Deck 3: Valuation

Question 1

Compared to capital budgeting and capital structure decisions,consideration of the time value of money in short-term financial decision making (specially for 'one-shot' projects)is:

A)Equally important
B)Less important
C)More important
D)Not a consideration at all

Answer 1

B

Question 2

By loosening its credit standards,the Henry Company believes its daily NPV will increase by $9,000.Henry uses a 10% cost of capital for credit policy decisions.If the increased daily NPV continues indefinitely,what is the aggregate NPV of the decision to lessen the credit standards? Assume a 365-day year.

A)$3,285,000
B)$9,000,000
C)$19,328,500
D)$32,850,000
E)$46,985,000

Answer 2

D

Question 3

For a one-shot short-term project,which of the following is a reason a financial analyst may NOT consider conducting an NPV analysis?

A)money has time value
B)cash flows can usually be more accurately evaluated
C)difficulties in estimating the appropriate discount rate
D)'a' and 'b'

Answer 3

C

Question 4

It is most commonly assumed that the manager's objective is to:

A)Minimizing the price of the firm's common stock
B)Maximizing shareholder value
C)Maximize accounts receivables
D)Minimize accounts payables

Question 5

Which of the following statements is NOT true regarding the financial statement approach to evaluating financial alternatives?

A)it includes a calculation of the anticipated revenues and expenses of the alternatives
B)it includes a discounting of some of the alternatives' revenue and expense flows
C)it implicitly defines project riskiness as the project's effect on liquidity
D)it includes risk by portraying the company's ability to pay near-term obligations

Question 6

The discount rate chosen in short-term financial decision making should always reflect:

A)the fluctuations of the company's past capital investments
B)the company's opportunity cost
C)the current overnight investment rate
D)the current long-term borrowing rate

Question 7

With more frequent than annual compounding,the effective annual rate is ______________ than the nominal rate,due to the effect of ______________.

A)lower,rounding differences
B)lower,not earning "interest on interest"
C)higher,rounding differences
D)higher,earning "interest on interest"

Question 8

Determining the Net Present Value (NPV)of a given course of action typically involves all of these steps EXCEPT:

A)determining the relevant cash flows
B)determining the timing of the cash flows
C)determining the probability of each cash flow
D)determining the appropriate discount rate
E)discounting the cash flows

Question 9

Which of the following is NOT one of the primary difficulties companies face in arriving at an appropriate discount rate for short-term decisions?

A)the time horizon is too short to allow use of a long-term average cost of capital
B)difficulty in incorporating risk
C)treasurers rarely raise monies for short-term projects
D)the absence of current market data for short-term interest rates

Question 10

__________________ is the determination of the present dollar value of a series of cash flows.

A)Liquidity analysis
B)Programming analysis
C)Shareholder wealth maximization
D)Valuation

Question 11

The financial statement approach involves:

A)Estimating additional unit sales
B)Estimating the cost of capital of additional investment in payables
C)Determining the additional bad debt loss
D)'a' and 'c'
E)'a','b' and 'c'

Question 12

The Aubrey Company employs $60,000,000 of long-term capital and $20,000,000 of short-term liabilities.Its weighted-average cost of capital is 10% while its operating profit is $17,000,000.If the company has a marginal tax rate of 40%,Aubrey's EVA is:

A)$4,200,000
B)$8,000,000
C)$9,000,000
D)$11,000,000
E)$16,200,000