FINANCIAL MANAGEMENT FINAL EXAM
WITH CORRECT AND DETAILED
RESPONCES
risk cpremium cbetween cstocks cand cbonds c- cCORRECT✅✅with cin ccompany cis
cfairly cpredictable c4-7%
not cunder ccontrol cfactors cof cWACC c- cCORRECT✅✅interest crates cin cthe
ceconomy
general clevel cof cstock cprices
tax crates
factors cwe ccan ccontrol cof cWACC c- cCORRECT✅✅weights cwe cdetermine, chow
cmuch cdebt cvs cequity cwe cwant cto cuse
returns con cbond cloans, cstock
risk: chigh crisk cprojects chigher crequired crate c, cB cgoes cup cthenRd cgoes cup cRe cgoes
cup cWACC cgoes cup
why cmust cfirms cadjust ctheir ccosts cof ccapital cfor crisk? chow? c-
cCORRECT✅✅different cprojects chave cdifferent crisk clevels cand ctherefore cneed cto
cbe cheld cto cdifferent cstandards
firms ccan cuse cproject cspecific ccosts cof ccapital cto cadjust cfor cdiffering crisk clevels
normal crisk cprojects: c- cCORRECT✅✅use cwacc cas cdiscount c(hurdle) crate
high crisk cprojects c- cCORRECT✅✅use cr c> cWACC
low crisk cprojects c- cCORRECT✅✅use cr c< cWACC
estimating cproject cspecific ccosts cpure cplay capproach c- cCORRECT✅✅use crequired
crate cof creturn cof ca cnear csubstitute cinvestment
estimating cproject cspecific ccosts csubjective capproach c- cCORRECT✅✅assign
cinvestment cto c"risk" ccategories cwith ccoresponding crisk cpremiums
lower crisk c: cdiscount crate cis cWACC c-2%
normal crisk c: cdiscount crate cis cWACC
high crisk: cdiscount crate cis cWACC c+2%
managers cmain cconcern cof ccapital c- cCORRECT✅✅MARP cestimate cin cCAPM cRe
c(E(Rm-Rf))
flotation ccosts c- cCORRECT✅✅direct ccost cif cissuing csecurities
investment cbanking cfees
, costs ccan cincrease cthe ccosts cof ctaking con cprojects
why cdo cflotation ccosts cincrease cthe ccost cof ctaking con cprojects c-
cCORRECT✅✅you cmust cinflate cRd cand cRe cestimates cbefore ccalculating cWACC
cto caccount cfor cthese
what cdo cmajority cof cfirms cuse cto cfind cRe c- cCORRECT✅✅CAPM
how coften cdo cfirms ccalculate cWACC cand cwhat cis cavg. c- cCORRECT✅✅at cleast
cannually
9%
what chappens cto cWACC cwhen cyou cuse cdebt c- cCORRECT✅✅goes cdown
relationship cof cRd cand cRe cand cwhat cis cexception c- cCORRECT✅✅Rd<Re cexcept
cfor cfirms cwith cextremely chigh cdebt
wacc cfor criskier cfirms c- cCORRECT✅✅higher
possible cdecision crules cof ccapital cbudgeting c- cCORRECT✅✅payback crule,
cdiscounted cpayback crule
npv, cirr
problems cwith cdiscounted cpay cback crule c- cCORRECT✅✅there cis can carbitrary ccut
coff cyou cignore ccfs cbeyond cthis crule: cpayback cignores cTVM
incremental ccash cflows c- cCORRECT✅✅any cand call cchanges cin cfuture cCFS cthat
care cdirect cresult cof cthe cinvestment cdecision
what cnot cto cinclude cin cestimating cproject ccash cflows c- cCORRECT✅✅sunk ccosts,
cfinancing ccosts cas ccfs
what cto cinclude cin cestimating cproject ccash cflows c- cCORRECT✅✅opportunity
ccosts
side ceffects c(externalities)
changes cin cnet cworking ccapital
tax ceffects
internal crate cof creturn c- cCORRECT✅✅discount crate cthat cmakes cthe cpv cof cthe
cfuture ccfs=initial cinvestment
to ccalc. cset cNPV=0 cand csolve cfor cr
rule cof cirr c- cCORRECT✅✅accept cif cirr> crequired creturn
npv cprofile c- cCORRECT✅✅plot cof can cinvestments cnpv cat cvarious cdiscount crates
shows cranges cof c"r" cwhere cyou cwould caccept, creject cor cbe cindifferent
