Test 3 FIN 3403|QUESTIONS AND ANSWERS

1. The mix of long-term sources of funds used by the firm is called the firm's: a. Capital structure b. Cost of capital c. Internal equity d. Asset management e. Cost of debt 2. All of the following are criticisms of the payback period EXCEPT: a. It does not consider the time value of money b. It ignores cash flows occurring after the payback period c. It uses accounting profit instead of cash flows d. It does not consider the required rate of return e. It does not consider risk 3. Which of the following is NOT a correct statement of a capital budgeting decision rule? a. If the PI is greater than 1, accept the project b. If the cost of capital (discount rate) is greater than the IRR, accept the project c. If a project has a payback period that is shorter than the one desired by the company, accept the project d. If the NPV is positive, accept the project e. Accept the largest EAA if two projects have unequal lives 4. For a typical capital budgeting project, if the NPV is positive then the IRR is: a. less than the required return b. greater than the required return c. equal to the required return d. equal to zero e. difficult to determine 5. The discount rate that equates the present value of a project's cash flows with the project's initial cash outlay is the: a. Opportunity cost b. Cost of capital c. Return on equity d. Internal rate of return e. Equivalent annual annuity