Corporate Finance Midterm Exam Study Guide
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 described as a(n):
a. Mixed stream and a non-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 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 three. The payback period of the
project is:
a. Between 2 and 3 years
9. A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash
inflows presently values at $4,000. The NPV of the investment is:
a. -$1,000
10. The ______ is the discount rate that equates the present value of the cash inflows with the initial
investment.
a. IRR
11. A firm with a cost of capital of 12.5% is evaluating 3 capital projects. The IRRs are as follows:
i. Project IRR
1. 12%
2. 15%
3. 13.5%
ii. The firm should:
b. Accept 2 & 3; reject 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 managers 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 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
This study source was downloaded by 100000820853758 from CourseHero.com on 12-02-2025 10:03:27 GMT -06:00
https://www.coursehero.com/file/40911548/Corporate-Finance-Midterm-Exam-Study-Guide-Multiple-Choicedocx/
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 described as a(n):
a. Mixed stream and a non-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 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 three. The payback period of the
project is:
a. Between 2 and 3 years
9. A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash
inflows presently values at $4,000. The NPV of the investment is:
a. -$1,000
10. The ______ is the discount rate that equates the present value of the cash inflows with the initial
investment.
a. IRR
11. A firm with a cost of capital of 12.5% is evaluating 3 capital projects. The IRRs are as follows:
i. Project IRR
1. 12%
2. 15%
3. 13.5%
ii. The firm should:
b. Accept 2 & 3; reject 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 managers 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 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
This study source was downloaded by 100000820853758 from CourseHero.com on 12-02-2025 10:03:27 GMT -06:00
https://www.coursehero.com/file/40911548/Corporate-Finance-Midterm-Exam-Study-Guide-Multiple-Choicedocx/
