HW6 - HW6 25 questions BUSINESS FINANCE 1 . Hancock...

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HW6 25 questions BUSINESS FINANCE 1 . Hancock Furniture Inc. is considering new expansion plans for building a new store. In reviewing the proposed new store, several members of the firm’s financial staff have made a number of points regarding the proposed project. Which of the following items should the CFO include in the analysis when estimating the project’s net present value (NPV)? a. The new store is expected to take away sales from two of the firm’s existing stores located in the same town. b. The company owns the land that is being considered for use in the proposed project. This land could instead be leased to a local developer. c. The company spent $2 million two years ago to put together a national advertising campaign. This campaign helped generate the demand for some of its past products, which have helped make it possible for the firm to consider opening a new store. d. Statements a and b are correct. e. All of the statements above are correct. 2 . Twin Hills Inc. is considering a proposed project. Given available information, it is currently estimated that the proposed project is risky but has a positive net present value. Which of the following factors would make the company less likely to adopt the current project? a. It is revealed that if the company proceeds with the proposed project, the company will lose two other accounts, both of which have positive NPVs. b. It is revealed that the company has an option to back out of the project 2 years from now, if it is discovered to be unprofitable. c. It is revealed that if the company proceeds with the project, it will have an option to repeat the project 4 years from now. d. Statements a and b are correct. e. Statements b and c are correct. 3 . A company is considering a proposed expansion to its facilities. Which of the following statements is most correct? a. In calculating the project's operating cash flows, the firm should not subtract out financing costs such as interest expense, since these costs are already included in the WACC, which is used to discount the project’s net cash flows. b. Since depreciation is a non-cash expense, the firm does not need to know the depreciation rate when calculating the operating cash flows.
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c. When estimating the project’s operating cash flows, it is important to include any opportunity costs and sunk costs, but the firm should ignore cash flows from externalities since they are accounted for elsewhere. d. Statements a and c are correct. e. None of the statements above is correct. 4 . Which of the following statements is correct? a. Well-diversified stockholders do not consider corporate risk when determining required rates of return. b. Undiversified stockholders, including the owners of small businesses, are more concerned about corporate risk than market risk. c.
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This note was uploaded on 11/11/2011 for the course FIN 534 taught by Professor Nalla during the Spring '08 term at Strayer.

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HW6 - HW6 25 questions BUSINESS FINANCE 1 . Hancock...

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