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SDSU BA323 BRINCKS FINAL EXAM 2025 | ALL
QUESTIONS AND CORRECT ANSWERS |
GRADED A+ | NEWEST VERSION | VERIFIED
ANSWERS
What is the difference between independent and mutually exclusive projects? Which type of project is harder to calculate? ---------CORRECT ANSWER-----------------With independent projects, the cash flows of one project are unaffected by the acceptance of the other. In mutually exclusive projects, the cash flows of one can be adversely impacted by the acceptance of other projects (harder to calculate) Explain the difference between normal and nonnormal cash flow streams. - --------CORRECT ANSWER-----------------Normal cash flow streams initially have a negative cash flow followed by a series of positive cash inflows. Non-normal cash flow streams are irregular. Which cash flow is most common and why. ---------CORRECT ANSWER---- -------------Normal cash flow is more common. What is internal rate of return? ---------CORRECT ANSWER----------------- The discount rate that forces the present value of the cash inflows to equal the price of the bond (or forcing the NPV to equal zero) What are the decision rules for using IRR and when to accept or reject a project. ---------CORRECT ANSWER-----------------If IRR > WACC, accept If projects are independent, accept both projects if IRR > WACC If mutually exclusive, accept project with the highest IRR
What are the different reinvestment rate assumptions for the NPV method vs. the IRR method? ---------CORRECT ANSWER-----------------NPV assumes CFs are reinvested at the WACC. IRR assumes CFs are reinvested at IRR Which of the methods (NPV or IRR) is the best and why. ---------CORRECT ANSWER-----------------NPV is better because reinvesting at the opportunity cost of capital is more realistic. Why is MIRR a better measure than IRR? ---------CORRECT ANSWER------ -----------MIRR assumes that cash flows are reinvested at the WACC which is more realistic. What is the payback period? ---------CORRECT ANSWER-----------------The number of years required to recover a projects' cost Why do companies often use the payback period despite its problems? ----- ----CORRECT ANSWER-----------------Payback period serves as a quick indication of project's risk. What are the pros and cons of using the payback period? --------- CORRECT ANSWER-----------------Pros: easy to calculate and understand Cons: No relation with investor wealth maximization.
What are signaling effects in capital structure? ---------CORRECT ANSWER-----------------Managers have better information about a firm's long-run value than outside investors. What will management do if they believe the stock is overvalued or undervalued? ---------CORRECT ANSWER-----------------If overvalued, stock will be issued. If undervalued, buyback shares or issue debt Why do investors view stock offerings as negative for the firm's future prospects? ---------CORRECT ANSWER-----------------Investors view strong offering as a negative sign because they think that the company may not be optimistic about the future. What are various risk factors for multinational corporations? --------- CORRECT ANSWER-----------------Different currency exchange rate, political risk, economic and legal ramifications, role of governments, and language and culture differences. How do companies hedge currency risk? ---------CORRECT ANSWER------- ----------Use exchange rate futures/forwards to hedge currency risk What is exchange rate risk? ---------CORRECT ANSWER-----------------The risk that the value of cash flows will change due to changes in the value of exchange rates. Why do companies care about exchange rate risk? ---------CORRECT ANSWER-----------------Impact costs and profitability
How do companies mitigate exchange rate risk? ---------CORRECT ANSWER-----------------Hedge using future/forwards What is the international monetary system? ---------CORRECT ANSWER---- -------------The framework within which exchange rates are determined What is the difference between devaluation and revaluation? --------- CORRECT ANSWER-----------------When the government increases or decreases the value of the currency What is the difference between depreciation and appreciation? --------- CORRECT ANSWER-----------------When market forces cause currencies to increase or decrease What are the 5 different types of currency regimes? ---------CORRECT ANSWER-----------------Freely floating, managed float, no local currency, currency board, fixed peg Which currency regimes are the most common? ---------CORRECT ANSWER-----------------Freely floating, managed float, and fixed peg What are the pros and cons of joining the Euro currency? --------- CORRECT ANSWER-----------------No exchange rates, but lost of control of monetary policy, making it hard to tailor monetary policy to a specific country's economic conditions
Why do companies issue ADRs? ---------CORRECT ANSWER----------------- To sell to an international market. Why do we care about the weighted average cost of capital (WACC)? ------- --CORRECT ANSWER-----------------WACC is necessary for making corporate investment decisions, such as building a new factory. WACC gauges the risk of a project (Higher WACC means more risk associated.) Two sides of an investment decision:
- How much money will this project make?
