Describe three of the six decision models used in capital budgeting decision-making and briefly evaluate their effectiveness. What will be an ideal response? ANSWER Answer: Payback Period is simple and fast but economically unsound. It ignores all cash flow after the cutoff date and it ignores the time value of money. Discounted Payback […]
An individual investor has either sufficient wealth or sufficient borrowing capacity to purchase or sell a substantial proportion of a given firm’s securities, so that investor’s trades may affect the market value of these securities. This is an example of the violation of which of the assumptions of an ideal capital market? a. Capital Markets […]
In general, the greater a firm’s operating leverage, the higher its business risk. Indicate whether the statement is true or false ANSWER TRUE
A major metric of a company’s health and its prospects for a long life is how much ________ it can generate. A) cash flow B) depreciation C) tax deferral D) net income ANSWER Answer: A
The ________ model incorporates the time-value of money but still ignores cash flows after the cutoff date. A) Payback Period B) Discounted Payback Period C) IRR D) Modified Internal Rate of Return ANSWER Answer: B
Financial risk is the risk to a firm of being unable to cover operating costs. Indicate whether the statement is true or false ANSWER TRUE
Which of the following is an advantage of factoring? A) accounts receivable immediately turned into cash B) addition of credit and collection departments C) less costly form of secured short-term loans D) improves current ratio ANSWER A
One principal-agent conflict is that between a firm’s creditors (as a principal) and its shareholders (as agent). For example, after issuing risky debt, stockholders have an incentive to increase the riskiness of the firm’s assets (e.g. , by changing operating strategy), which would tend to expropriate wealth from creditors to stockholders. Which of the assumptions […]
The ________ method is simple and fast but economically unsound as it ignores all cash flow after the cutoff date and ignores the time-value of money. A) Payback Period B) MIRR C) Net Present Value D) IRR ANSWER Answer: A
The ________ is/are critical to business decisions, business growth, and ultimately business success. A) risk and timing but not the amount of cash flow B) currency denomination of profits C) risk and profits but not the amount of cash flow D) timing and amount of cash flow ANSWER Answer: D
