Finance 301 exam 3 questions well
answered
Discounted Cash Flow (DFC) Valuation - correct answer ✔✔-Value equals the sum of expected
cash flows discounted for the time and risk
-Value of financial investment- the present value of the investment's expected future cash flows
-Once the value of the asset is determined, you can compare the value of the asset to the
asset's price to determine whether the asset is overvalued, undervalued, or fairly valued
The three steps to DFC valuation - correct answer ✔✔1. Estimate the expected future cash
flows of the investment
2. Determine the appropriate interest rate to use to discount the expected cash flows of the
investment
3. Find the present value of each of the expected future cash flows and total them to find the
value of the investment
Investment Classifications - correct answer ✔✔Bonds- the future cash flows are the payments
of periodic interest and the repayment of principal at maturity
Mortgage- the future cash flows are the monthly payments that consist of both payment of
interest and principal
Stock- the future cash flows are payments of dividends by the stock, if there are any, and capital
gains or losses related to the movement in the price of the stock
Loan payments - correct answer ✔✔-when you are making a payment on a loan, some of the
money from the payment goes to interest and the rest goes to pay your down principal
Amortization table - correct answer ✔✔-a tool used to break down how much of each loan
payment goes to interest and how much goes to principal
, -The amount of your loan payment will be the same every year; however, the percent of the
payment that goes to interest and the percent that goes to principal will change every year
-In the early years of a loan, most of your payment will go to pay interest, and only a little bit
will go to pay your down principal
-In the later years of the loan, most of your payment will go to pay down your principal, and
only a little bit will go to interest
Annual Interest Expense =
Principal Reduction =
Total Interest Expense = - correct answer ✔✔Principal Balance x Interest Rate
Annual Payment - Annual Interest Expense
(Annual Payment)(Number of Years) - Amount of Loan
Capital budgeting - correct answer ✔✔-Planning and managing a firm's long-term investments
(assets)
-Financial managers want to invest in opportunities that will be worth more than they cost to
build or purchase
-Financial managers maximize the value of the firm by investing in projects that have a present
value of cash flows that is greater than the cost of the project
Factors financial managers need to take into account when making capital budgeting decisions: -
correct answer ✔✔1. Return- how much they will earn on an investment
2. Timing- when will the investment's cash flows take place
3. Risk- how likely they are to receive the investment's expected cash flows
Capital budgeting decision are the output of a firm's strategic planning process.- a firm's
marketing and production strategies determine a firm's requirement for long-term assets. -
correct answer ✔✔-Firms will need to expand their facilities and infrastructure to support
growth
answered
Discounted Cash Flow (DFC) Valuation - correct answer ✔✔-Value equals the sum of expected
cash flows discounted for the time and risk
-Value of financial investment- the present value of the investment's expected future cash flows
-Once the value of the asset is determined, you can compare the value of the asset to the
asset's price to determine whether the asset is overvalued, undervalued, or fairly valued
The three steps to DFC valuation - correct answer ✔✔1. Estimate the expected future cash
flows of the investment
2. Determine the appropriate interest rate to use to discount the expected cash flows of the
investment
3. Find the present value of each of the expected future cash flows and total them to find the
value of the investment
Investment Classifications - correct answer ✔✔Bonds- the future cash flows are the payments
of periodic interest and the repayment of principal at maturity
Mortgage- the future cash flows are the monthly payments that consist of both payment of
interest and principal
Stock- the future cash flows are payments of dividends by the stock, if there are any, and capital
gains or losses related to the movement in the price of the stock
Loan payments - correct answer ✔✔-when you are making a payment on a loan, some of the
money from the payment goes to interest and the rest goes to pay your down principal
Amortization table - correct answer ✔✔-a tool used to break down how much of each loan
payment goes to interest and how much goes to principal
, -The amount of your loan payment will be the same every year; however, the percent of the
payment that goes to interest and the percent that goes to principal will change every year
-In the early years of a loan, most of your payment will go to pay interest, and only a little bit
will go to pay your down principal
-In the later years of the loan, most of your payment will go to pay down your principal, and
only a little bit will go to interest
Annual Interest Expense =
Principal Reduction =
Total Interest Expense = - correct answer ✔✔Principal Balance x Interest Rate
Annual Payment - Annual Interest Expense
(Annual Payment)(Number of Years) - Amount of Loan
Capital budgeting - correct answer ✔✔-Planning and managing a firm's long-term investments
(assets)
-Financial managers want to invest in opportunities that will be worth more than they cost to
build or purchase
-Financial managers maximize the value of the firm by investing in projects that have a present
value of cash flows that is greater than the cost of the project
Factors financial managers need to take into account when making capital budgeting decisions: -
correct answer ✔✔1. Return- how much they will earn on an investment
2. Timing- when will the investment's cash flows take place
3. Risk- how likely they are to receive the investment's expected cash flows
Capital budgeting decision are the output of a firm's strategic planning process.- a firm's
marketing and production strategies determine a firm's requirement for long-term assets. -
correct answer ✔✔-Firms will need to expand their facilities and infrastructure to support
growth
