Milestone 4
June 9, 2021
Health Care Policy discussion board
June 9, 2021

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

 

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