The two most fundamental aspects of a corporation (as a form of business organization) that lead to not only tremendous economies of scale and scope (as a positive) but also are linked to the financing problems that we address in the course (as a negative) are: a. the separation of ownership and control AND private […]
The EBIT is $20,000, depreciation is $5,000, and taxes are $3,000. What is the operating cash flow (OCF)? A) $25,000 B) $22,000 C) $14,000 D) $28,000 ANSWER Answer: B Explanation: B) OCF = EBIT + Depreciation – Taxes = $20,000 + $5,000 – $3,000 = $22,000.
Asymmetric information results when managers of a firm have more information about the firm’s operations and future prospects than investors have. Indicate whether the statement is true or false ANSWER TRUE
Information asymmetry is chief among violations of which of the assumptions of an ideal capital market? a. Capital Markets are frictionless b. Homogeneous expectations c. Atomistic competition d. The firm has a fixed investment program e. Once chosen, the firm’s financing is fixed ANSWER B
The ________ method is economically sound and properly ranks projects across various sizes, time horizons, and levels of risk, without exception for all independent projects. A) NPV B) Discounted Payback Period C) Profitability Index D) Modified IRR ANSWER Answer: A
Business risk is the risk to a firm of being unable to cover operating costs. Indicate whether the statement is true or false ANSWER TRUE
The ________ model provides a single measure (return) but must apply risk outside the model, thus allowing for errors in rankings of projects. A) Payback Period B) IRR C) Net Present Value D) Profitability Index ANSWER Answer: B
________ corrects for most, but not all, of the problems of IRR and gives the solution in terms of a return. A) Profitability Index B) Discounted Payback Period C) Net Present Value D) MIRR ANSWER Answer: D
Lenders recognize that by having an interest in collateral they can reduce losses if the borrowing firm defaults, ________. A) and the presence of collateral reduces the risk of default B) but the presence of collateral has no impact on the risk of default C) therefore lenders prefer to lend to customers from whom they […]
According to an academic survey of large and small U.S. businesses, the IRR method of capital budgeting is slightly preferred over NPV by the survey respondents. Indicate whether the statement is true or false. ANSWER Answer: TRUE
