Finance

Please select the correct answer for each question. Each one is worth 4 points.

1  If you take out a loan from a bank, you will be charged ________.

A) for principal but not interest

B) for interest but not principal

C) for both principal and interest

D) for interest only

2. A company selling a bond is ________ money.

A) borrowing

B) lending

C) taking

D) reinvesting

3. To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate.

A) number of compounding periods for the length of an investment

B) number of discounting periods for the length of an investment

C) number of compounding periods per year

D) number of compounding periods per month

4. Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 5.00%. What is your investment worth in one year?

A) $1,025.00

B) $1,500.95

C) $1,025.27

D) $1,050.95

5. The typical payments on a consumer loan are made at ________.

A) the end of each day

B) the end of each week

C) the end of each month

D) the beginning of each month

6. A major metric of a company’s health and its prospects for a long life is how much ________ it can generate.

A) cash flow

B) depreciation

C) tax deferral

D) net income

7. ________ cash flow is the increase in cash generated by a new project above the current cash flow without the new project.

A) Future

B) Current

C) Discounted

D) Incremental

8. Whenever a new product competes against a company’s already existing products and reduces the sales of those products, ________ occur.

A) erosion costs

B) opportunity costs

C) sunk costs

D) working capital costs

9. The are two main reasons why we need to deal with depreciation. Which of the below is one of these reasons?

A) The gain but not the loss when a capital asset is disposed

B) The loss but not the gain when a capital asset is disposed

C) The tax flow implications from the OCF

D) The tax rate implications from the OCF

10. ________ of a project are those that have already been incurred and cannot be reversed.

A) Erosion costs

B) Opportunity costs

C) Sunk costs

D) Working capital costs

11. ________ involve(s) a cash flow that never occurs, but we need to add it as a cost or outflow of a new project.

A) Cost recovery of divested assets

B) Capital expenditures

C) Sunk costs

D) Opportunity costs

12. The ________ is the cost of each financing component multiplied by that component’s percent of the total funding amount.

A) NPV

B) IRR

C) cost of capital

D) cost of debt

13. The cost of capital is ________.

A) the cost of debt in a firm that finances with both debt and equity.

B) the cost of each financing component multiplied by that component’s percent of the total borrowed.

C) another name for the IRR.

D) All of the above

14. Which of the following would be classified as debt lenders for a firm?

A) Preferred shareholders, banks, and nonbank lenders

B) Nonbank lenders, common shareholders, and commercial banks

C) Preferred shareholders, common shareholders, and suppliers

D) Suppliers, nonbank lenders, and commercial banks

15. When a company borrows money from a bank or sells bonds, it is called ________.

A) capital structure financing

B) stock financing

C) equity financing

D) debt financing

16. The weighted average cost of capital is ________.

A) the average of the cost of each financing component, weighted by the proportion of each component

B) the cost of capital for the firm as a whole

C) made up of three financing components: the cost of debt, the cost of preferred stock, and the cost of equity

D) All of the above

17. In capital budgeting, the ________ is the appropriate discount rate to use when calculating the NPV of an average risk project.

A) WACC

B) IRR

C) cost of debt

D) cost of Equity

18. The ________ is the return that the bank or bondholder demands on new borrowing.

A) IRR

B) WACC

C) cost of equity

D) cost of debt

19. Which of the following are tax-deductible expenses for corporations?

A) Interest expenses

B) Preferred stock dividends

C) Common stock dividends

D) All are tax-deductible for corporations.

20. Which of the following in NOT a potential problem suffered by the IRR method of capital budgeting?

A) Multiple IRRs

B) Disagreement with the NPV as to whether a project with ordinary cash flows is profitable or not.

C) Incorporates the IRR as the reinvestment rate for the future cash flows

D) Comparing mutually exclusive projects

21. ________ is at the heart of corporate finance, because it is concerned with making the best choices about project selection.

A) Capital budgeting

B) Capital structure

C) Payback period

D) Short-term budgeting

22. The ________ model is usually considered the best of the capital budgeting decision-making models.

A) Internal Rate of Return (IRR)

B) Net Present Value (NPV)

C) Profitability Index (PI)

D) Discounted Payback Period

23. The ________ model determines at what point in time cash outflow is recovered by the corresponding future cash inflow.

A) NPV

B) Buyback

C) Net Present Value

D) Payback Period

24. Consider the following tem-year project. The initial after-tax outlay or after-tax cost is $1,000,000. The future after-tax cash inflows each year for years 1 through 10 are $200,000 per year. What is the payback period without discounting cash flows?

A) 10 years

B) 5 years

C) 2.5 years

D) 0.5 years

25. In the NPV Model, all cash flows are stated ________.

A) in future value dollars, and the total inflow is “netted” against the outflow to see if the net amount is positive or negative

B) in present value or current dollars, and the outflow is “netted” against the total inflow to see if the gross amount is positive or negative

C) in present value or current dollars, and the total inflow is “netted” against the initial outflow to see if the net amount is positive or negative

D) in future dollars, and the initial outflow is “netted” against the total inflow to see if the net amount is positive