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Unformatted text preview: FIN 6352 Financial Management FMQuiz12 Dr. Xavier Garza Gmez University of Houston-Victoria FIN 6352 Financial Management Review Quiz for Chapter 12 - Cash Flow Estimation and Risk Analysis True-False 1. Using the same risk-adjusted discount rate to discount all cash flows ignores the fact that the more distant cash flows are more risky. a. True b. False 2. The two cardinal rules which financial analysts follow to avoid capital budgeting errors are: (1) capital budgeting decisions must be based on accounting income, and (2) only in- cremental cash flows are relevant to accept/reject decisions. a. True b. False 3. Opportunity costs include those cash inflows that could be generated from assets the firm already owns, if those assets are not used for the project being evaluated. a. True b. False Multiple Choice: Concepts 4. Other things held constant, which of the following would increase the NPV of a project being considered? a. A shift from MACRS to straight-line depreciation. b. Making the initial investment in the first year rather than spreading it over the first 3 years. c. A decrease in the discount rate associated with the project. d. The sale of the old machine in a replacement decision at a capital loss rather than at book value. e. An increase in required working capital. 5. Which of the following statements is correct? a. Well diversified stockholders do not consider corporate risk when determining re- quired rates of return. b. Undiversified stockholders, including the owners of small businesses, are more con- cerned about corporate risk than market risk. c. Managers care only about market risk. d. Market risk is important but does not have a direct effect on stock price because it on- ly affects beta. e. All of the statements above are false. FIN 6352 Financial Management FMQuiz12 Dr. Xavier Garza Gmez 6. Sanford & Son Inc. is thinking about expanding their business by opening another shop on property they purchased 10 years ago. Which of the following items should be in- cluded in the analysis of this endeavor? a. The property was cleared of trees and brush 5 years ago at a cost of $5,000. b. The new shop is expected to affect the profitability of the existing shop since some current customers will transfer their business to the new shop. Sanford and Son esti- mate that profits at the existing shop will decrease by 10 percent. c. Sanford & Son can lease the entire property to another company (that wants to grow flowers on the lot) for $5,000 per year....
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This note was uploaded on 11/23/2008 for the course FIN 6352 taught by Professor Gomez during the Spring '08 term at TAMU Intl..
- Spring '08