The Fundamentals of Corporate Finance Exam Questions with Correct Answers| New Update
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Capital budgeting It involves choosing projects that add value to a company.
Capital Budgeting Process It can involve almost anything, including acquiring land or
purchasing fixed assets like a new truck or machinery.
Operational These budgets are often____, outlining how the company's revenue and
expenses will shape up over the subsequent 12 months.
Capital budgeting It is the long-term financial plan for larger financial outlays.
First, capital budgets are often exclusively cost centers; they do not incur revenue during the
project and must be funded from an outside source, such as revenue from a different
department.
Second, due to the long-term nature of capital budgets, there are more risks, uncertainty, and
things that can go wrong Several unique challenges to capital budgeting:
Capital budgeting It is often prepared for long-term endeavors, then reassessed as the
project or undertaking is under way.
True Companies will often periodically reforecast their capital budget as the project moves
along. The importance in a capital budget is to proactively plan ahead for large cash outflows
that, once they start, should not stop unless the company is willing to face major potential
project delay costs or losses.
Capital Budgeting Process It is a measurable way for businesses to determine the long-term
economic and financial profitability of any investment project.
1. Discounted Cash Flow Analysis
,2. Payback Analysis
3. Throughput Analysis Methods Used in Capital Budgeting:
Discounted cash flow techniques Because a capital budget will often span many periods and
potentially many years, companies often use _______ to assess not only cash flow timing but
also implications of the dollar.
True A central concept in economics facing inflation is that a dollar today is worth more than
a dollar tomorrow, as a dollar today can be used to generate revenue or income tomorrow.
Payback Analysis Instead of strictly analyzing dollars and returns, payback methods of
capital budgeting plan around the timing of when certain benchmarks are achieved.
Throughput methods It often analyze revenue and expenses across an entire organization,
not just for specific projects.
Throughput methods It entail taking the revenue of a company and subtracting variable
costs.
Throughput Analysis This method results in analyzing how much profit is earned from each
sale that can be attributable to fixed costs.
True Once a company has paid for all fixed costs, any throughput is kept by the entity as
equity.
1. Payback Period
2. Internal Rate of Return
3. Net Present Value Metrics used in Capital Budgeting:
, Payback Period It calculates the length of time required to recoup the original investment.
Payback periods These are typically used when liquidity presents a major concern.
True If a company only has a limited amount of funds, it might be able to only undertake
one major project at a time. Therefore, management will heavily focus on recovering their
initial investment in order to undertake subsequent projects.
True Another major advantage of using the payback period is that it is easy to calculate once
the cash flow forecasts have been established.
Discounted Payback Period Basically, the _____ factors in TVM and allows one to determine
how long it takes for the investment to be recovered on a discounted cash flow basis.
Internal Rate of Return (IRR) or expected return on a project is the discount rate that would
result in a net present value of zero.
True Since the NPV of a project is inversely correlated the discount rate-if the discount rate
increases, then future cash flows become more uncertain and thus become worth less in value
—the benchmark for IRR calculations is th actual rate used by the firm to discount after-tax
cash flows.
True An IRR that is higher than the weighted average cost of capital suggests that the capital
project is a profitable endeavor and vice versa.
1. IRR > Cost of Capital = Accept Project
2. IRR < Cost of Capital = Reject Project The IRR rule is as follows:
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Capital budgeting It involves choosing projects that add value to a company.
Capital Budgeting Process It can involve almost anything, including acquiring land or
purchasing fixed assets like a new truck or machinery.
Operational These budgets are often____, outlining how the company's revenue and
expenses will shape up over the subsequent 12 months.
Capital budgeting It is the long-term financial plan for larger financial outlays.
First, capital budgets are often exclusively cost centers; they do not incur revenue during the
project and must be funded from an outside source, such as revenue from a different
department.
Second, due to the long-term nature of capital budgets, there are more risks, uncertainty, and
things that can go wrong Several unique challenges to capital budgeting:
Capital budgeting It is often prepared for long-term endeavors, then reassessed as the
project or undertaking is under way.
True Companies will often periodically reforecast their capital budget as the project moves
along. The importance in a capital budget is to proactively plan ahead for large cash outflows
that, once they start, should not stop unless the company is willing to face major potential
project delay costs or losses.
Capital Budgeting Process It is a measurable way for businesses to determine the long-term
economic and financial profitability of any investment project.
1. Discounted Cash Flow Analysis
,2. Payback Analysis
3. Throughput Analysis Methods Used in Capital Budgeting:
Discounted cash flow techniques Because a capital budget will often span many periods and
potentially many years, companies often use _______ to assess not only cash flow timing but
also implications of the dollar.
True A central concept in economics facing inflation is that a dollar today is worth more than
a dollar tomorrow, as a dollar today can be used to generate revenue or income tomorrow.
Payback Analysis Instead of strictly analyzing dollars and returns, payback methods of
capital budgeting plan around the timing of when certain benchmarks are achieved.
Throughput methods It often analyze revenue and expenses across an entire organization,
not just for specific projects.
Throughput methods It entail taking the revenue of a company and subtracting variable
costs.
Throughput Analysis This method results in analyzing how much profit is earned from each
sale that can be attributable to fixed costs.
True Once a company has paid for all fixed costs, any throughput is kept by the entity as
equity.
1. Payback Period
2. Internal Rate of Return
3. Net Present Value Metrics used in Capital Budgeting:
, Payback Period It calculates the length of time required to recoup the original investment.
Payback periods These are typically used when liquidity presents a major concern.
True If a company only has a limited amount of funds, it might be able to only undertake
one major project at a time. Therefore, management will heavily focus on recovering their
initial investment in order to undertake subsequent projects.
True Another major advantage of using the payback period is that it is easy to calculate once
the cash flow forecasts have been established.
Discounted Payback Period Basically, the _____ factors in TVM and allows one to determine
how long it takes for the investment to be recovered on a discounted cash flow basis.
Internal Rate of Return (IRR) or expected return on a project is the discount rate that would
result in a net present value of zero.
True Since the NPV of a project is inversely correlated the discount rate-if the discount rate
increases, then future cash flows become more uncertain and thus become worth less in value
—the benchmark for IRR calculations is th actual rate used by the firm to discount after-tax
cash flows.
True An IRR that is higher than the weighted average cost of capital suggests that the capital
project is a profitable endeavor and vice versa.
1. IRR > Cost of Capital = Accept Project
2. IRR < Cost of Capital = Reject Project The IRR rule is as follows:
