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    True or False Questions in Finance

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    True or False

    26.) All benefits expected from a proposed project must be measured on a cash flow basis which may be found by adding any non-cash charges deducted as expense on the firm's income statement back to net profits after taxes.

    27.) The weight average cost of capital (WACC) reflects the expected average future cost of funds over the long-run.

    28.) Firms are able to raise funds through the sale of commercial paper more cheaply than by borrowing from a commercial bank.

    31.) Relevant cash flows are the incremental cash outflows and inflows associated with a proposed capital expenditure.

    32.) The firm's free cash flow (FCF) represents the amount of cash flow available to investors (stockholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments

    33.) If a firm's marginal tax rate is increased, this would, other things held constant, lower the cost of debt used to calculate its WACC.

    34.) Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.

    35.) In the valuation process, the higher the risk, the greater the required return.

    Short Answer- Please show calculations

    36.) If I collect my accounts receivables every 38 days, pay my accounts payable every 35 days, and my inventory turns over 8.4 times per year, what is my cash conversion cycle?

    40.) Determine the IRR on the following projects:

    a. Initial outlay of $35,000 with an after-tax cash flow at the end of the year of $5,836 for seven years

    b. Initial outlay of $350,000 with an after-tax cash flow at the end of the year of $70,000 for seven years

    c. Initial outlay of $3,500 with an after-tax cash flow at the end of the year of $1,500 for three years

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    Solution Preview

    Please see the attached file:

    True or False

    26.) All benefits expected from a proposed project must be measured on a cash flow basis which may be found by adding any non-cash charges deducted as expense on the firm's income statement back to net profits after taxes.

    TRUE
    For capital budgeting, after tax cash flows are taken. Adding back non cash expenses like depreciation to profit after taxes gives after tax cash flows.

    27.) The weight average cost of capital (WACC) reflects the expected average future cost of funds over the long-run.

    TRUE

    28.) Firms are able to raise funds through the sale of commercial paper more cheaply than by borrowing from a commercial bank.

    TRUE
    Well estblished and reputable firms raise money using commercial paper because people subscribe to such paper. This saves intermediation costs which the commercial banks charge.

    31.) Relevant cash flows are the incremental cash outflows and inflows associated with a proposed capital expenditure.

    TRUE

    Only those cash flows are relevant for decision making which differ between alternatives.

    32.) The firm's free cash flow (FCF) represents the amount of cash flow available to investors (stockholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments

    TRUE

    Free Cash Flow is cash that the firm is free to distribute to investors (stockholders and bondholders) because it is not needed for working capital or fixed assets investment.

    33.) If a firm's marginal tax rate is increased, this would, other things held constant, lower the cost of debt used to calculate its WACC.

    TRUE

    After tax cost of debt = Before tax cost of debt x (1-Tax rate); Higher the tax rate, lower is the after tax cost of debt.

    34.) Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.

    TRUE

    NPV is the better of the two methods..

    35.) In the valuation process, the higher the risk, the greater the required return.

    TRUE

    Investors are assumed to be risk averse. They have to be compensated in the form of higher risk ...

    Solution Summary

    Answers True or False Questions and short answer questions.

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