Question 1

Long-term capital budgeting proposals are normally expected to incur negative cash flows in the initial time period,but eventually they should generate positive cash flows.

Accepted Answer

Long-term capital budgeting proposals usually require large upfront investments in assets, equipment, or technology, which result in negative cash flows in the initial years. However, these investments are expected to generate positive cash flows in the future through increased revenues, reduced costs, or other benefits. Thus, evaluating the feasibility of capital budgeting proposals requires considering the timing, magnitude, and uncertainty of these cash flows over the project's life.

Question 2

Capital structure is the value of a firm's physical assets,such as its buildings and other permanent structures,less accumulated depreciation.

Accepted Answer

Capital structure refers to how a company finances its operations and growth, including the mix of different types of financing such as debt, equity, and retained earnings. It has nothing to do with the value of a firm's physical assets. The value of a firm's physical assets is typically referred to as its book value.

Question 3

Retained earnings are considered a form of equity financing.

Accepted Answer

Retained earnings are profits that are not distributed as dividends but are instead reinvested back into the business. As a result, retained earnings increase the equity of the business and are considered a form of equity financing.

Question 4

A wealthy relative offers you $1000 today but doesn't actually get around to giving you the money until a year later.The delay in receiving the money causes you to lose the opportunity to earn a year's worth of interest.This example illustrates the rationale for the time value of money.

Accepted Answer

The example demonstrates how the delay in receiving money can result in lost opportunities for earning interest, highlighting the importance of the time value of money.

Question 5

The present value of a cash flow received in a future time period is the amount of money which,if invested today at a specified rate of interest,would grow to become that future amount of money.

Accepted Answer

This statement accurately describes the concept of present value.

Question 6

The time value of money is based on the idea that inflation erodes the purchasing power of the dollar.

Accepted Answer

The time value of money is based on the principle that a dollar today is worth more than a dollar in the future due to its potential earning capacity. This core principle is independent of inflation, although inflation can affect the future value of money.

Question 7

The sooner you receive a sum of money the sooner you can put that money to work to earn even more money.

Accepted Answer

This is true because the earlier you receive the money, the more time you have to invest it and potentially earn interest or returns on your investment. Delaying the receipt of the money means a missed opportunity for potential gains.

Question 8

A cash flow of $1000 received three years from today would have the same present value as a cash flow of $1000 received two years from today.

Accepted Answer

The cash flow of $1000 received three years from today would have a lower present value than the cash flow of $1000 received two years from today, as money received sooner is worth more than money received later due to the time value of money.

Question 9

Financial leverage is the use of debt in a firm's capital structure.

Accepted Answer

Financial leverage refers to the practice of using debt, rather than only equity, to finance a firm's operations or growth. This can increase potential returns to equity owners, but also increases the risk of financial distress or bankruptcy.

Question 10

Interest payments on a firm's debt are a tax-deductible expense.

Accepted Answer

Interest payments on a firm's debt are considered a business expense and therefore, are tax-deductible. This means that the amount of interest paid by the firm can be subtracted from their taxable income, resulting in a lower tax liability.

Question 11

Retained earnings is the net income a firm makes when revenues exceed liabilities.

Accepted Answer

Retained earnings represent the cumulative amount of net income a company keeps, after dividends are paid, not just the net income from revenues exceeding liabilities.

Question 12

Financial managers at Tuckerverse Corporation have just computed the NPV for a capital budgeting proposal and found that it is $1500.The financial managers are likely to approve this proposal.

Accepted Answer

An NPV of $1500 indicates that the proposal is expected to generate positive net cash flows, which exceed the initial investment. Therefore, it is likely that the financial managers will approve the proposal.

Question 13

In the 21st century,managers use financial calculators and spreadsheet software to make computing present values easy by simply entering the amount and timing of the estimated cash flow into the calculator (or spreadsheet)along with the discount rate.

Accepted Answer

This statement is true. Managers commonly use financial calculators and spreadsheet software to compute the present value of future cash flows by entering the cash flow amounts and timing, as well as the discount rate. These tools make the process much simpler than manual calculations.

Question 14

One disadvantage of equity financing is that it locks the firm into making fixed payments.

Accepted Answer

Equity financing does not involve fixed payments as the investors receive a share of the ownership in the company and a portion of the profits. They do not have a fixed claim on the company's earnings and do not require regular payments like debt financing.

Question 15

Covenants are restrictions placed on firms seeking to obtain debt financing.They are intended to protect the interests of the lenders.

Accepted Answer

Covenants are conditions and restrictions that lenders impose on borrowers to protect their interests and ensure that the borrower meets certain financial requirements. These restrictions can include limitations on asset purchases, dividend payments, and other financial decisions that could affect the borrower's ability to repay the loan.

Question 16

Leverage increases the expected return on paper of a shareholder's investments,but it also increases the firm's financial risk.

Accepted Answer

Leverage can increase the return on a shareholder's investment because it amplifies gains, but it also increases the firm's financial risk because it amplifies losses. Therefore, both statements in the question are true.

Question 17

You have the opportunity to spend $1000 today to purchase an investment that will pay you $360 next year,$360 in two years,and $400 in three years.This is clearly a good deal because the total amount of money you will receive over this three-year period is $1120,which is more than the $1000 you'd have to pay for the investment.

Accepted Answer

The statement does not account for the time value of money, which means that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. Without considering the discount rate or the rate of return required for the investment to be considered a good deal, simply comparing the total future cash flows to the initial investment cost is not sufficient to determine if it's a good deal.

Question 18

Covenants are terms included in long-term loan agreements that are intended to protect borrowers from unfair policies imposed by lenders.

Accepted Answer

Covenants are actually included in loan agreements to protect lenders from risks associated with lending money, not borrowers.

Question 19

Financial managers face a challenge in accurately forecasting cash flows as they must analyze only relevant cash flows.

Accepted Answer

Financial managers must consider only those cash flows that are relevant to their decision-making process. These may include future cash inflows and outflows associated with investment projects, financing decisions, working capital management, and other operational activities. Accurately forecasting cash flows is important for making sound financial decisions and maximizing shareholder value.

Question 20

The net present value of an investment proposal is found by adding the present values of all of its estimated future cash flows and subtracting the initial cost of the investment from the sum.

Accepted Answer

This is the definition of net present value.

Quiz 8: Finance: Acquiring and Using Funds to Maximize Value