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Capital Budgeting & Corporate Investments

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1. How do you determine if a cash flow is relevant or irrelevant?

2. Beside the ones given in the text, please give an example of an indirect benefit.

3. I bought my car for 28,000 five years ago, it is now worth 16,000 (net of selling expenses). I want to use my car in a new taxi business that I am starting. What is the correct opportunity cost that should be used in calculating the NPV of my taxi service?

4. How do you depreciate land?

5. What formula do you use to calculate the annual depreciation on commercial buildings?

6. Are increases in accounts receivables a source or use of cash?

7. Are increases in accounts payables a source or use of cash?

8. If the working capital balance was $140,000 at the end of 2011 and was $100,000 at the end of 2012. What is the incremental investment in working capital for 2012?

9. Discuss one method (discussed in the text) that businesses use in practice to forecast demand.

10. Discuss one method (discussed in the text) that businesses use in practice to forecast costs.

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Solution Preview

1. How do you determine if a cash flow is relevant or irrelevant?

2. Beside the ones given in the text, please give an example of an indirect benefit.

3. I bought my car for 28,000 five years ago, it is now worth 16,000 (net of selling expenses). I want to use my ...

Solution Summary

This solution thoroughly discusses each of the capital budgeting and corporate investment questions presented.

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10 Corporate Finance Questions on Corporate Finance that discuss issues like Cost of Capital, Credit Policy, Working Capital Financing, Dividend payments, Capital Structure, Impact of write off of non performing assets

1. A company has a debt ratio greater than the industry average. How would an investor evaluate the implications of this higher debt ratio in making an investment decision in this company's common stock?

2. In your opinion, what are the major factors determining the kind of financing for working capital a company can secure?

3. A company has three capital budget projects for the upcoming fiscal year all of equal risk, and having equal NPV, Pay Back Period and IRR which is above the firm's current cost of capital. Only two can be funded from the current capital structure and funds available. The third project must be funded by raising more debt at a cost that will increase the overall cost of capital. Should the company raise the additional funds? YES NO Explain your answer.

4 In the last few years, many large corporations, such as General Motors, [and now Quest and Lucent] have written off large amounts of their non-performing (or poorly performing) assets as they have shrunk their operations [and recognized decreased value]. What is the impact of these asset impairment write-offs on the future return on assets, future return on common equity, and future financial leverage ratios? What impact would you expect these write-offs to have on the market value of the firm's equity securities? Why?

5. Your company wants to increase sales by extending credit to customers with less than a top credit rating. How would you evaluate this decision?

6. You are evaluating two capital investment proposals. One is a new product line that requires an investment of $500,000. The second is a cost saving new machine that requires an investment of $375,000. If you only had funds to do one or the other, explain how capital budgeting concepts would assist you in making the decision.

7. Why is Net Present Value (NPV) used for investment decisions?

8. You are a board member for a company considering cutting the quarterly dividend payment to shareholders. What are your concerns for the company and shareholders?

9. A company has a cost of capital greater than the industry average. What are several of the most significant reasons for this?

10. What are the major considerations for an established, and already public company, in its efforts to raise additional equity capital?

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