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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  • Investment returns are never taxed until withdrawn from the fund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