# Capital Budgeting

See attached file.

1. The difference between the market value of an investment and its cost is the:

Net present value

Internal rate of return

Payback Period

Profitability Index

2. The process of valuing an investment by determining the net present value of its future cash flows is called (the):

Constant dividend growth model

Discount cash flow valuation

Expected earnings model

Capital Asset Pricing Model

3. The length of time required for an investment to generate cash flow sufficient to recover its initial cost it the:

Net present value

Internal rate of return

Payback period

Profitability index

4. The discount rate that makes the net present value of an investment exactly equal to zero is the:

Payback period

Internal rate of return

Average accounting return

Profitability index

5. A situation in which taking one investment prevents the taking of another is called:

Net present value profiling

Operational ambiguity

Mutually exclusive investment decisions

Issues of scale

Multiple rates of return

6. The chnages in the firms future cash flows that are a direct consequence of accepting a project are called:

Incremental cash flows

Stand-alone cash flows

Aftertax cash flows

Net present value cash flows

Erosion cash flows

7. A cost that has alread been paid, or the liability to pay has already been incurred is a(n):

Salvage value expense

Net working capital expense

Opportunity cost

Sunk cost

Erosion cost

8. The most valuable investment given up if an alternative investment is chosen is a(n):

Salvage value expense

Net working capital expense

Sunk cost

Opportunity cost

Erosion cost

9. The possibility that errors in projected cash flows can lead to incorrect NPV estimates is called:

Forecasting risk

Projection risk

Scenario risk

Monte Carlo risk

Accounting risk

10. An analysis of what happens to NPV estimates when we ask what-if questions is called:

Forecasing analysis

Scenario analysis

Sensitivity analysis

Simualtion analysis

Break-even analysis

11. An analysis of the relation between sales volume and various measures of profitability is called:

Forecasting analysis

Scenario analysis

Sensitivity analysis

Simulation analysis

Break-evem analysis

12. The return that lender require on their loaned funds to the firm is called the:

Coupon rate

Current yield

Cost of debt

Capital gains yield

Cos of capital

13. The weighted averal of the firm's cost of equity, preferred stock, and after-tax debt is the:

Reward to risk ratio for the firm

Expected capital gains yield of the stock

Expected capital gains yield for the firm

Portfolio beta of the firm

Weighted average cost of capital (WACC)

14. The proportions of the market value of the firm's assets financed via debt, common stock, and preferred stock are called the firms ______________.

Financing costs

portfoliio weights

Beta coefficient

Capital structure weights

Cost of capital

15. The legal document describing details of the issuing corporation and its security offering to potential investors is called the _____________.

Letter of comment

Rights offering

Offering prospectus

Regulation A statement

Tombstone advertisement

16. A public offering of securities offered for sale to the general public on a direct cash basis is called a:

Best efforts offer

Firm commitment offer

General cash offer

Rights offer

Red herring offer

17. The use of personal borrowing to change the overall amount of finanical leverage to which the individual is exposed is called:

Private debt placement

Dividend recapture

Homemade leverage

A privileged subscription offer

The weighted average cost of captial

18. The equity risk derived from the firm's operating activities is called ________ risk.

market

systematic

extrinsic

business

financial

19. The proposition that the cost of equity is a positive linear function of capital structure is called :

The Capital Asset Pricing Model

M&M Proposition I

M&M Propostion II

The Law of One Price

The Efficient Markets Hypothesis

20. The equity risk derived form the firm's capital structure policy is called ___________ risk.

market

systematic

extrinsic

financial

business

21. Payments made out of the firm's earning to its owners in the form of cash or stock are called:

Dividends

Distributions

Share repurchases

Payment-in-kind

Stock splits

22. Payments made by a firm to its owners from sources other than current or accumulated earings is called:

Dividends

Distributions

Share repurchases

Payment-in-kind

Stock splits

23. A cash payment made by a firm to its owners as a result of a one-time event is called a:

Share repurchase

Liquidating dividends

Regular cash dividend

Special dividend

Extra cash dividend

24. The date by which a stockholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is called the _________.

date of ex-rights

date of ex-dividend

date of record

date of payment

date of declaration

25. The date on which the board of directors passes a resolution authorizing payment of a dividend to the sharholders if the _________ date.

ex-rights

ex-dividend

record

payment

declaration

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#### Solution Summary

The solution explains some multiple choice questions relating to capital budgeting

Cost of Capital, Capital Budgeting, Capital Structure, Forecasting, and Working Capital Management

Please see attachment use word or excel but please show how you got the answer.

Question 1: (Cost of Capital)

You are provided the following information on a company. The total market value is $38 million. The company's capital structure, shown here, is considered to be optimal.

(see attached file for data)

a. What is the after-tax cost of debt? (assume the company's effective tax rate = 40%)

b. Assuming a $4 dividend paid annually, what is the required return for preferred shareholders (i.e. component cost of preferred stock)? (assume floatation costs = $0.00)

c. Assuming the risk-free rate is 1%, the expected return on the stock market is 7%, and the company's beta is 1.0, what is the required return for common stockholders (i.e., component cost of common stock)?

d. What is the company's weighted average cost of capital (WACC)?

Question 2: (Capital Budgeting)

It's time to decide how to use the money your firm is expected to make this year. Two investment opportunities are available, with net cash flows as follows:

(See attached file for data)

a. Calculate each project's Net Present Value (NPV), assuming your firm's weighted average cost of capital (WACC) is 7%

b. Calculate each project's Internal rate of Return (IRR).

c. Plot NPV profiles for both projects on a graph).

d. Assuming that your firm's WACC is 7%:

(1) If the projects are independent which one(s) should be accepted?

(2) If the projects are mutually exclusive which one(s) should be accepted?

Question 3: (Capital Structure)

Aaron Athletics is trying to determine its optimal capital structure. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table:

(See attached file for data)

The company's tax rate, T, is 40 percent. The company uses the CAPM to estimate its cost of common equity, Rs. The risk-free rate is 1 percent and the market risk premium is 6 percent. Aaron estimates that if it had no debt its beta would be 1.0. (i.e., its "unlevered beta," bU, equals 1.0.)

On the basis of this information, what is the company's optimal capital structure, and what is the firm's cost of capital at this optimal capital structure?

Question 4: (Forecasting)

A firm has the following balance sheet:

(See attached file for data)

Sales for the year just ended were $6,000, and fixed assets were used at 80 percent of capacity. Current assets and accounts payable vary directly with sales. Sales are expected to grow by 20 percent next year, the expected net profit margin is 5 percent, and the dividend payout ratio is 80 percent.

How much additional funds (AFN) will be needed next year, if any?

Question 5: Working Capital Management

The Chickman Corporation has an inventory conversion period of 60 days, a receivables collection period of 30 days, and a payables deferral period of 30 days. Its annual credit sales are $6,000,000, and its annual cost of goods sold (COGS) is 60% of sales.

a. What is the length of the firm's cash conversion cycle?

b. What is the firm's investment in accounts receivable?

c. What is the company's inventory turnover ratio?

d. Identify three ways in which the company could reduce its cash conversion cycle?

e. What are the possible risks of reducing the cash conversion cycle per your recommendations in part d?