Fundamentals of Corporate Finance Ch.
10
Accelerated Cost Recovery System (ACRS) - ANS - a depreciation method under U.S. tax law
allowing for the accelerated write-off of property under various classifications
\accounting earnings - ANS - don't matter
\always increases the equity beta relative to the asset beta - ANS - financial leverage
\appropriate aftertax cost of debt to the company - ANS - the interest rate it would have to pay if
it
were to issue new debt today.
\appropriate discount rate does not depend on which company is investing;
It depends on the risk of the project. - ANS - true
\beta - ANS - measures the responsiveness of a security's returns to movements in the market
(systematic)
determined by the cyclicality of a firm's revenues.
cyclicality is magnified by the firm's operating and financial leverage.
\capital expenditure analysis must be based on? - ANS - cash
\cost of capital - ANS - depends on the risk of the project, not the source of the money.
\e, firms whose revenues are more responsive to movements in the economy will generally
have higher betas than firms with less-cyclical revenues - ANS - true
\Equivalent Annual Cost (EAC) - ANS - the present value of a project's costs calculated on an
annual basis
\Erosion - ANS - the cash flows of a new project that come at the expense of a firm's existing
projects
\expected return on any asset is dependent on - ANS - beta (slope)
\Financial leverage - ANS - arises from the use of debt in the firm's capital structure. A levered
firm must make fixed interest payments regardless of its revenues.
\flotation cost - ANS - cost of issuance, include in npv analysis
\if the firm is unlevered discount rate = - ANS - capm
\if the firm uses debt the discount rate to use is - ANS - Rwacc
\Incremental Cash Flows - ANS - the difference between a firm's future cash flows with a project
and those without the project
\it is difficult to observe the market's valuation of the risk of
the division. - ANS - Two typical ways around this are to use a pure play proxy for the division,
or to use
subjective adjustments of the overall firm hurdle rate based on the perceived risk of the division.
\Operating leverage - ANS - the percentage change in earnings before interest and taxes (EBIT)
for a percentage change in sales.
\Opportunity Cost - ANS - the most valuable alternative that is given up if a particular investment
is undertaken
10
Accelerated Cost Recovery System (ACRS) - ANS - a depreciation method under U.S. tax law
allowing for the accelerated write-off of property under various classifications
\accounting earnings - ANS - don't matter
\always increases the equity beta relative to the asset beta - ANS - financial leverage
\appropriate aftertax cost of debt to the company - ANS - the interest rate it would have to pay if
it
were to issue new debt today.
\appropriate discount rate does not depend on which company is investing;
It depends on the risk of the project. - ANS - true
\beta - ANS - measures the responsiveness of a security's returns to movements in the market
(systematic)
determined by the cyclicality of a firm's revenues.
cyclicality is magnified by the firm's operating and financial leverage.
\capital expenditure analysis must be based on? - ANS - cash
\cost of capital - ANS - depends on the risk of the project, not the source of the money.
\e, firms whose revenues are more responsive to movements in the economy will generally
have higher betas than firms with less-cyclical revenues - ANS - true
\Equivalent Annual Cost (EAC) - ANS - the present value of a project's costs calculated on an
annual basis
\Erosion - ANS - the cash flows of a new project that come at the expense of a firm's existing
projects
\expected return on any asset is dependent on - ANS - beta (slope)
\Financial leverage - ANS - arises from the use of debt in the firm's capital structure. A levered
firm must make fixed interest payments regardless of its revenues.
\flotation cost - ANS - cost of issuance, include in npv analysis
\if the firm is unlevered discount rate = - ANS - capm
\if the firm uses debt the discount rate to use is - ANS - Rwacc
\Incremental Cash Flows - ANS - the difference between a firm's future cash flows with a project
and those without the project
\it is difficult to observe the market's valuation of the risk of
the division. - ANS - Two typical ways around this are to use a pure play proxy for the division,
or to use
subjective adjustments of the overall firm hurdle rate based on the perceived risk of the division.
\Operating leverage - ANS - the percentage change in earnings before interest and taxes (EBIT)
for a percentage change in sales.
\Opportunity Cost - ANS - the most valuable alternative that is given up if a particular investment
is undertaken