WITH CORRECT AND DETAILED
RESPONCES
risk cpremium cbetween cstocks cand cbonds c- cCORRECT✅✅with cin ccompany cis
cfairly cpredictable c4-7%
not cunder ccontrol cfactors cof cWACC c- cCORRECT✅✅interest crates cin cthe
ceconomy
general clevel cof cstock cprices
tax crates
factors cwe ccan ccontrol cof cWACC c- cCORRECT✅✅weights cwe cdetermine, chow
cmuch cdebt cvs cequity cwe cwant cto cuse
returns con cbond cloans, cstock
risk: chigh crisk cprojects chigher crequired crate c, cB cgoes cup cthenRd cgoes cup cRe cgoes
cup cWACC cgoes cup
why cmust cfirms cadjust ctheir ccosts cof ccapital cfor crisk? chow? c-
cCORRECT✅✅different cprojects chave cdifferent crisk clevels cand ctherefore cneed cto
cbe cheld cto cdifferent cstandards
firms ccan cuse cproject cspecific ccosts cof ccapital cto cadjust cfor cdiffering crisk clevels
normal crisk cprojects: c- cCORRECT✅✅use cwacc cas cdiscount c(hurdle) crate
high crisk cprojects c- cCORRECT✅✅use cr c> cWACC
low crisk cprojects c- cCORRECT✅✅use cr c< cWACC
estimating cproject cspecific ccosts cpure cplay capproach c- cCORRECT✅✅use crequired
crate cof creturn cof ca cnear csubstitute cinvestment
estimating cproject cspecific ccosts csubjective capproach c- cCORRECT✅✅assign
cinvestment cto c"risk" ccategories cwith ccoresponding crisk cpremiums
lower crisk c: cdiscount crate cis cWACC c-2%
normal crisk c: cdiscount crate cis cWACC
high crisk: cdiscount crate cis cWACC c+2%
managers cmain cconcern cof ccapital c- cCORRECT✅✅MARP cestimate cin cCAPM cRe
c(E(Rm-Rf))
flotation ccosts c- cCORRECT✅✅direct ccost cif cissuing csecurities
investment cbanking cfees
, costs ccan cincrease cthe ccosts cof ctaking con cprojects
why cdo cflotation ccosts cincrease cthe ccost cof ctaking con cprojects c-
cCORRECT✅✅you cmust cinflate cRd cand cRe cestimates cbefore ccalculating cWACC
cto caccount cfor cthese
what cdo cmajority cof cfirms cuse cto cfind cRe c- cCORRECT✅✅CAPM
how coften cdo cfirms ccalculate cWACC cand cwhat cis cavg. c- cCORRECT✅✅at cleast
cannually
9%
what chappens cto cWACC cwhen cyou cuse cdebt c- cCORRECT✅✅goes cdown
relationship cof cRd cand cRe cand cwhat cis cexception c- cCORRECT✅✅Rd<Re cexcept
cfor cfirms cwith cextremely chigh cdebt
wacc cfor criskier cfirms c- cCORRECT✅✅higher
possible cdecision crules cof ccapital cbudgeting c- cCORRECT✅✅payback crule,
cdiscounted cpayback crule
npv, cirr
problems cwith cdiscounted cpay cback crule c- cCORRECT✅✅there cis can carbitrary ccut
coff cyou cignore ccfs cbeyond cthis crule: cpayback cignores cTVM
incremental ccash cflows c- cCORRECT✅✅any cand call cchanges cin cfuture cCFS cthat
care cdirect cresult cof cthe cinvestment cdecision
what cnot cto cinclude cin cestimating cproject ccash cflows c- cCORRECT✅✅sunk ccosts,
cfinancing ccosts cas ccfs
what cto cinclude cin cestimating cproject ccash cflows c- cCORRECT✅✅opportunity
ccosts
side ceffects c(externalities)
changes cin cnet cworking ccapital
tax ceffects
internal crate cof creturn c- cCORRECT✅✅discount crate cthat cmakes cthe cpv cof cthe
cfuture ccfs=initial cinvestment
to ccalc. cset cNPV=0 cand csolve cfor cr
rule cof cirr c- cCORRECT✅✅accept cif cirr> crequired creturn
npv cprofile c- cCORRECT✅✅plot cof can cinvestments cnpv cat cvarious cdiscount crates
shows cranges cof c"r" cwhere cyou cwould caccept, creject cor cbe cindifferent
