Identify methods that firms use to establish hurdle rates for capital projects. What will be an ideal response? ANSWER Firms use many techniques to establish hurdle rates. First, if they have multiple and distinct business divisions, they may use industry averages for that type of business. Or, they may have historical reference points […]
How is the profitability index calculated? A) The present value of the net cash flows minus the initial investment. B) The present value of the net cash flows /plus the initial investment. C) The present value of the net cash flows divided by the initial investment. D) The initial investment divided by the present value […]
A firm’s balance sheet shows the following changes over the most recent quarter: Cash increases by $1,000,000, long-term assets increase by $3,000,000, accounts payable increase by $750,000, long-term-debt increases by $1,000,000, retained earnings increase by $1,250,000, and new equity increases by $1,000,000. Which of the following statements must be TRUE? A) Cash was a $1,000,000 […]
Financial leverage is concerned with the relationship between a firm’s earnings after interest and taxes and its common stock earnings per share. Indicate whether the statement is true or false ANSWER FALSE
If a firm increases the amount of debt that it has this could lead to an increase in: A) financial risk. B) the cost of equity. C) both the cost of equity and the financial risk. D) None of the above. ANSWER C
All of the following are important factors in the economy EXCEPT: A) technology. B) interest rates. C) financial markets. D) credit conditions. ANSWER A
The interest rate on a line of credit is normally stated as a fixed rate-the prime rate. Indicate whether the statement is true or false ANSWER FALSE
The ________ method is a capital budgeting technique for evaluating projects of unequal lives. A) equivalent annual cost B) equal amortization C) straight-line annuity D) none of the above ANSWER A
Hurdle rates may change if: A) the cost of borrowing changes. B) the firm’s risk profile changes. C) the overall economic environment changes. D) All of the above. ANSWER D
Total leverage is concerned with the relationship between a firm’s sales revenue and its common stock earnings per share. Indicate whether the statement is true or false ANSWER TRUE
