Principle of Finance Milestone 4 Sophia Course Q&A

When performing capital budgeting and considering replacement projects, one factor that must be considered is the potential of equipment that is no longer needed. • taxation • depreciation • salvage value • sunk costs CONCEPT Cash Flow Analysis and Other Factors 2 According to the residual dividend model, what takes priority over distributing dividends? • Paying off debt • Increasing share price • Establishing a target payout ratio • Financing planned projects CONCEPT Setting the Dividend 3 In what way are debt securities, equity securities and derivatives similar? • They all confer ownership in a business. • They all have fixed terms. • They can all be used to hedge against risk. • Their value is derived from an underlying asset. CONCEPT Securities Management 4 A construction company is preparing a capital budget and considering four long-term investments. The profitability index of each project is as follows: •Project A: 0.34 •Project B: 1.12 •Project C: 1.26 •Project D: 0.93 In theory, which two projects should the company pursue? • Projects A and D • Projects B and C • Projects A and C • Projects B and D CONCEPT Introduction to Capital Budgeting 5 Which of the following is true of venture capital? • Venture capitalists reserve the right to sell their portion of company shares before an IPO. • Venture capital is comparable to a bank loan, which must be repaid over time. • One way venture capitalists evaluate potential investments is by analyzing a company's share price. • On average, venture capital investors seek a return on their investment in about five years. CONCEPT Venture Capital 6 What is one advantage of NPV as a capital budget method? • Cash flows and the discount rate are easy to accurately determine. • It is flexible, in the sense that the discount rate can be adjusted to account for factors like risk. • It accounts fully for opportunity costs. • It is equally accurate whether cash flows are known or estimated. CONCEPT Net Present Value 7 Which of the following types of financing is typical for a business in its mature stage? • Equity • Bank loans • Second-round venture capital • Start-up venture capital CONCEPT Types of Financing 8 Farrah owns 500 shares of stock valued at $30/share in Company A. After the company issues a 3% stock dividend, what does Farrah own? • 500 shares valued at $30/share ...........................................CONTINUED.....................................