Study Guide

Study Guide

Question 1

The NPV does not account for the initial negative cash, or the initial investment, of a proposed project.
Select one:
b. False
Question 2
You loan your friend $100 subject to the following repayment schedule: $20/months for six months. You stand to profit $20 from the loan. There is also a chance your friend may not make the final payment of $20. Given this information, find the difference between the NPVs depending whether the final payment occurs. Assume a 5% discount rate. What do the NPV rules tell you?
Select one:
b. Give the loan if and only if the friend ensures the final payment.
Question 3
The breakeven point is defined as __________.
Select one:
a. number of units at which the company goes from being unprofitable to being profitable.
Question 4

A dividend policy determines __________.
c. A and B
Question 5
Which is not a step in the capital budgeting process?
b. Placing securities lawyers on retainer before analyzing potential investments
Question 6
Operating risk increases as __________ costs rise relative to variable costs.
d. fixed
Question 7

The failure of a company to establish an effective system of corporate governance represents a major operational risk to the company and its investors.
Select one:
a. True
Question 8
You are asked to determine whether to invest into a project. The project requires a $40,000 investment and will have the following cash flows:
Year         Cash Flow
1                $12,000
2                $13,000
3                $12,000
What are the NPV and IRR? Choose the closest answer:
b. NPV = -$8,141.53; IRR = -3%
Question 9

Which of the following is not a factor affecting working capital needs?
Select one:
b. Shareholder Voting
Question 10

Higher values of the WACC often imply a higher quality and less risky investment.
Select one:
b. False
Question 11
Modigliani and Miller's theory revealed that, without taxes, the capital structure...

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