1.) The most common motive for adding fixed assets to the firm Is:
a. Expansion
2.) ________ is the process of evaluating and selecting long-term
investments consistent with the firm's goal of wealth maximization.
a. Capital Budgeting
3.) Consider the following cash flow pattern. In year zero: capital expense
= $100,000; year 1 cash inflow = $25,000; year 2 cash inflow =
$10,000; year 3 cash inflow = $50,000; year 4 cash inflow = $60,000.
This cash flow pattern is best described as a(n):
a. Mixed Stream and Conventional Cash Flow
4.) ________________projects do not compete with each other, the
acceptance of one ___________ the others from consideration.
a. Independent does not eliminate
5.) A firm with limited dollars available for capital expenditures is subject
to:
a. Capital Rationing
6.) The ____________ is the exact amount of time it takes the firm to
recover its initial investment
a. Payback
7.) All of the following are weaknesses of the payback method except:
a. It is easy to calculate
8.) A firm is evaluating a proposal which has an initial investment of
$35,000 and has cash inflows of $10,000 in year one; $20,000 in year
two; and $10,000 in year 3. The payback period of the project is:
a. Between 2&3 years
9.) A firm is evaluating an investment proposal which has an initial
investment of $5,000 and cash inflows presently valued at $4,000. The
NPV pf the investment is:
a. 4,000 – 5,000 = -1,000
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, 10.) The _________________ is the discount rate that equates the present
value of the cash inflows with the initial investment.
a. Internal Rate of Return (IRR)
11.) A firm with a cost of capital of 12.5% is evaluating 3 capital projects.
The IRRs are as follows: Project IRR 1 12% 2 15% 3 13.5% The firm
should:
a. Accept Projects 2 and 3 and Reject Project 1.
12.) When NPV is negative, the IRR is ______________ the cost of capital.
a. Less than
13.) In comparing NPV to IRR:
a. NPV is theoretically superior, but financial mangers prefer IRR
14.) In the context of capital budgeting, risk refers to:
a. The degree of variability of the cash inflows.
15.) The initial investment for replacement decisions includes all of the
following except:
a. All of the above would be included
16.) The four basic sources of long-term funds for a business are:
a. Long-term debt, common stock, preferred stock, and retained
earnings
17.) The higher the risk of a project, the higher its RADR and thus the
lower the NPV for a given stream of inflows.
a. True
18.) The firm's optimal mix of debt and equity is called its:
a. Target Capital Structure
19.) The ____________________ is the weighted average cost of funds which
relates the interrelationship of financial decisions.
a. Cost of Capital
20.) A tax adjustment must be made in determining the cost
of____________.
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a. Expansion
2.) ________ is the process of evaluating and selecting long-term
investments consistent with the firm's goal of wealth maximization.
a. Capital Budgeting
3.) Consider the following cash flow pattern. In year zero: capital expense
= $100,000; year 1 cash inflow = $25,000; year 2 cash inflow =
$10,000; year 3 cash inflow = $50,000; year 4 cash inflow = $60,000.
This cash flow pattern is best described as a(n):
a. Mixed Stream and Conventional Cash Flow
4.) ________________projects do not compete with each other, the
acceptance of one ___________ the others from consideration.
a. Independent does not eliminate
5.) A firm with limited dollars available for capital expenditures is subject
to:
a. Capital Rationing
6.) The ____________ is the exact amount of time it takes the firm to
recover its initial investment
a. Payback
7.) All of the following are weaknesses of the payback method except:
a. It is easy to calculate
8.) A firm is evaluating a proposal which has an initial investment of
$35,000 and has cash inflows of $10,000 in year one; $20,000 in year
two; and $10,000 in year 3. The payback period of the project is:
a. Between 2&3 years
9.) A firm is evaluating an investment proposal which has an initial
investment of $5,000 and cash inflows presently valued at $4,000. The
NPV pf the investment is:
a. 4,000 – 5,000 = -1,000
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, 10.) The _________________ is the discount rate that equates the present
value of the cash inflows with the initial investment.
a. Internal Rate of Return (IRR)
11.) A firm with a cost of capital of 12.5% is evaluating 3 capital projects.
The IRRs are as follows: Project IRR 1 12% 2 15% 3 13.5% The firm
should:
a. Accept Projects 2 and 3 and Reject Project 1.
12.) When NPV is negative, the IRR is ______________ the cost of capital.
a. Less than
13.) In comparing NPV to IRR:
a. NPV is theoretically superior, but financial mangers prefer IRR
14.) In the context of capital budgeting, risk refers to:
a. The degree of variability of the cash inflows.
15.) The initial investment for replacement decisions includes all of the
following except:
a. All of the above would be included
16.) The four basic sources of long-term funds for a business are:
a. Long-term debt, common stock, preferred stock, and retained
earnings
17.) The higher the risk of a project, the higher its RADR and thus the
lower the NPV for a given stream of inflows.
a. True
18.) The firm's optimal mix of debt and equity is called its:
a. Target Capital Structure
19.) The ____________________ is the weighted average cost of funds which
relates the interrelationship of financial decisions.
a. Cost of Capital
20.) A tax adjustment must be made in determining the cost
of____________.
This study source was downloaded by 100000902527396 from CourseHero.com on 12-01-2025 18:48:53 GMT -06:00
https://www.coursehero.com/file/253070032/Week-3-Midterm-Exam-Sheetdocx/
