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WorksheetsPre Final - Financial Modeling & Valuation
Total questions: 53
Worksheet time: 44mins
True
A cash budget is used to determine:
profit
cash closing balance
the value of the business
the debts of the business
A business may prepare for a cash deficit by:
reducing planned profits
reducing planned cash payments
reducing capital contributions
increasing loan payments
Purpose of a budget is to:
identify cash in and out flows of a business
determine the actual cash on hand for a previous period
identify revenue earned for the current period
determine expenses incurred for the current period
What is one advantage of preparing a cash budget?
Higher credit rating
Knowing when cash my be idle & can therefore be invested
It makes doing the business annual tax return quicker
It is quick and easy to do
Which of the following items are included in a cash budget?
Depreciation
Accumulated depreciation
Cash receipts
Bad debts
It's an advantage of budgets
Your data, when estimated, will be subject to the judgment or experience of those who determined it
Coordinate and link the activities of the organization
Coordinate the different cost centers in order to ensure that the company runs in a comprehensive manner
They facilitate administrative control
Monthly fixed costs are Php 20,000 excluding depreciation of Php 5,000. Which figure should be shown in the Receipts section of the cash budget?
Php 20,000
Php 25,000
Php 15,000
none of the others
Monthly fixed costs are Php 100,000 excluding depreciation of Php 20,000. Which figure should be shown in the Payments section of the cash budget?
Php 100,000
Php 120,000
Php 80,000
none of the others
New machine costing Php 100,000 is purchased in August with a 20% deposit and 8 monthly instalments starting in September. What is the value of the first instalment to be shown in the cash budget?
Php 20,000
Php 10,000
Php 1,000
Php 12,000
The money you start with is called the
Budget
Opening Balance
Cash
Closing Balance
A loan is included in which section of the cash budget?
The back of your wallet
Receipts
Payments
Opening Balance
Machinery purchases are put in which section?
Closing Balance
Opening Balance
Receipts
Payments
The formula for calculating the cash closing balance is
SUM
Opening balance - payments
Receipts - payments
Opening balance + receipts - payments
The purpose of a cash budget is (select all that apply)
to forecast when there will be surplus cash
to forecast when there will be a deficit
to have something fun to do
to use your calculator
What is a deficit?
When you haven't completed a cash budget
When you can see that you will have extra money this month
When you forecast that you will have extra money to spend
When you forecast that you will be short of money
How can you make sure you will not have a deficit? (Select all that apply)
Reduce the amount of money spent
Ask the bank for a loan
Change the numbers in the budget so they give positive totals
Increase your loan payments
Although it ignores the time value of money, what is the most common method used in practice for capital budgeting?
internal rate of return
net present value
payback
accounting rate of return
Which of the following is always true with regard to the net present value (NPV) approach?
The NPV and the IRR approaches will always rank projects in the same order
The NPV and Payback approaches will always rank projects in the same approaches
If a project is found to be acceptable under the NPV approach, it would also be acceptable under the internal rate of return (IRR) approach
If a project is found to be acceptable under the NPV approach, it would also be acceptable under the payback approach
This is a form of analysis defined by calculating how long it will take for the asset to "earn back" the money you invested in purchasing it.
internal rate of return
net present value
payback method analysis
tax accounting
This answers the question, "How much is my asset worth right now?"
net present value
internal rate of return
discount rate
capital budgeting
Although it ignores the time value of money, what is the most common method used in practice for capital budgeting?
internal rate of return
net present value
payback
accounting rate of return
A set of projects in which the acceptance of one project means that the others cannot be accepted
Replacement Decision
Expansion Decision
Independent Projects
Mutually Exclusive Projects
The present value of an asset's future cash flows minus its purchase price initial investment is
Internal Rate of Return
Payback
Net Present Value
Modified Internal Rate of Return
Which of the following statements regarding NPV is true?
If NPV is positive, the project is expected to earn more than the firm's cost of capital.
Accepting negative NPV projects will reduce shareholders' wealth.
If the NPV is positive, the project's cost is less than the project's expected benefit.
All of the above.
The following are the advantages of net present value, EXCEPT
it can be used as a rough screening device to eliminate those projects whose returns do not materialize until later years.
all positive NPVs will increase the value of the firm
it allows comparison of benefits and costs in a logical manner
it recognizes the timing of benefits resulting from the project
When selecting the best project from a group of mutually exclusive projects, you should choose the project with the highest ________.
net present value
internal rate of return
accounting rate of return
payback period
A significant advantage of the net present value is that it _______.
fully considers time value of money
takes into consideration the yield to maturity
usus profit in the analysis
none of the above
Which of the following statement about NPV is FALSE?
