Sophia Finance Milestone 4(a)|Principle of Finance Milestone 4 Sophia Course (100% correct)

Principle of Finance Milestone 4 Sophia Course 1 When performing capital budgeting and considering replacement projects, one factor that must be considered is the potential __________ of equipment that is no longer needed. · taxation · depreciation · salvage value · sunk costs CONCEPT Cash Flow Analysis and Other Factors 2 According to the residual dividend model, what takes priority over distributing dividends? · Paying off debt · Increasing share price · Establishing a target payout ratio · Financing planned projects CONCEPT Setting the Dividend 3 In what way are debt securities, equity securities and derivatives similar? · They all confer ownership in a business. · They all have fixed terms. · They can all be used to hedge against risk. · Their value is derived from an underlying asset. CONCEPT Securities Management 4 A construction company is preparing a capital budget and considering four long-term investments. The profitability index of each project is as follows: ·Project A: 0.34 ·Project B: 1.12 ·Project C: 1.26 ·Project D: 0.93 In theory, which two projects should the company pursue? · Projects A and D · Projects B and C · Projects A and C · Projects B and D CONCEPT Introduction to Capital Budgeting 5 Which of the following is true of venture capital? · Venture capitalists reserve the right to sell their portion of company shares before an IPO. · Venture capital is comparable to a bank loan, which must be repaid over time. · One way venture capitalists evaluate potential investments is by analyzing a company's share price. · On average, venture capital investors seek a return on their investment in about five years. CONCEPT Venture Capital 6 What is one advantage of NPV as a capital budget method? · Cash flows and the discount rate are easy to accurately determine. · It is flexible, in the sense that the discount rate can be adjusted to account for factors like risk. · It accounts fully for opportunity costs. · It is equally accurate whether cash flows are known or estimated. CONCEPT Net Present Value 7 Which of the following types of financing is typical for a business in its mature stage? · Equity · Bank loans · Second-round venture capital · Start-up venture capital CONCEPT Types of Financing 8 Farrah owns 500 shares of stock valued at $30/share in Company A. After the company issues a 3% stock dividend, what does Farrah own? · 500 shares valued at $30/share · 515 shares valued at $29.13/share · 515 shares valued at $30/share · 500 shares valued at $30.90/share CONCEPT Cash Dividend Alternatives 9 Alyx needs additional short-term financing to modify her children's clothing business. To generate funds, she sells her accounts receivable to an external party for slightly less than their book value. What type of financing resource is Alyx using? · Trade credit · Commercial lending · Peer-to-peer lending · Factoring CONCEPT Short-Term Financing 10 Select one advantage of IRR as a capital budget method. · The IRR can easily be evaluated alongside a company's threshold rate. · It accurately reflects the reinvestment rate risk. · It is simple to understand because it ignores the time value of money. · It is more useful than NPV analysis when evaluating mutually exclusive projects. CONCEPT Internal Rate of Return 11 Which of the following is an example of an operational risk for a company that manufactures automobiles? · Damage to completed cars held on a storage lot · Rising interest rates that affect the terms of car loans, thereby decreasing demand · A state tax increase that makes buying and registering a car more expensive · A national car rental agency backing out of a contract to buy a certain volume of new cars CONCEPT Risk and Capital Budgeting 12 Which of the following describes the securities underwriting process? · A company sells its securities to an investment bank, who then sells the securities to market participants. · An investment bank helps to connect a private company with sources of capital. · An investment bank determines if a company can afford to go public. · An investment bank responsible for market liquidity quotes a bid price and an ask price for a security. CONCEPT The Role of Investment Banks in Financing 13 Ollie owned stock in a hotel company that announced a dividend, but he did not receive it. This is because he sold the stock before the __________ date had passed. · record · ex-dividend · in-dividend · payment CONCEPT Introduction to Dividends 14 Determine whether the following description is true of a capital lease, an operating lease, neither or both.