corporate finance

It is likely that:

A) prudent managers have a detailed knowledge of the composition of their shareholders.

B) mixing asset purchase and financing decisions could cause managers to make good decisions.

C) none of the above.

D) A and B.

The present value of a cash flow allows an investor to assess:

A) the present value of a future cash flow.

B) the value of a stream of cash flows in terms of the best and most certain alternative.

C) what equivalent present payment would be equally acceptable in lieu of the investment under consideration.

D) A and B.

E) A, B, and C.

In a stable, predictable industry, an average of the previous ten years' sales growth figures probably provides a less accurate forecast than assuming the same level of sales next year as in the current year.

True

False

Which of the following would be included among the investment numbers of a capital budget?

A) Purchase price of the asset.

B) Trade-in value of an asset being replaced.

C) Investment tax credit from acquisition.

D) Installation costs of the machinery.

E) All of the above.

If projected assets exceed liabilities and owners' equity, it is assumed that the difference is funded through short-term or long-term debt.

True

False

For capital budgeting purposes, an asset's depreciable life is:

A) always equal to the time horizon of an evaluation.

B) equal to the asset's useful life.

C) equal to the asset's economic life.

D) an arbitrary period dictated by GAAP.

E) none of the above.

The most accurate pro formas do not necessarily contain the most detail.

True

False

Analysts within a company are less likely to fall into the 'false accuracy trap' when they develop pro formas than would external analysts because insiders have access to more detailed information.

True

False

Which of the following statements record a firm's financial situation on a single day?

A) Statement of financial position.

B) Income statement.

C) Statement of cash flows.

D) All of the above.

E) Both A and B.

Residual cash flows are estimated when:

A) the useful lives of alternatives are different.

B) one asset has a shorter economic life than its alternatives.

C) one asset has a longer economic life than its alternatives.

D) A and B.

E) A, B, and C.

The cost of capital can be defined as:

A) the weighted average cost of attracting investors to the firm.

B) the price of obtaining funding for the firm, weighted according to target ratios in the capital structure.

C) less than the weighted average return that investors in the firm require.

D) A and B.

E) A, B, and C.

It is not possible for stock appreciation to offset a dividend reduction and create value for shareholders.

True

False

Dividends are not the sole source of returns for shareholders.

True

False

If managers do not foresee investment opportunities in the coming year that are as attractive as they have seen in the past, it is not necessarily appropriate to raise the dividend to the level that mature companies pay.

True

False

If an investment's IRR is higher than the firm's chosen hurdle rate, then the investment:

A) has a positive NPV.

B) is of greater risk than the overall risk of the firm.

C) should be qualitatively considered before selection.

D) A and C.

E) A, B, and C.

A differential analysis:

A) can be used to compare an alternative to the status quo.

B) can be used to compare any set of alternatives.

C) is easier to comprehend if a consistent frame of reference is employed.

D) B and C.

E) A, B, and C.

Flexibility issues are those which:

A) deal with a company's financing reserves.

B) impact the debt capacity that a firm should maintain.

C) All of the above.

As the interest rate used to discount future cash flows is decreased, present value of the future cash inflows:

A) increases.

B) decreases.

C) stays the same.

A firm with substantial fixed costs such as a manufacturing overhead will have a lower degree of risk in the trough of a business cycle than will a firm with high variable costs and limited fixed costs.

True

False

The qualitative portion of a financial analysis is analogous to the hypothesis-forming stage of scientific investigation because:

A) assumptions are not tested until the numbers are run.

B) false hypotheses (assumptions) may be formed.

C) empirical measurement is not performed later.

D) A and B.

E) A, B, and C.

'Other' issues normally do not cause managers to assign more importance to one FRICTO element than the others.

True

False

The risk-free rate of return used to determine a firm's cost of capital will not vary depending upon the financial and operating risk level of the firm.

True

False

Timing issues involve:

A) the costs of the alternative forms of capital.

B) sequencing the alternatives, once funding amounts are known.

C) none of the above.

D) A and B.

If a company consistently uses hurdle rates that are higher than its marginal cost of capital, then:

A) it will certainly increase its earnings.

B) it may have fewer and fewer investment alternatives.

C) the risk of the firm will decrease.

D) A and C.

E) B and C.

The risk of illiquidity is more pronounced for share owners than it is for debt holders in a public company.

True

False

FRICTO analysis does not point out poor investments.

True

False

A valuation determines whether a merger should occur; legalities determine what form the business combination should be.

True

False

The 'efficient market' theory seems to be reasonable because:

A) there are fewer financial analysts valuing securities.

B) there are hundreds of investors trying to make money from improperly valued securities, and the market forces which result drive stock prices to a fair value.

C) statistical assessments are becoming increasingly important in financial analysis.

D) B and C.

E) A, B, and C.

It is best when evaluating mergers to rely on several quantitative methods.

True

False

It is not impossible for the acquisition price of a target firm ever to fall below book value.

True

False

Present value calculations allow managers to:

A) choose assets which create the most value, even if their cash flows are timed differently.

B) express present values in terms of future cash flows.

C) create value for the firm.

D) A and C.

E) A, B, and C.

The final step(s) in using pro formas are to:

A) test the assumptions.

B) compare the results of the sensitivity analysis to the decision maker's risk tolerance in the current situation.

C) create best- and worst-case scenarios.

D) A and C.

E) A, B, and C.

Qualitative comparisons may be as important as the numerical comparisons in financial analysis.

True

False

When performing sensitivity analysis:

A) statistical methods should not be employed.

B) electronic spreadsheets can save time.

C) assumptions should be changed one at a time.

D) all of the above.

E) B & C.

Management can improve its ROA by increasing investments in property, plant, and equipment.

True

False

A payment of dividends reduces the cash balance.

True

False

Compound rates are used in an attempt to:

A) screen out weak investments.

B) quantify the firm's opportunity costs.

C) quantify the firm's risk.

D) A and B.

E) none of the above.

More detail in a pro forma doesn't necessarily mean greater accuracy.

True

False

Synergy between two companies:

A) is the complimentary situation where value is created in the joining of the firms.

B) may result in the improvement of the acquirer's bottom line.

C) could be defined by purely qualitative benefits.

D) A and C.

E) A, B, and C.

The utility of sensitivity analysis is as great in merger valuations as it is in capital budgeting.

True

False