FINANCE 301 EXAM 3 QUESTIONS &
UPDATED COMPLETE SOLUTIONS
PASSED
Discounted Cash Flow (DFC) Valuation - Correct Answer ✔✔ -Value equals the sum of
expected cash flows discounted for the time and risk
-Value of financial investment- the present value of the investment's expected future
cash flows
-Once the value of the asset is determined, you can compare the value of the asset to
the asset's price to determine whether the asset is overvalued, undervalued, or fairly
valued
The three steps to DFC valuation - Correct Answer ✔✔ 1. Estimate the expected future
cash flows of the investment
2. Determine the appropriate interest rate to use to discount the expected cash flows of
the investment
3. Find the present value of each of the expected future cash flows and total them to
find the value of the investment
Investment Classifications - Correct Answer ✔✔ Bonds- the future cash flows are the
payments of periodic interest and the repayment of principal at maturity
Mortgage- the future cash flows are the monthly payments that consist of both payment
of interest and principal
Stock- the future cash flows are payments of dividends by the stock, if there are any,
and capital gains or losses related to the movement in the price of the stock
Loan payments - Correct Answer ✔✔ -when you are making a payment on a loan,
some of the money from the payment goes to interest and the rest goes to pay your
down principal
Amortization table - Correct Answer ✔✔ -a tool used to break down how much of each
loan payment goes to interest and how much goes to principal
-The amount of your loan payment will be the same every year; however, the percent of
the payment that goes to interest and the percent that goes to principal will change
every year
-In the early years of a loan, most of your payment will go to pay interest, and only a
little bit will go to pay your down principal
-In the later years of the loan, most of your payment will go to pay down your principal,
and only a little bit will go to interest
Annual Interest Expense =
Principal Reduction =
, Total Interest Expense = - Correct Answer ✔✔ Principal Balance x Interest Rate
Annual Payment - Annual Interest Expense
(Annual Payment)(Number of Years) - Amount of Loan
Capital budgeting - Correct Answer ✔✔ -Planning and managing a firm's long-term
investments (assets)
-Financial managers want to invest in opportunities that will be worth more than they
cost to build or purchase
-Financial managers maximize the value of the firm by investing in projects that have a
present value of cash flows that is greater than the cost of the project
Factors financial managers need to take into account when making capital budgeting
decisions: - Correct Answer ✔✔ 1. Return- how much they will earn on an investment
2. Timing- when will the investment's cash flows take place
3. Risk- how likely they are to receive the investment's expected cash flows
Capital budgeting decision are the output of a firm's strategic planning process.- a firm's
marketing and production strategies determine a firm's requirement for long-term
assets. - Correct Answer ✔✔ -Firms will need to expand their facilities and infrastructure
to support growth
-Firms will need to invest in additional long-term assets to develop new products and
services
-Firms will need to acquire other companies in an attempt to fill market or product
niches
-Firms will need to invest in technology to support customer service
-Firms will need to upgrade equipment and facilities over time
Capital Budgeting techniques used to analyze projects: - Correct Answer ✔✔ 1. Net
Present Value (NPV)
2. Internal Rate of Return (IRR)
3. Payback Period
4. Profitability Index
5. Book Rate of Return
Net Present Value (NPV) - Correct Answer ✔✔ -the difference between the present
value of an investment's cash flows and the cost of the investment
NPV = - Correct Answer ✔✔ present value of cash flows - cost of the investment
A positive NPV
A negative NPV
A $0 NPV - Correct Answer ✔✔ accept (earning rate of return greater than required rate
of return)
always reject
investment is expected to earn required rate of return
UPDATED COMPLETE SOLUTIONS
PASSED
Discounted Cash Flow (DFC) Valuation - Correct Answer ✔✔ -Value equals the sum of
expected cash flows discounted for the time and risk
-Value of financial investment- the present value of the investment's expected future
cash flows
-Once the value of the asset is determined, you can compare the value of the asset to
the asset's price to determine whether the asset is overvalued, undervalued, or fairly
valued
The three steps to DFC valuation - Correct Answer ✔✔ 1. Estimate the expected future
cash flows of the investment
2. Determine the appropriate interest rate to use to discount the expected cash flows of
the investment
3. Find the present value of each of the expected future cash flows and total them to
find the value of the investment
Investment Classifications - Correct Answer ✔✔ Bonds- the future cash flows are the
payments of periodic interest and the repayment of principal at maturity
Mortgage- the future cash flows are the monthly payments that consist of both payment
of interest and principal
Stock- the future cash flows are payments of dividends by the stock, if there are any,
and capital gains or losses related to the movement in the price of the stock
Loan payments - Correct Answer ✔✔ -when you are making a payment on a loan,
some of the money from the payment goes to interest and the rest goes to pay your
down principal
Amortization table - Correct Answer ✔✔ -a tool used to break down how much of each
loan payment goes to interest and how much goes to principal
-The amount of your loan payment will be the same every year; however, the percent of
the payment that goes to interest and the percent that goes to principal will change
every year
-In the early years of a loan, most of your payment will go to pay interest, and only a
little bit will go to pay your down principal
-In the later years of the loan, most of your payment will go to pay down your principal,
and only a little bit will go to interest
Annual Interest Expense =
Principal Reduction =
, Total Interest Expense = - Correct Answer ✔✔ Principal Balance x Interest Rate
Annual Payment - Annual Interest Expense
(Annual Payment)(Number of Years) - Amount of Loan
Capital budgeting - Correct Answer ✔✔ -Planning and managing a firm's long-term
investments (assets)
-Financial managers want to invest in opportunities that will be worth more than they
cost to build or purchase
-Financial managers maximize the value of the firm by investing in projects that have a
present value of cash flows that is greater than the cost of the project
Factors financial managers need to take into account when making capital budgeting
decisions: - Correct Answer ✔✔ 1. Return- how much they will earn on an investment
2. Timing- when will the investment's cash flows take place
3. Risk- how likely they are to receive the investment's expected cash flows
Capital budgeting decision are the output of a firm's strategic planning process.- a firm's
marketing and production strategies determine a firm's requirement for long-term
assets. - Correct Answer ✔✔ -Firms will need to expand their facilities and infrastructure
to support growth
-Firms will need to invest in additional long-term assets to develop new products and
services
-Firms will need to acquire other companies in an attempt to fill market or product
niches
-Firms will need to invest in technology to support customer service
-Firms will need to upgrade equipment and facilities over time
Capital Budgeting techniques used to analyze projects: - Correct Answer ✔✔ 1. Net
Present Value (NPV)
2. Internal Rate of Return (IRR)
3. Payback Period
4. Profitability Index
5. Book Rate of Return
Net Present Value (NPV) - Correct Answer ✔✔ -the difference between the present
value of an investment's cash flows and the cost of the investment
NPV = - Correct Answer ✔✔ present value of cash flows - cost of the investment
A positive NPV
A negative NPV
A $0 NPV - Correct Answer ✔✔ accept (earning rate of return greater than required rate
of return)
always reject
investment is expected to earn required rate of return
