1
When performing capital budgeting and considering replacement projects, one factor that must be considered is the potential of equipment that is no
... [Show More] longer needed.
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taxation
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depreciation
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salvage value
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sunk costs CONCEPT
Cash Flow Analysis and Other Factors 2
According to the residual dividend model, what takes priority over distributing dividends?
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Paying off debt
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Increasing share price
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Establishing a target payout ratio
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Financing planned projects CONCEPT
Setting the Dividend 3
In what way are debt securities, equity securities and derivatives similar?
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They all confer ownership in a business.
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They all have fixed terms.
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They can all be used to hedge against risk.
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Their value is derived from an underlying asset. CONCEPT
Securities Management 4
A construction company is preparing a capital budget and considering four long-term investments. The profitability index of each project is as follows:
•Project A: 0.34
•Project B: 1.12
•Project C: 1.26
•Project D: 0.93
In theory, which two projects should the company pursue?
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Projects A and D
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Projects B and C
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Projects A and C
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Projects B and D CONCEPT
Introduction to Capital Budgeting 5
Which of the following is true of venture capital?
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Venture capitalists reserve the right to sell their portion of company shares before an IPO.
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Venture capital is comparable to a bank loan, which must be repaid over time.
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One way venture capitalists evaluate potential investments is by analyzing a company's share price.
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On average, venture capital investors seek a return on their investment in about five years. CONCEPT
Venture Capital 6
What is one advantage of NPV as a capital budget method?
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Cash flows and the discount rate are easy to accurately determine.
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It is flexible, in the sense that the discount rate can be adjusted to account for factors like risk.
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It accounts fully for opportunity costs.
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It is equally accurate whether cash flows are known or estimated. CONCEPT
Net Present Value 7
Which of the following types of financing is typical for a business in its mature stage?
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Equity
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Bank loans
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Second-round venture capital
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Start-up venture capital CONCEPT [Show Less]