The present value is the sum of money received in the future.
Question 1The present value is the sum of money received in the future.
Answers:
True
False
Question 2The PV factor for a cash flow in 3 years using an 8% discount rate is:
Answers:
A. .7894
B. .6405
C. 1.08
D. .7938
Question 3The weighted cost of capital does not include which of the following?
Answers:
A. Capital employed by the business
B. Capital obtained from trade credit
C. Risk Premium
D. Percent of Stock Buy Backs
Question 4Hamilton Corporation has decided to seek outside financing. The CFO is attempting to compute Hamilton’s weighted average cost of capital. You have been provided the following information.
Capital Structure Weight Cost
Debt 30.00% 11.60%
Preferred 15.00% 12.10%
Common Equity 55.00% 16.70%
The weighted average cost of capital for Hamilton is:
Answers:
A. 14.5%
B. 11.3%
C. 22.0%
D. 10.1%
Question 5The time value of money theory consists in four beliefs: (1) Investment risk is important; (2) money today is worth more than money tomorrow; (3) inflation must be considered when making investment decisions; and (4) investment opportunity costs must be considered.
Answers:
True
False
Question 6The payback period is the time it takes to earn back the initial investment plus interest.
Answers:
True
False
Question 7Chester Franks is considering installing solar panels on his house to decrease his electricity costs. Chester has a proposal that will cost $25,450 for a complete installation. Engineers have estimated that Chester will save an average of 26% from his electricity usage from the grid. Also, engineers have projected that Chester will be able to put power back into the grid 10% of the time, which will further reduce his electricity bill by 7.6%. Chester’s current average monthly bill for electricity is $656.00. Chester has his liquid funds invested in a small cap account that earns 9.93%. The funds for this investment would come from this account. The estimated life of the solar panels is 55 years. Which of the following are ?
Answers:
A. Payback is 9 years, 7 months
B. The projected annual savings is $2,645
C. One of the most widely used techniques in CBA is discounted cash flow (DCF)
D. All answers are
Question 8The capital budgeting process requires four steps to complete: (1) Finding new investment opportunities; (2) Collecting the relevant data; (3) Evaluation and decision making; and (4) Reevaluation and adjustment to plans as necessary.
Answers:
True
False
Question 9Karen Smith is 22 years old, and her grandmother has remembered Karen in her will, which is now being probated. Karen has been bequeathed either a cash payment today of $35,000 or a cash payment on her birthday six years from now of $75,000. Assuming an annual interest rate of 5%, Karen should take the cash and run.
Answers:
True
False
Question 10As a general rule, Nominal Payback will always occur sooner than a Discounted Payback.
Answers:
True
False
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