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HCAD 760 EXAM 2 QUESTIONS AND ANSWERS WIT COMPLETE SOLUTIONS VERIFIED $10.49
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HCAD 760 EXAM 2 QUESTIONS AND ANSWERS WIT COMPLETE SOLUTIONS VERIFIED
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HCAD 760 EXAM 2 QUESTIONS AND ANSWERS WIT COMPLETE SOLUTIONS VERIFIED What does the "Trade Off" model tell you about how much debt or equity to use? o Higher risk businesses should borrow less money to avoid financial distress. o Businesses with tangible assets should borrow more money. (Becau...

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  • November 12, 2024
  • 11
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers

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  • hcad 760 exam 2 questions and answers wit complete

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  • HCAD 760
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HCAD 760 EXAM 2 QUESTIONS AND ANSWERS WIT COMPLETE

SOLUTIONS VERIFIED


What does the "Trade Off" model tell you about how much debt or equity to use?

o Higher risk businesses should borrow less money to avoid financial distress.

o Businesses with tangible assets should borrow more money. (Because the tangible

assets are less likely to lose value during financial distress)

o Businesses at high tax rates should borrow more money (to take advantage of tax

reductions of interest)

Financial Risk

The extra risk for using debt financing

Business Risk

The risk of a business being profitable, in general.In other words, the riskiness of a

business' assets, assuming they are all-equity financed

What are the steps of capital investment financial analysis?

1. Estimate the project's expected cash flows.

-Capital outlay or cost

- Operating cash flow

-Terminal (ending) cash flow

2. Risk Assessment

3. Estimate the project's cost of capital

-Its operating costs or discount rate

, -This represents the aggregate risk of an asset (risk inherent in average project)

-If it doesn't have an average risk, the CCC has to be adjusted

*NPV & IRR both used to calculate cost of a project or how much profit the project will

generate.

Dollar Return

NPV shows a projects _________ ______________.

Rate of Return

IRR shows a project's ______ ____ _________

Net Present Value

NPV stands for _______________ ________________ ___________

Internal Rate of Return

IRR stands for _____________________ ___________ ___ ________________

Any value over ZERO

What NPV shows a good investment?

Any value over the COST OF CAPITAL

What IRR shows a good investment?

NPV

• Sum of all cash flows of a project

discounted at the cost of capital rate

• Represented in dollars, easier to

understand, more commonly used,

used in excel

IRR

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