Skip to content
Solved Assignments

FIN650-Module 6 � Static Online Exam 2

Exam covering financial concepts from Module 6 of FIN 650.

Preview 3 of 9 pages

See the first 3 pages exactly as they appear in the document.

  1. Page 1
    Read page 1 as text

    FIN650 - Module 6 – Static Online Exam 2 The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt. a. True b. False The cost of preferred stock to a firm must be adjusted to an after - tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation's taxable income. a. True b. False The cost of common stock is the rate of return the marginal stockholder requires on the firm's common stock. a. True b. False For capital budgeting and cost of capital purposes, the firm should always consider retained earnings as the first source of capital, i.e., use these funds first, because retained earnings have no cost to the firm. a. True b. False The cost of debt, rd, is normally less than rs, so rd(1 - T) will normally be less than rs. Therefore, as long as the firm is not completely debt financed, the weighted average cost of capital (WACC) will normally be greater than rd(1 - T). a. True b. b. False The lower the firm's tax rate, the lower will be its after - tax cost of debt and WACC, other things held constant. a. True b. False A firm should never undertake an investment if accepting the project would lead to an increase in the firm's cost of capital. a. True b. False Because "present value" refers to the value of cash flows that occur at different points in time, a series of present values should not be summed to determine the value of a capital budgeting project. a. True b. False Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. A) A project’s NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. B) The lower the WACC used to calculate it, the lower the calculated NPV will be. C) If a project’s NPV is less than zero, then its IRR must be less than the WACC.

  2. Page 2
  3. Page 3
    Read page 3 as text

    D) The NPV of a relatively low - risk project should be found using a relatively high WACC. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. A) A project’s NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. B) The lower the WACC used to calculate it, the lower the calculated NPV will be. C) If a project’s NPV is less than zero, then its IRR must be less than the WACC. D) If a project’s NPV is greater than zero, then its IRR must be less than zero. E) The NPV of a relatively low - risk project should be found using a relatively high WACC. In theory, any capital budgeting investment rule should depend solely on forecasted cash flows and the opportunity cost of capital. The rule itself should not be affected by managers' tastes, the choice of accounting method, or the profitability of other independent projects. a. True b. False When considering two mutually exclusive projects, the firm should always select that project with an internal rate of return that is higher, provided the projects have the same initial cost. This statement is true regardless of whether the projects can be repeated or not. a. True b. False Which of the following is NOT a cash flow and thus should not be reflected in the analysis of a capital budgeting project? A) Changes in net operating working capital. B) Shipping and installation costs. C) Cannibalization effects. D) Opportunity costs. E) Sunk costs that have been expensed for tax purposes. Suppose Tapley Corporation uses a WACC of 8% for below - average risk projects, 10% for average - risk projects, and 12% for above - average risk projects. Which of the following independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects? A) Project A, which has average risk and an IRR = 9%. B) Project B, which has below - average risk and an IRR = 8.5%. C) Project C, which has above - average risk and an IRR = 11%. D) Without information about the projects' NPVs we cannot determine which one or ones should be accepted. E) All of the projects should be accepted. Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not relevant in a capital budgeting analysis. a. True b. False If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land.

6 more pages in the full document

Unlock it once and it stays in your library, ready to chat with or turn into flashcards.

Unlock the full document

More Finance study materials

See all

Study this document with CramX

Once it is in your library, every tool can work from it.