FINC 306 FINAL QUESTIONS &
ANSWERS(RATED A+)
If you are doing an NPV analysis and using the WACC as the discount rate, how do you
account for interest paid to bondholders? - ANSWERthrough the cost of debt portion of
the WACC
When estimating the WACC, which is the best measure of the firm's cost of debt -
ANSWERthe YTM for its bonds
When estimating the WACC, which is the best measure of the firm's cost of equity -
ANSWERthe stock's expected return according to the CAPM
When computing NPV, how do you account for the fact that bond interest is tax
deductible? - ANSWERmultiply the cost of debt by (1-t)
What does EBIT stand for? - ANSWERearnings before interest and taxes
how should you handle an interest payment on debt when computing incremental cash
flow? - ANSWERignore it
how should you handle depreciation when computing incremental cash flow? -
ANSWERsubtract it just like on an income statement, but add it back after computing
taxes
an increase in net working capital represents - ANSWERa cash outflow
what is the goal of the financial manager? - ANSWERmaximize shareholder wealth
which best describes NPV - ANSWERthe present value of all expected inflows net of
the present value of all expected outflows
which series of cash flows represents a "normal" project? - ANSWERCF0= -100; CF1 =
200; CF3 = !00; CF4 = 200
all else equal, which will result in a LOWER NPV for a normal project - ANSWERhigher
discount rate
a bonds entire value is typically repaid at maturity - ANSWERtrue
selling a stock is equivalent to selling the rights to all of the stock's future dividends -
ANSWERtrue
ANSWERS(RATED A+)
If you are doing an NPV analysis and using the WACC as the discount rate, how do you
account for interest paid to bondholders? - ANSWERthrough the cost of debt portion of
the WACC
When estimating the WACC, which is the best measure of the firm's cost of debt -
ANSWERthe YTM for its bonds
When estimating the WACC, which is the best measure of the firm's cost of equity -
ANSWERthe stock's expected return according to the CAPM
When computing NPV, how do you account for the fact that bond interest is tax
deductible? - ANSWERmultiply the cost of debt by (1-t)
What does EBIT stand for? - ANSWERearnings before interest and taxes
how should you handle an interest payment on debt when computing incremental cash
flow? - ANSWERignore it
how should you handle depreciation when computing incremental cash flow? -
ANSWERsubtract it just like on an income statement, but add it back after computing
taxes
an increase in net working capital represents - ANSWERa cash outflow
what is the goal of the financial manager? - ANSWERmaximize shareholder wealth
which best describes NPV - ANSWERthe present value of all expected inflows net of
the present value of all expected outflows
which series of cash flows represents a "normal" project? - ANSWERCF0= -100; CF1 =
200; CF3 = !00; CF4 = 200
all else equal, which will result in a LOWER NPV for a normal project - ANSWERhigher
discount rate
a bonds entire value is typically repaid at maturity - ANSWERtrue
selling a stock is equivalent to selling the rights to all of the stock's future dividends -
ANSWERtrue
