Practice Questions 3a solutions

Practice Questions 3a solutions - (1) Assume that your firm...

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(1) Assume that your firm has several investment opportunities, however, these investment opportunities are mutually exclusive. You are tasked to select the best of these opportunities. The NPV rule and the Internal Rate of Return may give the different relative rankings amongst the projects. True ___X___ False _______ (2) Interest expense is not included as an incremental expense when calculating the after-tax cash flows of a project. True ___X___ False _______ (3) Firms generally use straight line depreciation for their financial accounting books and accelerated depreciation for their tax accounting books. True ____X__ False _______ (4) Net Working Capital is calculated as the sum of cash, accounts receivable, inventories and accounts payable. True _______ False ___X___ While these are the four components of net working capital, accounts payable is effectively a loan so it is subtracted when calculating Net Working Capital. (5) If a project’s NPV is negative when its expected cash flows are discounted at rate k , then it’s IRR is greater than k . True _______ False ___X____ False, if the NPV < 0, the IRR is less than k, as explained several times in class. (6) If you are using the NPV rule to evaluate investment projects, you will accept projects only if their NPV is greater than 1. True ________ False ___X___ If a project's NPV is greater than 0 then it is a worthwhile project. (7) Long-term debt is part of Net Working Capital. True ________ False ___X___ Net Working Capital is Cash + Inventories + Accounts Receivable – Accounts Payable (8) When calculating cash flows for a capital budgeting project, sunk costs are included in incremental revenues and expenses. True ________ False ___X___ (9) Assume that a firm has just announced that it will do a Seasoned Equity Offering in the near future. The market generally interprets this as a positive signal about the quality of the firm and the stock price will jump upwards by 2% to 3% on average. True ______, False ___X___ (10) Assume that the appropriate discount rate for a project is 12% and that the project has a positive NPV when cash flows are discounted at 12%. The Internal Rate of Return of this project will be greater than 12%. True ___X__, False _______
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(11) The optimal amount of leverage (debt in the capital structure) for a firm like American Airlines (whose major asset is airplanes) will generally be greater than the optimal amount of leverage for a firm like Andersen Consulting (whose major asset is the employees.) True ___X___ False _______ (12) When a firm increases its financial leverage, the residual cash flows left over for equity will always become riskier. As a result, investors' required rate of return for the equity will increase. True ___X___ False _______
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Practice Questions 3a solutions - (1) Assume that your firm...

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