Practice Questions 3a

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

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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 _______
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
(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 _______ False ______ (14) In the real world, a firm’s optimal capital structure maximizes firm value and minimizes WACC.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern