Help
Options
Didn't know it?
click below
click below
Knew it?
click below
click below
Don't Know
Remaining cards (0)
Know
retry
shuffle
restart
0:00
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.
Normal Size Small Size show me how
Normal Size Small Size show me how
FIN 301 FINAL EXAM
| Question | Answer |
|---|---|
| Module 5 on project finance investigates the _____ _____ for companies (one of the three decisions) | Investment decision |
| Companies make _____ _____ _____ about which long-term assets to acquire, using funds raised through either debt or equity | Capital budgeting decisions |
| This is the gold standard investment decision method! | Net present value |
| List all five investment decision rules | 1. Net present value 2. Internal rate of return 3. Payback period 4. Discounted payback period 5. Modified IRR |
| An investment rule that computes the present value of all future cash flows minus the initial investment | Net present value |
| An investment rule that computes the discount rate at which the project's NPV equals zero (essentially, this is the project's annualized rate of return) | Internal rate of return |
| An investment rule that computes the number of years required to recover the initial investment from undiscounted cash flows | Payback period |
| A refinement of the payback period rule which discounts each cash flow before accumulating them (addresses the time value shortcoming but still ignores cash flows that arrive after the cutoff date) | Discounted payback period |
| A corrected version of IRR that assumes interim cash flows are reinvested at the firm's cost of capital rather than at the (often unrealistically high) IRR itself | Modified IRR |
| Payback period is easy to calculate, but it is imperfect because it ignores these two things | 1. Time value of money 2. Cash flows beyond the payback cutoff |
| MIRR provides a more _____ and _____ measure of a project's return compared to IRR | Conservative, realistic |
| IRR is the rate that a company needs to _____ back into a project to keep the project going | Reinvest |
| In what situation would a company need to calculate MIRR? | When IRR is so large as to be unreasonable for reinvestment |
| These two methods are used when comparing multiple projects | 1. Profitability index 2. Equivalent annual annuity |
| When do we accept a project based on the NPV rule? When do we reject a project? | When NPV is positive; when NPV is negative |
| When do we accept a project based on the IRR rule? When do we reject a project? | When IRR is greater than required return; when IRR is less than required return |
| When do we accept a project based on the payback period rule? When do we reject a project? | When payback period is less than the benchmark provided by the company; when payback period is greater than that benchmark |
| When do we accept a project based on the discounted payback period rule? When do we reject a project? | When discounted payback period is less than the benchmark provided by the company; when discounted payback period is greater than that benchmark |
| When do we accept a project based on the MIRR rule? When do we reject a project? | When MIRR is greater than discount rate; when MIRR is less than discount rate |
| A measure to compare multiple projects that measures the present value of future cash flows per dollar of initial investment | Profitability index |
| A measure to compare multiple projects that converts a project's total NPV into an equal annual cash flow over the project's life, allowing fair comparison of mutually exclusive projects with different durations | Equivalent annual annuity |
| Profitability index (PI) is used for _____ _____ of projects, while equivalent annual annuity (EAA) is used to compare projects of _____ _____ | Capital rationing, different lives |
| Without using EAA, shorter-lived projects appear _____ _____ | Less valuable |
| A situation when the firm has more postive-NPV projects than available funding and must rank them by value created per dollar spent (and therefore use PI) | Capital rationing |
| The initial investment cost goes under _____ in the cash flows | CF0 |
| The minimum required annual return that investors demand in exchange for bearing a project's risk | Cost of capital |
| The first step in finding cash flows for a project | Build out revenues and subtract expenses |
| To find net present value of a project, find net present value of _____ _____ _____ | All cash flows |
| Net present value is a _____ of the cost of an _____ to the _____ _____ of its expected benefits. A positive NPV means the project _____ _____ for shareholders | Comparison, investment, present value, creates value |
| The IRR can be thought of as the project's annualized _____ _____ return: the return the project is _____ to generate, which is then compared to the _____ rate | Break even, expected, discount |
| _____ and _____ always agree on accept/reject decisions for conventional projects | NPV, IRR |
| The payback period answers the question: how many years will it take to _____ _____ the _____ _____ from the project's cash flows? | Fully recoup, initial investment |
| The discounted payback period answers the question: how many years will it take to recoup the investment in _____ _____ _____? | Present value terms |
