Practice Questions 3a

Practice Questions 3a - Practice Questions for Exam #3...

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Practice Questions for Exam #3 Note: I have not asked questions that relate to the practical investment advice lecture on previous exams. This time, I will ask a few questions about that material. (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 _______ False _______ (2) Interest expense is not included as an incremental expense when calculating the after-tax cash flows of a project. True _______ False _______ (3) Firms generally use straight line depreciation for their financial accounting books and accelerated depreciation for their tax accounting books. True _______ False _______ (4) Net Working Capital is calculated as the sum of cash, accounts receivable, inventories and accounts payable. True _______ False _______ (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 ________ (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 _______ (7) Long-term debt is part of Net Working Capital. True ________ False _______ (8) When calculating cash flows for a capital budgeting project, sunk costs are included in incremental revenues and expenses. True ________ False _______ (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 _______ (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 ______, False _______ (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 _______ False _______
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(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 _______ False _______ (13) Inventories are part of net working capital. True _______
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This note was uploaded on 06/22/2011 for the course FINA 363 taught by Professor Masoudie during the Fall '10 term at South Carolina.

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Practice Questions 3a - Practice Questions for Exam #3...

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