Corporate Finance - 2

What is meant by the 'separation of ownership and control?'

• That the owners of companies have become separated from those who control companies.

• That the law should seek to keep the owners and controllers of company apart in order to avoid an over-concentration of power.

• That owners and controllers of companies should not act in concert to defeat resolutions.

• That those who control the company should be separate to those who own it.

In proper capital budgeting analysis we evaluate incremental

• accounting income.

• cash flow.

• earnings.

• operating profit.

In estimating "after-tax incremental operating cash flows" for a project, you should include all of the following EXCEPT:

• sunk costs.

• opportunity costs.

• changes in working capital resulting from the project, net of spontaneous changes in current liabilities.

• effects of inflation.

Adam Smith is considering automating his pin factory with the purchase of a $475,000 machine. Shipping and installation would cost $5,000. Smith has calculated that automation would result in savings of $45,000 a year due to reduced scrap and $65,000 a year due to reduced labor costs. The machine has a useful life of 4 years and falls in the 3-year property class for MACRS depreciation purposes. The estimated final salvage value of the machine is $120,000. The firm's marginal tax rate is 34 percent. The incremental cash outflow at time period 0 is closest to

• $280,000.

• $380,000.

• $480,000.

• $580,000.

A profitability index of .85 for a project means that:

• the present value of benefits is 85% greater than the project's costs.

• the project's NPV is greater than zero.

• the project returns 85 cents in present value for each current dollar invested.

• the payback period is less than one year.

Woatich Windmill Company is considering a project that calls for an initial cash outlay of $50,000. The expected net cash inflows from the project are $7,791 for each of 10 years. What is the IRR of the project? [(Hint: The cash f lows from the project are an annuity so you can solve for i in the equation PVA = R(PVIFA_i,10).]

• 6 percent

• 7 percent

• 8 percent

• 9 percent

Which of the following statements is correct?

• If the NPV of a project is greater than 0, its PI will equal 0.

• If the IRR of a project is 0%, its NPV, using a discount rate, k, greater than 0, will be 0.

• If the PI of a project is less than 1, its NPV should be less than 0.

• If the IRR of a project is greater than the discount rate, k, its PI will be less than 1 and its NPV will be greater than 0.

Which of the following represents the future value of £1,000 invested at 10% per annum for 10 years?

• £2,500

• £1,913

• £2,594

• £2,600

On an accounting statement of cash flows an "increase(decrease) in cash and cash equivalents" appears as

• a cash flow from operating activities.

• a cash flow from investing activities.

• a cash flow from financing activities.

• none of the above.

Which of the following is NOT a cash outflow for the firm?

• depreciation.

• dividends.

• interest payments.

• taxes.