FI480 EXAM 3 QUESTIONS AND ANSWERS A+
GRADED
What are sunk costs?
money that has already been spent and cannot be recovered
What is the difference between sunk costs and future costs?
sunk costs are necessary, whereas future costs can be influenced by your choices
What are examples of sunk costs?
research, marketing campaigns, signing bonuses
Sunk costs are _____ costs, but _____ costs are not always sunk costs (because
you can sell equipment)
fixed
What is sensitivity analysis?
used to asses how changes in certain variables impact a financial outcome ("what-if"
analysis)
How do you preform a sensitivity analysis?
identify key variables, adjust those variables and evaluate the impact on your financial
metric
What does sensitivity analysis help with?
decision making, risk management and scenario planning
What is scenario analysis?
sees the effect of environmental factors on output
-which factors have biggest impact
What are the benefits of scenario analysis?
risk awareness, decision making and stress testing
What is the standalone principle?
the process of evaluating potential investments, stating that you should analyze
potential projects based on their cash flows
Why does standalone principle matter?
because you look at projects in isolation from the rest of the firm, SAP helps you avoid
getting swayed by sunk costs or non-relevant factors
What does standalone principle tell you?
a project's cash flows over time and a project's worth
What is a residual dividend policy?
a company prioritizes reinvesting profits back into the business before distributing
dividends to shareholders
What are the pros of residual dividend policy?
promotes long-term growth/sustainability, signals confidence in future prospects, less
pressure to maintain a steady dividend stream
What are the cons of residual dividend policy?
unpredictable dividend payouts is less attractive / shareholders could get frustrated with
inconsistent dividends
What companies typically used a residual dividend policy?
GRADED
What are sunk costs?
money that has already been spent and cannot be recovered
What is the difference between sunk costs and future costs?
sunk costs are necessary, whereas future costs can be influenced by your choices
What are examples of sunk costs?
research, marketing campaigns, signing bonuses
Sunk costs are _____ costs, but _____ costs are not always sunk costs (because
you can sell equipment)
fixed
What is sensitivity analysis?
used to asses how changes in certain variables impact a financial outcome ("what-if"
analysis)
How do you preform a sensitivity analysis?
identify key variables, adjust those variables and evaluate the impact on your financial
metric
What does sensitivity analysis help with?
decision making, risk management and scenario planning
What is scenario analysis?
sees the effect of environmental factors on output
-which factors have biggest impact
What are the benefits of scenario analysis?
risk awareness, decision making and stress testing
What is the standalone principle?
the process of evaluating potential investments, stating that you should analyze
potential projects based on their cash flows
Why does standalone principle matter?
because you look at projects in isolation from the rest of the firm, SAP helps you avoid
getting swayed by sunk costs or non-relevant factors
What does standalone principle tell you?
a project's cash flows over time and a project's worth
What is a residual dividend policy?
a company prioritizes reinvesting profits back into the business before distributing
dividends to shareholders
What are the pros of residual dividend policy?
promotes long-term growth/sustainability, signals confidence in future prospects, less
pressure to maintain a steady dividend stream
What are the cons of residual dividend policy?
unpredictable dividend payouts is less attractive / shareholders could get frustrated with
inconsistent dividends
What companies typically used a residual dividend policy?