| The standard IRR carried an implicit _____ _____: it assumes that every cash flow received during the projec'ts life is immediately reinvested at the IRR itself for the remaining project years | Reinvestment assumption |
| The MIRR corrects the reinvestment assumption by using _____ of _____ as the reinvestment rate rather than the IRR | Cost, capital |
| The projects at the top of the profitability index ranking _____ _____ _____ for shareholders | Maximize total value |
| Profitability index = _____ + (_____ / _____) | 1 + (NPV/initial investment) |
| To find equivalent annual annuity of a project, CPT _____ using _____ as the PV | PMT, NPV |
| An analysis measure that examines how the project's NPV (or IRR) changes when one variable is changed at a time, while all other variables are held constant | Sensitivity analysis |
| An analysis measure that changes multiple variables simultaneously to reflect internally consistent "states of the world" | Scenario analysis |
| An analysis measure often called a Monte Carlo simulation that takes scenario analysis to its logical conclusion by changing all variables at once, thousands of times, with each input drawn randomly from an assumed probability distribution | Simulation analysis |
| The decision rules all assume that project cash flows are known with certainty, but really they are all _____ | Estimates |
| Why does a company conduct sensitivity, scenario, and monte carlo analyses? | All projected cash flows depend on assumptions about future revenues, costs, growth rates, and discount rates. They are all only estimates |
| These are the three analysis measures when looking at potential project outcomes | 1. Sensitivity analysis 2. Scenario analysis 3. Simulation analysis |
| The goal in sensitivity analysis is to identify which inputs the project's value is _____ _____ to: which assumptions carry the most _____ | Most sensitive, risk |
| The output of a sensitivity analysis is a _____ of _____ or _____, showing how sensitive value is to each input | Range, NPVs, IRRs |
| In scenario analysis, management constructs a small number of _____ _____, commonly including a _____ _____, a _____ _____ and a _____ _____ and evaluates a project's NPV under each | Coherent scenarios, base case, best case, worst case |
| The _____ _____ scenario in scenario analysis is the situation already computed with the initial assumptions | Base case |
| _____ _____ is the most robust of the three analyses | Simulation analysis |
| The output of simulation analysis is a _____ _____ of NPV, including mean, standard deviation, and the _____ that NPV<0 | Probability distribution, probability |
| _____ _____ is best used for identifying the key value drivers and highest risk assumptions in a project | Sensitivity analysis |
| _____ _____ is best used for pressure testing the project against realistic alternative futures and communicating risk to decision makers | Scenario analysis |
| _____ _____ is best used for complex projects where many uncertain inputs interact; this provides the richest picture of risk but requires the most assumptions | Simulation analysis |
| Straight line depreciation per year = (_____ - _____) / _____ | (initial investment - salvage value) / number of years |
| This is the reason that there isn't any interest expense in a capital budgeting problem | How a project is financed shouldn't affect whether or not it is worth pursuing |
| After an initial cash outflow in net working capital at the beginning of a project, we need to _____ _____ _____ at the end of the project | Add it back |
| Project end gain on sale of asset = (_____ - _____)(_____ - _____) + _____ | (Sale value - salvage value)(1 - taxes) + salvage value |
| This is the complete list of adjustments used to find all cash flows: _____ -_____ =_____ -_____ =_____ -_____ =_____ +_____ =_____ _____ _____ _____ | Revenues -expenses =EBITDA -depreciation =EBIT -taxes =net income +depreciation =OCF CAPEX Change in NWC Opportunity cost |
| When there is an opportunity cost, _____ that amount from _____ | Subtract, CF0 |
| Sale value of an asset over salvage value needs to be _____ before being added in capex | Taxed |
| When there is a change in net working capital, only add the _____ _____ the sum of the _____ _____ to the next change row | Amount over, previous changes |
| Higher depreciation lowers _____ _____, which increases OCF even though depreciation itself is a non-cash charge | Tax expense |
| We subtract depreciation only to add it back later because depreciation is a _____ _____ expense and acts as a _____ _____ | Non cash, tax shield |
| A firm that carries no debt, where the only providers of capital are the shareholders | Unlevered firm |
| The use of investors' money to finance the company is not _____, since investors demand a _____ on their investment | Free, return |
| A firm that carries some level of debt, where capital is provided by shareholders and bondholders | Levered firm |
| The term used to refer to the cost of debt capital demanded by bondholders | Pre-tax cost of debt |
| Because interest expense is _____ _____, the firm receives a _____ from the government when using debt capital, equal to the corporate tax rate | Tax deductible, subsidy |
