a small
amount.
The project would earn exactly the rate of return required by the
firm.
The project would add value to the firm. - correct answer -The
project would earn exactly the rate of return required by the firm.
, Page | 2
An NPV of zero indicates that a project will neither add nor take
away value from a firm.
A financial analyst for the company Bobby's Books has been
asked to evaluate a potential investment using a method that
considers the time value of money. Is there more than one way to
do this?
No, the analyst could only use cash budgeting to evaluate the
project.
Yes, the analyst could use the current ratio and could compare
cost of capital rates.
Yes, the analyst could use both the NPV and the IRR. - correct
answer -Yes, the analyst could use both the NPV and the IRR.
Both NPV and IRR take into account the time value of money.
If two projects are mutually exclusive, which decision-making
criterion will help you make the best decision about which project
to accept?
Profitability index (PI)
Initial outlay (IO)
Internal rate of return (IRR)
Net present value (NPV) - correct answer -Net present value
(NPV). When only one project can be chosen, the PI is not useful
because it does not indicate the dollar value that a project will add
to or take away from a firm.
, Page | 3
Why might a firm prefer to raise debt capital through bonds
instead of stocks?
Bonds take advantage of upside potential.
Bonds do not require the firm to pay back its loan.
Bonds do not require a firm to give up any ownership.
Bonds have no expiration date. - correct answer -Bonds do not
require a firm to give up any ownership! This is attractive to a firm
that needs funds for a project but wishes to maintain control.
Why is it appropriate to calculate the value of a bond in the same
way that the present value of an annuity is calculated?
Even though bonds have a fixed length, the cash flows differ each
year.
Bonds pay a coupon every six months, pay a constant coupon
amount, and have a maturity date.
A bond is a fixed amount paid each period forever to compensate
investors.
The cash flows that come from owning a bond grow at a constant
rate every year, and the payments continue forever. - correct
answer -Bonds pay a coupon every six months, pay a constant
coupon amount, and have a maturity date! Bond cash flows are
an annuity, a constant amount paid every period.
, Page | 4
Why is it important to consider the cost of capital in an ideal
evaluation method of capital investment?
Because cash flows for a project may be uncertain
Because it cannot be determined how a potential project
enhances the firm's value without considering every cash flow of
the project
Because if you can receive money earlier, you can reinvest the
cash into different projects earlier - correct answer -Because cash
flows for a project may be uncertain
What must be determined in order to compare the values of two
projects with differently timed cash flows that does not need to be
determined for projects with similarly timed cash flows?
Positive cash inflows and negative cash outflows
Opportunity cost
Present value of the benefits
Future value of the benefits and future value of the costs - correct
answer -Opportunity cost must be determined to analyze two
such projects.
What is the disadvantage of debt financing?
Debt financing does not actually achieve an optimal capital
structure for a company.
