CFM EXAM 3 – BRUNE QUESTIONS WITH ALL
CORRECT & VERIFIED ANSWERS
What is the purpose of the corporation? Correct answer-to make money for the shareholder
Capital budgeting is the summary of ? (2) Correct answer-planned investments and long term
assets
When is an investment considered long term? Correct answer-longer than 1 year
What are incremental cash flows? Correct answer-the cash flows that occur only if the project is
selected
T/F we will do the investment if the cost is more than the return
T/F we use techniques to analyze expected cash flows
T/F we only consider incremental cash flows Correct answer-false
true
true
________________ is the time required to recover the initial investment Correct answer-payback
Payback is easy to understand and frequently used, but ? Correct answer-it's not optimal because
it does not consider TVM for cash flows beyond the cutoff
Payback is biased towards (short term/long term)? Correct answer-short term - emphasized
liquidity
When do we accept project based on using payback? Correct answer-if it is less than the cutoff
period
discounted payback means cash flows are discounted at the ____________. Meaning it does
consider the TVM of money. Therefore, it regards cash flows _____________ the cutoff period more
than regular payback. Correct answer-WACC, beyond (it's more long term than regular payback)
Net present value is the ? Correct answer-PV of expected cash flow of an investment
What is used as the discount rate for NPV? Correct answer-Wacc
When do we accept a project doing NPV? Correct answer-if the NPV is greater than zero (if it's a
positive number)
the IRR comes out as an (percentage/number)? Correct answer-percentage
IRR is the ? Correct answer-return generated from est cash flows
What is different about MIRR than IRR? ( Correct answer-assumes cash flows are reinvested at the
WACC rather than the IRR
, accommodates non-conventional cash flows
What are non-conventional cash flows? Correct answer-cash flows are anything other than when it
starts with negative numbers and ends with all positive
________________ projects means you will evaluate each project individually. ____________
___________ projects mean that you must choose one or the other. Correct answer-independent,
mutually exclusive
What is the difference between independent and mutually exclusive projects? Correct answer-
independent means you look at each project individually, mutually exclusive means you must choose
one project
If the projects are mutually exclusive select the ________ _____________ project Correct answer-
best profitable
If the projects are independent, select all _____________ projects. Correct answer-profitable
If the criteria for selecting a project disagree, what order of capital budgeting techniques should you
follow? Correct answer-1. NPV
2. IRR
3. payback
What is the WACC formula?
what do they all mean? Correct answer-WdRd(1-Tc) + WpRp + WcRc
Wd - weight of debt
Rd - cost of debt
Tc -tax rate
Wp = weight of preferred
Rp = cost of preferred
Wc = weight of common
Rc = cost of common
How do you calculate:
the cost of debt?
cost of preferred?
cost of equity? (2) Correct answer-solve for YTM with TVM (i is left blank)
dividend / share price
CPM or DCF
CORRECT & VERIFIED ANSWERS
What is the purpose of the corporation? Correct answer-to make money for the shareholder
Capital budgeting is the summary of ? (2) Correct answer-planned investments and long term
assets
When is an investment considered long term? Correct answer-longer than 1 year
What are incremental cash flows? Correct answer-the cash flows that occur only if the project is
selected
T/F we will do the investment if the cost is more than the return
T/F we use techniques to analyze expected cash flows
T/F we only consider incremental cash flows Correct answer-false
true
true
________________ is the time required to recover the initial investment Correct answer-payback
Payback is easy to understand and frequently used, but ? Correct answer-it's not optimal because
it does not consider TVM for cash flows beyond the cutoff
Payback is biased towards (short term/long term)? Correct answer-short term - emphasized
liquidity
When do we accept project based on using payback? Correct answer-if it is less than the cutoff
period
discounted payback means cash flows are discounted at the ____________. Meaning it does
consider the TVM of money. Therefore, it regards cash flows _____________ the cutoff period more
than regular payback. Correct answer-WACC, beyond (it's more long term than regular payback)
Net present value is the ? Correct answer-PV of expected cash flow of an investment
What is used as the discount rate for NPV? Correct answer-Wacc
When do we accept a project doing NPV? Correct answer-if the NPV is greater than zero (if it's a
positive number)
the IRR comes out as an (percentage/number)? Correct answer-percentage
IRR is the ? Correct answer-return generated from est cash flows
What is different about MIRR than IRR? ( Correct answer-assumes cash flows are reinvested at the
WACC rather than the IRR
, accommodates non-conventional cash flows
What are non-conventional cash flows? Correct answer-cash flows are anything other than when it
starts with negative numbers and ends with all positive
________________ projects means you will evaluate each project individually. ____________
___________ projects mean that you must choose one or the other. Correct answer-independent,
mutually exclusive
What is the difference between independent and mutually exclusive projects? Correct answer-
independent means you look at each project individually, mutually exclusive means you must choose
one project
If the projects are mutually exclusive select the ________ _____________ project Correct answer-
best profitable
If the projects are independent, select all _____________ projects. Correct answer-profitable
If the criteria for selecting a project disagree, what order of capital budgeting techniques should you
follow? Correct answer-1. NPV
2. IRR
3. payback
What is the WACC formula?
what do they all mean? Correct answer-WdRd(1-Tc) + WpRp + WcRc
Wd - weight of debt
Rd - cost of debt
Tc -tax rate
Wp = weight of preferred
Rp = cost of preferred
Wc = weight of common
Rc = cost of common
How do you calculate:
the cost of debt?
cost of preferred?
cost of equity? (2) Correct answer-solve for YTM with TVM (i is left blank)
dividend / share price
CPM or DCF
