FINC 3610 COMPREHENSIVE EXAM QUESTIONS AND
ANSWERS MARKED A+
✔✔__ describes a company buying back its own stock in order to reduce shares
outstanding - ✔✔stock repurchases
✔✔a __ is paid via additional shares of stock as opposed to cash - ✔✔stock dividend
✔✔__ is an increase or decrease in shares outstanding with NO change in overall vlaue
to investor - ✔✔stock split
✔✔details of equity (common stock ) - ✔✔- ownership intereset
- common stockholders vote for board of directors and other issues
- dividends are not considered a cost of doing business and are not tax deductible
- dividends are not liabliity of the firm and stockholders have no legal recourse if the
dividends are not paid
- an all-quity firm cannot technically go bankrupt but it could still become insolvent and
forced to shut down
✔✔** module 6 quizzes, additional practice, suggested problems - ✔✔
✔✔most important investment measure : - ✔✔NPV
✔✔___ is a measure of how much value is created or added TODAY by undertaking an
investment (did between investment's market value and its cost) - ✔✔NPV
✔✔how to measure NPV - ✔✔Estimate future cash flows : Calculate present value of
those cash flows minus initial cost
✔✔rule of NPV acceptance : - ✔✔an investment should be accepted if the net present
value is positive and rejected if negative (assumes cash flows are reinvested at the cost
of capital)
✔✔pros of NPV - ✔✔1. use all cash flows
2. adjusts for the time value of money
✔✔cons of NPV : - ✔✔1. need appropriate discount rate
2. relatively more difficult to communicate
✔✔__ is the discount rate that makes the net present value of a project equal to zero -
✔✔internal rate of return (IRR)
✔✔how to measure IRR - ✔✔set NPV=0 and solve for r ; calculating IRR is identical to
calculating the yield to maturity on bonds
, ✔✔rule of IRR: - ✔✔an investment is acceptable if the IRR exceeds the required rate of
return, it should be rejected otherwise (assumes cash flows are reinvested at the IRR)
✔✔pros of IRR - ✔✔1. closesly related to the NPV rule
2. relatively easier to communicate
✔✔cons of IRR - ✔✔1. may result in incorrect decisions (mutually exclusive
investments)
2. may result in multiple answers (nonconventional cash flows)
✔✔how to deal with IRR possibly resulting in incorrect decisions - ✔✔crossover rate
✔✔how to deal with IRR resulting in multiple answers - ✔✔MIRR
✔✔__ is the graph showing relation of NPV to various discount rates - ✔✔net present
value profile
✔✔what information does a net present value profile provide? - ✔✔1. NPV+
2. NPV-
3. NPV is zero
4. sensitivity to discount rate
✔✔__ is the discount rate that makes the NPV's of the two projects equal - ✔✔the
crossover rate
✔✔steps of crossover rate : - ✔✔1. calculate incremental cash flows
2. calculate IRR based on incremental cash flows
✔✔__ is calculation of IRR on modified cash flows. for combination approach, it is the
discount rate that equates the present value of all cash outflows to the future value of all
cash inflows - ✔✔MIRR
✔✔how to calculate MIRR: - ✔✔- discount all cash outflows to time 0
- compound all cash inflows to the end of the project
- calculate the discount rate that makes them equal
✔✔rule of MIRR: - ✔✔an investment is acceptable if the MIRR exceeds the required
rate of return. it should be rejected otherwise (assumes cash flows are reinvested at the
cost of capital )
✔✔pros of MIRR - ✔✔- closesly related to the NPV rule
- no longer possible to get multiple answers
ANSWERS MARKED A+
✔✔__ describes a company buying back its own stock in order to reduce shares
outstanding - ✔✔stock repurchases
✔✔a __ is paid via additional shares of stock as opposed to cash - ✔✔stock dividend
✔✔__ is an increase or decrease in shares outstanding with NO change in overall vlaue
to investor - ✔✔stock split
✔✔details of equity (common stock ) - ✔✔- ownership intereset
- common stockholders vote for board of directors and other issues
- dividends are not considered a cost of doing business and are not tax deductible
- dividends are not liabliity of the firm and stockholders have no legal recourse if the
dividends are not paid
- an all-quity firm cannot technically go bankrupt but it could still become insolvent and
forced to shut down
✔✔** module 6 quizzes, additional practice, suggested problems - ✔✔
✔✔most important investment measure : - ✔✔NPV
✔✔___ is a measure of how much value is created or added TODAY by undertaking an
investment (did between investment's market value and its cost) - ✔✔NPV
✔✔how to measure NPV - ✔✔Estimate future cash flows : Calculate present value of
those cash flows minus initial cost
✔✔rule of NPV acceptance : - ✔✔an investment should be accepted if the net present
value is positive and rejected if negative (assumes cash flows are reinvested at the cost
of capital)
✔✔pros of NPV - ✔✔1. use all cash flows
2. adjusts for the time value of money
✔✔cons of NPV : - ✔✔1. need appropriate discount rate
2. relatively more difficult to communicate
✔✔__ is the discount rate that makes the net present value of a project equal to zero -
✔✔internal rate of return (IRR)
✔✔how to measure IRR - ✔✔set NPV=0 and solve for r ; calculating IRR is identical to
calculating the yield to maturity on bonds
, ✔✔rule of IRR: - ✔✔an investment is acceptable if the IRR exceeds the required rate of
return, it should be rejected otherwise (assumes cash flows are reinvested at the IRR)
✔✔pros of IRR - ✔✔1. closesly related to the NPV rule
2. relatively easier to communicate
✔✔cons of IRR - ✔✔1. may result in incorrect decisions (mutually exclusive
investments)
2. may result in multiple answers (nonconventional cash flows)
✔✔how to deal with IRR possibly resulting in incorrect decisions - ✔✔crossover rate
✔✔how to deal with IRR resulting in multiple answers - ✔✔MIRR
✔✔__ is the graph showing relation of NPV to various discount rates - ✔✔net present
value profile
✔✔what information does a net present value profile provide? - ✔✔1. NPV+
2. NPV-
3. NPV is zero
4. sensitivity to discount rate
✔✔__ is the discount rate that makes the NPV's of the two projects equal - ✔✔the
crossover rate
✔✔steps of crossover rate : - ✔✔1. calculate incremental cash flows
2. calculate IRR based on incremental cash flows
✔✔__ is calculation of IRR on modified cash flows. for combination approach, it is the
discount rate that equates the present value of all cash outflows to the future value of all
cash inflows - ✔✔MIRR
✔✔how to calculate MIRR: - ✔✔- discount all cash outflows to time 0
- compound all cash inflows to the end of the project
- calculate the discount rate that makes them equal
✔✔rule of MIRR: - ✔✔an investment is acceptable if the MIRR exceeds the required
rate of return. it should be rejected otherwise (assumes cash flows are reinvested at the
cost of capital )
✔✔pros of MIRR - ✔✔- closesly related to the NPV rule
- no longer possible to get multiple answers
