Deck 8: Capital Budgeting and Costs of Capital

Question 1

The amount of estimated long-term investments in referred to as the:

A) Capital budget
B) Financial investment budget
C) Working capital budget
D) Research and development budget
E) Portfolio budget

Answer 1

A

Question 2

Costs of capital are:

A) Opportunity costs of funds
B) Required rates of returns
C) Discount rates
D) Cost of equity and cost of debt
E) All of the above

Answer 2

E

Question 3

Costs of equity should reflect:

A) Business risk
B) Operating risk
C) Financial risk
D) Systematic risk
E) All of the above

Answer 3

E

Question 4

Costs of equity for publicly traded-firms can ALWAYS be estimated using:

A) The dividend discount model
B) The Capital Asset Pricing Model
C) Unlevered beta adjusted approach
D) The nonconstant growth model
E) All of the above

Question 5

Adjusting costs of equity for privately held form involve:

A) Levered beta
B) Illiquidity discount
C) Unsystematic risk
D) All of the above
E) None of the above

Question 6

Weighted average cost of capital include:

A) Cost of equity
B) Cost of preferred stock
C) Cost of debt
D) Tax benefits on debt
E) All of the above

Question 7

Which of the following capital budgeting method is the most reliable according to finance theories?

A) Net present value method
B) Internal rate of return method
C) Profitability index method
D) Payback method
E) Modified internal rate of return method

Question 8

Which of the following is the most challenging tasks in project analysis?

A) Estimating startup costs and initial investment
B) Creating formulas in Excel to compute present values
C) Estimating size and timing of future cash flows
D) Estimating salvage value
E) All of the above tasks are equally challenging and have the same estimation risk

Question 9

Which of the following metric should be used to evaluate projects?

A) Future profits
B) Future revenues
C) Startup costs
D) Opportunity cost of capital
E) Present value of future cash flows

Question 10

Which of the following items would not affect the calculation of after-tax cash flows?

A) Depreciation
B) Amortization
C) Interest expense
D) Revenue
E) Cash expenses