Practice3(Section6) - Practice Questions for Exam 3...

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Conceptual: i. When evaluating a new project, the firm should consider all of the following factors except : a. Changes in working capital attributable to the project. b. Previous expenditures associated with a market test to determine the feasibility of the project, if the expenditures have been expensed for tax purposes. c. The current market value of any equipment to be replaced. d. The resulting difference in depreciation expense if the project involves replacement. e. All of the statements above should be considered. Answer: b ii. 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. Answer: c iii. Which of the following statements is not correct? a. The corporate valuation model can be used even for a company that does not pay dividends. b. The corporate valuation model discounts free cash flows by the required return on equity. c. The corporate valuation model can be used to find the value of a division. d. Free cash flows must grow at a constant rate in order to find the horizon, or terminal, value. e. All the above statements are incorrect. Answer: b iv. Which of the following is not always a way to increase the value of a company? a. Increase the growth rate of sales. b. Increase the operating profitability (NOPAT/Sales). c. Decrease the capital requirement (Capital/Sales). d. Decrease the weighted average cost of capital. e. Increase the expected return on invested capital.
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Practice3(Section6) - Practice Questions for Exam 3...

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