- How much does it cost for the firm to get the funds for this investment? What are the 3 main sources of capital for the firm? ---------CORRECT ANSWER-----------------Debt, preferred stock, and common equity are 3 main sources of capital What are the 2 components of common equity? ---------CORRECT ANSWER-----------------Retained earnings and new common stock are 2 components of common equity. What are 2 components of debt? ---------CORRECT ANSWER----------------- Short term notes payable and long-term debt are 2 components of debt. Do we care about after-tax or pre-tax analysis? Why? ---------CORRECT ANSWER-----------------After-tax capital cost since interest is tax deductible
What are the 3 methods of determining a company's target weights? --------
- CORRECT ANSWER-----------------Accounting numbers (book value), Market value and optimal capital structure determination are all methods used to determine target weights. What are the 3 ways to determine the cost of common equity? --------- CORRECT ANSWER-----------------CAPM, DCF, and Bond-yield + risk premium Why is there a cost for retained earnings? ---------CORRECT ANSWER------ -----------If earnings are retained, there is an opportunity cost (the return that stockholders could earn on alternative investments of equal risk). What factors influence a company's composite WACC? ---------CORRECT ANSWER-----------------Market conditions. The firm's capital structure and dividend policy. The firm's investment policy. Firms with riskier projects generally have a higher WACC. Should companies use the composite WACC as the hurdle rate for each project? Why not? ---------CORRECT ANSWER-----------------No, because projects typically have different riskiness. What are flotation costs and why do they make retained earnings cheaper than issuing new common stock? ---------CORRECT ANSWER-----------------
What is capital? ---------CORRECT ANSWER-----------------Long-term assets used in production. What is a company's strategic business plan? ---------CORRECT ANSWER- ----------------A long-run plan that outlines in broad terms the firm's basic strategy for the next 5-10 years. What are the 5 criteria used to accept or reject a project? ---------CORRECT ANSWER-----------------1. Net present value (NPV)
- Internal rate of return (IRR)
- Modified internal rate of return (MIRR)
- Regular payback
- Discounted payback What is the baseline scenario? ---------CORRECT ANSWER----------------- Baseline scenario is projected cash flows under the most likely scenario Why do managers care about worst-case scenarios more than other scenarios? ---------CORRECT ANSWER-----------------Worst case scenario is analyzed to try to avoid bankruptcy and prevent managers from being fired. How can using comparables improve accuracy? ---------CORRECT ANSWER-----------------Comparables use existing projects to predict cash flows, often improves forecast accuracy. If 2 projects have the same expected NPV, select the project with the less risky cash flow
How can Monte Carlo simulations improves forecast accuracy? --------- CORRECT ANSWER-----------------Monte Carlo simulation allow you to estimate a large number of scenarios for investment analysis What are 3 types of project risk? ---------CORRECT ANSWER----------------- Stand-alone risk Corporate risk Market risk Stand-alone risk ---------CORRECT ANSWER-----------------A project's total risk, if it were operated indepedently. Corporate risk ---------CORRECT ANSWER-----------------Project's risk when considering the firm's other projects Market risk ---------CORRECT ANSWER-----------------Project's risk to a well- diversified investor Which risk is most relevant for corporations and why? ---------CORRECT ANSWER-----------------Market risk is the most relevant risk because management's primary goal is shareholder wealth maximization. Care most about systematic risk What is real option analysis and why does this matter for deciding which projects to accept? ---------CORRECT ANSWER-----------------The analysis
Uncertainty about demands (sales) Uncertainty about output prices Uncertainty about costs Product obsolescence Foreign risk exposure Regulatory risk Operating leverage What is operating leverage? ---------CORRECT ANSWER----------------- Operating leverage is the use of fixed costs instead of variable costs If a company mainly has high fixed costs, does it have high or low operating leverage? ---------CORRECT ANSWER-----------------High fixed costs: high operating leverage. Does operating leverage create more or less business risk? --------- CORRECT ANSWER-----------------Creates more business risk What is the pro and con of using operating leverage to increase risk? --------
- CORRECT ANSWER-----------------Higher returns, more risk
What is financial leverage? ---------CORRECT ANSWER----------------- Financial leverage is the use of debt and preferred stock to increase returns Does financial leverage create more or less risk? ---------CORRECT ANSWER-----------------Financial leverage increases risk What does a firm's optimal capital structure mean? ---------CORRECT ANSWER-----------------The mix of debt, preferred, and common equity that maximizes shareholder value Describe the sequence of events in a recapitalization ---------CORRECT ANSWER-----------------1. Firm announces the recapitalization
New debt is issued
Proceeds are used to repurchase stock What effect does more debt have on a firm's cost of equity? --------- CORRECT ANSWER-----------------Increase the firms cost of equity