It does not allow for projects to be ranked.
It has an inadequate reinvestment assumption.
It is likely that there will be more than one NPV for a project.
All of the above
Which of the following statement regarding NPV is true?
An investment should be accepted if, and only if, the NPV equals the initial investment.
An investment should be accepted if, and only if, the NPV equals zero.
An investment should be accepted if the NPV is positive and rejected if it is negative
An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted.
You are analyzing two mutually exclusive projects of similar size and have determined the following data. Both projects have 5-year lives.
Based on the above details, which of the two projects would you accept?
Project A because it has the shortest payback period.
Both as they both have positive NPV.
Project B and reject Project A based on their NPV.
We compute the profitability index of a capital budgeting proposal by
multiplying the internal rate of return by the cost of capital.
dividing the present value of the annual after-tax cash flows by the cost of capital.
dividing the present value of the annual after-tax cash flows by the cash investment in the project.
multiplying the cash inflow by the internal rate of return.
The disadvantage of the IRR method is that
the IRR deals with cash flows.
the IRR gives equal regard to all returns within a project's life.
the IRR will always give the same project accept/reject decision as the NPV.
the IRR requires long, detailed cash flow forecasts.
Answer: D
An independent project should be accepted if it
produces a net present value that is greater than or equal to zero.
produces a net present value that is greater than the equivalent IRR.
has only one sign reversal.
produces a profitability index greater than or equal to zero.
A significant disadvantage of the internal rate of return is that it
does not fully consider the time value of money.
does not give proper weight to all cash flows.
can result in multiple rates of return (more than one IRR).
is expressed as a percentage.
Under what condition would you NOT accept a project that has a positive net present value?
If the project has a profitability index less than zero.
If two or more projects are mutually inclusive.
If the firm is limited in the capital it has available.
If a project has more than one sign reversal.
If the net present value of project A is +$50, and of project B is +$80, then the NPV of the combined project is:
$30
$50
$80
$130
If the NPV of project A is +$80, and that of project B is -$40, and that of project C is +$20, what is the NPV of the combined project?
$100
-$40
$60
$20
Which one of the following will increase the NPV of a project?
An increase in the discount rate.
Increasing the amount of the initial cash outflow
Decreasing the amount of each cash inflow
A decrease in the discount rate
Payback period rule accepts all projects for which the payback period is:
Greater than the cut-off value.
Less than the cut-off value.
Positive
An integer
The advantage of the payback period is :
Adjustment for uncertainty of early CF
It is simple to calculate and use
Does not discount CF
None of the above
The discount rate that makes the net present value of an investment exactly equal to zero is called the:
Internal rate of return
External rate of return
WACC
Average rate of return
The cost of equity is equal to the:
expected market return.
rate of return required by stockholders.
cost of retained earnings plus dividends.
equity plus cost
Which of the following statements is/are correct?
The appropriate tax rate to use in the adjustment of the before-tax cost of
debt to determine the after-tax cost of debt is the average tax rate because
interest is deductible against the company's entire taxable income.
For a given company, the after-tax cost of debt is generally less than both
the cost of preferred equity and the cost of common equity.
For a given company, the investment opportunity schedule is upward slop-
ing because as a company invests more in capital projects, the returns from
investing increase.
All of the above
A financial analyst at Entity A wants to compute the company's weighted average cost of capital (WACC) using the dividend discount model. The analyst has gathered the following data (see attachment):
Entity A’s WACC is closest to:
8%
9%
10%
12%
XYZ Securities had a long-term stable debt-to-equity ratio of 0.65. Recent
bank borrowing for expansion into North Luzon Expressway raised the ratio to 0.75.
The increased leverage has what effect on the asset beta and equity beta of the
company?
The asset beta and the equity beta will both rise.
The asset beta will remain the same and the equity beta will rise.
The asset beta will remain the same and the equity beta will decline.
None of the choices
Ms. A Beta Advisers is estimating the cost of capital of ABC Corporation as part of her valuation analysis of the Ccompany. Ms. A will be using this estimate, along with projected cash flows from ABC's new projects, to estimate the effect of these new projects on the value of ABC. Ms. A has gathered the following information on Frontier Corporation (See attachment)
The weights that Ms. A should apply in estimating ABC's cost of capital
for debt and equity are, respectively:
debt = 0.200; equity = 0.800.
debt= 0.185;
equity = 0.815.
debt = 0.223;
equity = 0.777.
debt = 0.300;
equity = 0.700.
