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6. Corporate financing comes ultimately from:
- Savings by households and foreign investors
- Cash generated from the firm's operations
- The financial markets and intermediaries
- The issue of shares in the firm
7. Positive NPV projects exist because:
- Cash-flow projections are extended into the future
- Analysts select sufficiently low discount rates
- Firms hold competitive advantage
- Most projects are unique and innovative
8. In capital budgeting analysis, an increase in working capital can be shown as:
- A decrease in the initial amount invested
- A cash inflow at the beginning of the project
- An outflow at the beginning and an equal inflow at the end of the project
- An inflow at the beginning and an equal outflow at the end of the project
9. Which of the following descriptions is representative of scenario analysis?
- It represents the ‘top-down’ approach
- One variable at a time is allowed to change
- Different combinations of variables are analysed
- It isolates the unknowns that belong in the model
10. When a corporation decides to issue long-term debt in order to pay for the acquisition of real assets, it has made a:
- Money market decision
- Capital budgeting decision
- Financing decision
- Secondary market decision
11. What happens over time to the real cost of purchasing a home if the mortgage payments are fixed in nominal terms and inflation is in existence?
- The real cost is constant
- The real cost is decreasing
- The real cost is increasing
- The price index must be known to answer this question
12. Compared to buying stocks and bonds directly, what are the advantages of investing in a mutual fund?
- All of these
- Mutual funds are efficiently diversified and professionally managed
- You can buy additional shares in the fund or cash out at any time
- Investment returns are never taxed until withdrawn from the fund
13. The opportunity cost of capital:
- Is the maximum acceptable rate of return on a project
- Is the minimum acceptable rate of return on a project
- Is always less than 10%
- Is the interest rate that the firm pays on a loan from a financial institution
14. If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then:
- Additional marketing analysis may be beneficial before proceeding
- Fixed costs should be traded for variable costs
- The project should not be undertaken
- Variable costs should be traded for fixed costs
15. Which of the following statements best distinguishes the difference between real and financial assets?
- Financial assets appreciate in value; real assets depreciate in value
- Financial assets represent claims to income that is generated by real assets
- Real assets are tangible; financial assets are not
- Real assets have less value than financial assets
16. According to the NPV rule, all projects should be accepted if NPV is positive when discounted at the
- Risk-free interest rate
- Accounting rate of return
- Opportunity cost of capital
- Internal rate of return
17. The value of a proposed capital budgeting project depends on the:
- Incremental cash flows produced
- Total cash flows produced
- Accounting profits produced
- Increase in total sales produced
18. The greater the ratio of variable costs to sales, the:
- Lower the level of profitability
- Lower the benefit of conducting a sensitivity analysis
- More units must be sold to cover fixed charges
- More each additional sale contributes to coverage of fixed costs
19. One common reason for partnerships to convert to a corporate form of organization is that the partnership:
- Faces rapidly growing financing requirements
- Agreement expires after 10 years
- Wishes to avoid double taxation of profits
- Has issued all of its allotted shares
20. A tax shield is equal to the reduction in:
- Net income caused by depreciation
- Total tax liability resulting from a tax-deductible expense
- Taxable income resulting from a decrease in long-term debt
- Taxable income resulting from depreciation