FINANCE 322 FINAL EXAM WITH
CORRECT ANSWERS
Capital Budgeting - CORRECT ANSWER-is concerned with
cash flow, not accounting profit.
To evaluate a capital investment, we must know: - CORRECT
ANSWER-Incremental cash outflows of the investment
(marginal cost of investment), and
Incremental c...
Capital Budgeting - CORRECT ANSWER-is concerned with
cash flow, not accounting profit.
To evaluate a capital investment, we must know: - CORRECT
ANSWER-Incremental cash outflows of the investment
(marginal cost of investment), and
Incremental cash inflows of the investment (marginal benefit of
investment).
The timing and magnitude of cash flows and accounting profits
can differ dramatically.
CAPM: - CORRECT ANSWER-E(R)=Rf+Bi(E(RM)-Rf)
What factors influence a firm's beta? - CORRECT ANSWER-
Operating Leverage & Financial Leverage
Financial Leverage - CORRECT ANSWER-The extent to which
a firm finances operations by borrowing. The fixed costs of
repaying debt increases a firm's beta in the same way that
operating leverage does.
(The dominant source fro new financing for corporations across
the world is internally generated cash flows.)
Marginal BENEFITS of raising capital externally: - CORRECT
ANSWER-ability to raise greater sums of money per dollar
spent to acquire financing
Marginal COSTS of raising capital externally: - CORRECT
ANSWER-transaction, legal and other costs usually decline per
dollar of capital raised.
A firm needing external capital faces the following choices: -
CORRECT ANSWER--Employ an investment bank to advise
and hand offering;
-Approach Private vs. Public capital market
-Negotiate privately with investment banks
-Issue shares to existing stockholders or general cash offering.
Advantages of IPO - CORRECT ANSWER--IPOs can raise
large amounts of new capital for growth
-Publicly traded stock serve as as currency for acquisitions
-Listed stock (options) can be used to attract top managers
-Entrepreneurs enjoy personal wealth and liquidity.
-IPOs serve as advertising for firms and their products/services
Disadvantages of IPO - CORRECT ANSWER--High financial
costs, with no guarantee of success: Cash expenses of an IPO
often approach $1 million.
-Managerial costs of planning and executing IPO
-Firms need to focus on stock price and deal with shareholders.
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