Question 1

Which of the following statements is false?

Accepted Answer

A)  We can use scenario analysis to evaluate alternative pricing strategies for our project. 
B)  Scenario analysis considers the effect on NPV of changing multiple project parameters. 
C)  The difference between the IRR of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision. 
D)  Scenario analysis breaks the NPV calculation into its component assumptions and shows how the NPV varies as each one of the underlying assumptions change. 
A)  We can use scenario analysis to evaluate alternative pricing strategies for our project. 
B)  Scenario analysis considers the effect on NPV of changing multiple project parameters. 
C)  The difference between the IRR of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision. 
D)  Scenario analysis breaks the NPV calculation into its component assumptions and shows how the NPV varies as each one of the underlying assumptions change.

Question 2

Use the information for the question(s) below.
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections:
  
-The free cash flow for the last year of Epiphany's project is closest to:

Accepted Answer

A)  $53,000 
B)  $38,000 
C)  $35,000 
D)  $43,000 
A)  $53,000 
B)  $38,000 
C)  $35,000 
D)  $43,000

Question 3

What is an opportunity cost? Should it be included in the incremental cash flows for a project? Why or why not?

Accepted Answer

Many projects use resources that the com

Question 4

The depreciation tax shield for Shepard Industries project in year one is closest to:

Accepted Answer

A)  $84 million 
B)  $168 million 
C)  $96 million 
D)  $72 million 
A)  $84 million 
B)  $168 million 
C)  $96 million 
D)  $72 million

Question 5

Use the information for the question(s) below.
Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions of dollars).
  
-The incremental unlevered net income for Shepard Industries in year two is closest to:

Accepted Answer

A)  $355 million 
B)  $415 million 
C)  $600 million 
D)  $510 million 
A)  $355 million 
B)  $415 million 
C)  $600 million 
D)  $510 million

Question 6

Use the information for the question(s) below.
Ford Motor Company is considering launching a new line of hybrid Diesel-Electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 30% tax rate on its pre-tax income.
-The amount that Ford Motor Company owes in taxes next year without the launch of the new SUV is closest to:

Accepted Answer

A)  $24.0 million. 
B)  $56.0 million. 
C)  $31.5 million. 
D)  $13.5 million. 
A)  $24.0 million. 
B)  $56.0 million. 
C)  $31.5 million. 
D)  $13.5 million.

Question 7

The free cash flow from Shepard Industries project in year two is closest to:

Accepted Answer

A)  $345 million 
B)  $455 million 
C)  $275 million 
D)  -$5 million 
A)  $345 million 
B)  $455 million 
C)  $275 million 
D)  -$5 million

Question 8

Which of the following statements is false?

Accepted Answer

A)  Depreciation expenses have a positive impact on free cash flow. 
B)  Free Cash Flow = (Revenues - Costs - Depreciation) × (1 - τc) - Capital Expenditures - ΔNWC + τc × Depreciation. 
C)  The firm cannot use its earnings to buy goods, pay employees, fund new investments, or pay dividends to shareholders. 
D)  The depreciation tax shield is the tax savings that result from the ability to deduct depreciation. 
A)  Depreciation expenses have a positive impact on free cash flow. 
B)  Free Cash Flow = (Revenues - Costs - Depreciation) × (1 - τc) - Capital Expenditures - ΔNWC + τc × Depreciation. 
C)  The firm cannot use its earnings to buy goods, pay employees, fund new investments, or pay dividends to shareholders. 
D)  The depreciation tax shield is the tax savings that result from the ability to deduct depreciation.

Question 9

The CCA tax shield is nothing more than a growing perpetuity with a growth rate equal to

Accepted Answer

A)  a negative percentage. 
B)  a positive percentage. 
C)  zero. 
D)  none of the above. 
A)  a negative percentage. 
B)  a positive percentage. 
C)  zero. 
D)  none of the above.

Question 10

According to Canadian Revenue Agency,the balance of the cost after the "half year rule" should be added to ________ for the asset pool.

Accepted Answer

A)  total variable costs 
B)  total operating costs 
C)  undepreciated capital cost 
D)  total fixed costs 
A)  total variable costs 
B)  total operating costs 
C)  undepreciated capital cost 
D)  total fixed costs

Question 11

An exploration of the effect on NPV of changing multiple project parameters is called

Accepted Answer

A)  scenario analysis. 
B)  IRR analysis. 
C)  accounting break-even analysis. 
D)  sensitivity analysis. 
A)  scenario analysis. 
B)  IRR analysis. 
C)  accounting break-even analysis. 
D)  sensitivity analysis.

Question 12

In Canada,the deductions of Capital Cost Allowance (CCA)have

Accepted Answer

A)  no impact on the firm's free cash flows. 
B)  positive impact on the firm's free cash flows. 
C)  negative impact on the firm's free cash flows. 
D)  none of the above. 
A)  no impact on the firm's free cash flows. 
B)  positive impact on the firm's free cash flows. 
C)  negative impact on the firm's free cash flows. 
D)  none of the above.

Question 13

What is a sunk cost? Should it be included in the incremental cash flows for a project? Why or why not?

Accepted Answer

A sunk cost is any unrecoverable cost fo

Question 14

What is sensitivity analysis?

Accepted Answer

Sensitivity analysis breaks the NPV calc

Exam 9: Fundamentals of Capital Budgeting

Which of the following statements is false?

What is an opportunity cost? Should it be included in the incremental cash flows for a project? Why or why not?

The depreciation tax shield for Shepard Industries project in year one is closest to:

The free cash flow from Shepard Industries project in year two is closest to:

Which of the following statements is false?

The CCA tax shield is nothing more than a growing perpetuity with a growth rate equal to

According to Canadian Revenue Agency,the balance of the cost after the "half year rule" should be added to ________ for the asset pool.

An exploration of the effect on NPV of changing multiple project parameters is called

In Canada,the deductions of Capital Cost Allowance (CCA)have

What is a sunk cost? Should it be included in the incremental cash flows for a project? Why or why not?

What is sensitivity analysis?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress, managerial Incentives, and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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