| After-tax cost of debt = _____(_____ - _____) | Cost of debt(1 - taxes) |
| A company's composition of debt and equity capital | Capital structure |
| The minimum rate of return that must be generated to meet bondholders' and shareholders' return requirements | Weighted average cost of capital |
| WACC is the _____ _____ that must be earned on _____ to compensate bondholders and shareholders for the use of their money. That's why WACC is usually the _____ _____ used by companies for all operations! | Minimum return, projects, single R |
| WACC = _____(_____)(_____ - _____) + _____(_____) + _____(_____) | Cost of debt(weight of debt)(1 - taxes) + cost of common stock(weight of common stock) + cost of preferred stock(weight of preferred stock) |
| Weighted average cost of capital can be thought of as a _____ _____ point for projects | Break even |
| Why do we multiply by 1-taxes to lower the cost of debt in a WACC problem? | Interest expense is tax deductible |
| Cost of debt = 6% Tax rate = 25% What part of the 6% cost is paid by us? What part is paid by the government? | We pay 75% of the cost, the government pays 25% |
| A form of equity financing that is cheaper than common equity but costlier than debt | Preferred stock |
| A firm's cost of debt financing is equal to the _____ at which the company can issue bonds, so a company's pre-tax cost of debt = _____ on long-term bonds | YTM, YTM |
| Perpetuity formula: _____ = _____ / _____ | Current price = perpetuity cash flow / discount rate |
| Formula to find market value of preferred stock: _____ = _____ / _____ | Market value = perpetuity cash flow / discount rate |
| These are the two approaches to find the cost of common equity | 1. Capital asset pricing model (CAPM) 2. Bond yield plus risk premium (BYPRP) |
| In effect, the cost of preferred stock is the rate that investors _____ to _____ the preferred stock. If the company were to issue a new series of preferred stock with the same characteristics, _____ _____ would need to equal this cost | Demand, buy, dividend rate |
| CAPM cost of equity = _____ + _____(_____) | Risk-free rate + beta(market risk premium) |
| The model stating that the required return on a risky investment equals the risk-free rate plus a risk premium that compensates for the investment's risk relative to the overall market | CAPM approach |
| A rate typically proxied using the YTM on government bonds (typically the 3-month US treasury bill yield) which is directly observable on any financial news website | Risk-free rate |
| This rate is typically estimated from historical data about return on large-cap stocks and US treasury bills, denoting what an average stock should earn over the risk free rate | Market risk premium (equity risk premium) |
| A coefficient that scales the market risk premium for a given stock's relative riskiness. It is estimated using regression and measures the linear relationship between a particular stock's returns and the returns of the overall market | Beta |
| A beta of 1 means _____ risk A beta >1 means _____ risk A beta < 1 means _____ risk | Average High Low |
| Alpha = _____ - _____ | Actual return - expected return |
| If a stock's alpha is negative, the stock _____ If a stock's alpha is positive, the stock _____ | Underperformed Overperformed |
| Computing alpha allows us to _____ returns compared to the level of _____ we took | Adjust, risk |
| Companies use CAPM to estimate the cost of capital of _____ _____, as well as for the cost of equity used in the WACC formula | Individual projects |
| BYPRP cost of equity = _____ + _____ | Yield on the company's long-term bonds + equity risk premium |
| Before calculating weights and costs in a WACC problem, we need to find the _____ _____ of all parts of a company's financing | Market value |
| Cost of debt = _____ (from exam 2) | YTM |
| To find market value of debt, we need to do a _____ _____ _____ with given inputs, and calculate _____ | Time value problem, PV |
| To find cost of debt when given market value and par value, we need to do a _____ _____ _____ with given inputs, and calculate _____. Then, we need to multiply by _____ to get _____ | Time value problem, I/Y, 2, YTM |
| To find market value of common stock: _____ = _____ * _____ | Market value = common shares outstanding * current share price |
| An EAA calculation is a time value problem, but _____ always equals 0 in the inputs | FV |
| IRR and MIRR generally agree with _____ for conventional projects, and _____ is preferred when the reinvestment assumption is unrealistic | NPV, MIRR |
| _____ _____ is widely used in investment decisions for its simplicity, but should only be used as a secondary filter due to its two key drawbacks | Payback period |
| For _____ projects with no capital constraint, PI > 1 always yields the same conclusion as NPV > 0. The two criteria can conflict for _____ _____ projects or when _____ _____ creates portfolio selection problems | Independent, mutually exclusive, capital rationing |
| For _____ _____ projects, NPV is the correct decision criterion instead of PI. When they have different lives, use _____ | Mutually exclusive, EAA |
Created by:
Liechtensteiner