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50 Cards in this Set
- Front
- Back
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choosing between machine a and machine b
machine a last for 5 years while machine b lasts for seven years. assuming both have net present value greater than zero, how should you choose between a and b? |
choose the machine with the highest equivalent annual annuity
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the payment made each period under an amortized loan is constant, and it consists of some interest and some principal. the later we are in the loans life, the smaller the interest portion of the payment
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true statement
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required return on equity is higher then the return on debt bc?
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equity is riskier than debt
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if market interest rates fall from 8% to 7%, which bod will have the largest % increase in its value
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a 10-year zero-coupon bond
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in which event would a company call its outstanding callable bonds
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a reduction in market interest rates
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assume the federal reserve actions increase the growth rate in the supply of money. under the loanable funds theory of interest rates the _____ curve would shift and interest rate would ______
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supply
decrease |
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which financial statement is considered to be permanent
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balance sheet
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not considered a relevant concern in determining incremental cash flows for a new product
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the cost of a product analysis completed in the previous tax year and specific to the new product
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which financial statement is required due to the widespread use of accrual accounting
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statement of cash flows
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correct statement
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the effective annual rate will always be greater than the simple rate except in situation where the periodic rate is equal to the simple rate
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not a money market instrument
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show considerable variation in credit risk
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when examining a statement of cash flows which should be the largest source of cash
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net income
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your uncle would like to restrict his interest rate risk and his default risk, but he still would like to invest in corporate bonds. which of the possible bonds satisfies your uncles criteria
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AAA bond with 5 years to maturity
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time value of money
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a dollar received today is worth more than a dollar to be received in the future
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correct statement
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the yield to maturity on a non callable discount bond will normally exceed the bonds coupon interest rate
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depositor institution
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life insurance companies
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given a growth rate model which is not a valid assumption
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the growth rate exceeds the required rate of return
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when evaluating a new project dont consider
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previous expenditures associated with a market test to determine the feasibility of the project, if the expenditures have been expended for tax purposes
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does not represent a cash outflow from the firm
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depreciation
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correct statement
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in estimating incremental operating cash flows for the purpose of capital budgeting, interest payments should not be included since the effects of these payments are already included in the rate of return the firm is required to earn from its investments
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when an independents projects NPV exceeds zero
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the project should be accepted without any further consideration, assuming we are confident that the csh flows and the required rate of return have been properly estimated
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cash dividends are a _____ of cash and appear in the _____ section of the cash flow statement
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use
financing |
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the cost of debts equals
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the coupon rathe yield to maturity on existing bonds adjusted for taxes
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which is not included in property, plant, and equipment
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goodwill
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a firm purchased an asset for 10 million five years ago. it was expected to last 10 years. today sold for 6 million which would be reported
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the company must report 1 million in additional taxable income
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offered two equally risky annuities, each paying 10,000 per year for five years. one is an ordinary annuity, the other is an annuity due.
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present value of annuity due exceeds the present value of the ordinary annuity, and future value of the annuity due also exceeds fv of ordinary annuity
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company choose accelerated method for depreciating a new asset. for the first year that new asset is in operation, which best describes the effect of the choice of depreciation method
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the companies cash flow will be higher using an accelerated method of depreciation rather than the straight line method
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not a cash flow that results from the decision to accept a project
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sunk costs
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given some amount to be received several years in the future, if the interest rate increases, the present value of the future amount will be
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lower
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financial system is best described as
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a way to connect those who need money with those with savings to invest
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a firm is deciding whether or not it should invest in a new product. last year the company spent 500,000 on test marketing. this expense should be _____ as a cash flow because it is a______
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excluded
sunk cost |
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which is the most expensive source of capital?
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new equity ( sale of new shares)
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difference between the income statement and the statement of cash flows is
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the income statement is accrual based and the statement of cash flows is not
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shortcoming of the payback method of capital budgeting?
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it doesnt consider the time value of money
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the excess of the purchase price of a company over the fair market value of its net assets is known as
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goodwill
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treasury stock
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is issued but not outstanding
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the value of bonds is equal to
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the present value of the principal plus the present value of the interest
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recently yield on BBB rated corporate bonds exceeded the yield on AAA corporate bonds by around 175 basis points (1.75%) what most likely accounts for this difference? differences in
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credit risk
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the cost of capital (discount rate) is used in
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capital investment analysis because it reflects what the firm pays for the money in invests
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not a use of funds
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bank loans
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federal reserve
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insurance rate down= money supply up
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statement of cash flows
operations activities |
the cash effects of transactions and other events that enter into determination of net income
- cash inflows from - cash sales - credit sales ( receipts from acc/rec) -recapture of expensed depreciation (paper expense in income statement) -receipts from other changes in inventory cash outflows -payments for acquisitions of inventory payments to employees -payments for interest payments for other expenses -payments for taxes |
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statements of cash flows
investing activities |
lending and collecting cash on loans and acquiring and selling investments and productive long-term assets
cash inflows from -receipts for loans collected -sales of debt or equity securities -sales of plat,property and equipment cash outflows -cash disbursement on loans to other entities -investment in debt or equity securities -purchase of plant property and equipment |
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statement of cash flows
financing activities |
borrowing and repaying long term loans; issuing equity securities; payment of dividends to shareholders
cash inflows - sale of equity securities - sale of bonds, mortgages, notes, and other short and long term borrowings cash outflow -purchase of equity securities -redemption of bond, mortgages, notes, and other short and long term borrowing |
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payback method
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time in which the intial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. it is one of the simplest investment appraisal techniques
initial investment/cash inflow per period when cash inflows are uneven we need to calculate the cumulative net cash flow for each period and then use the following formula A+b/c a= last period with a negative cumulative cash flow B is he absolute value of cumulative cash flow at the end of the period a c is the total cash flow during the period after a decision rule- accept the project only if its payback period is less than the target payback period adv= simple to calculate can be a measure of risk inherent in a project since cash flows that occur later in a projects life are considered uncertain, payback period provides an indication of how certain the project cash inflows are for companies facing liquidity problems, it provides a good ranking of projects that would return money early |
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mutually exclusive
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mean that if one is accepted, the other projects are automatically rejected. these are either or decisions.
ex a city is deciding which of three models of garbage trucks it is going to purchase. sine it will only purchase one model, acceptance of one automatically means that the other two will be rejected |
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NPV
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is the present value of cash inflows minus the present value of cash outflows. generally if the NPV is positive, then the investment should be accepted sine it is worth more than it costs. if the NPV is negative then the investment should be rejected.
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internal rate of return IRR
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is the discount rate that makes the NPV of a project equal to zero. in other words the discount rate that makes the present value of cash outflows equal to the present value of cash inflows.
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sunk cost
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a cash outflow that occurred in the past and isnt affected by the acceptance or rejection of a current project
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incremental cash flow
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the cash flow if a project is adopted minus the cash flows if the project isnt adopted
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