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Test Bank for Fundamentals of Corporate Finance Ch. 10 (6th edition by Jonathan Berk)
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Test Bank for Fundamentals of Corporate Finance Ch. 10 (6th edition by Jonathan Berk)
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Test Bank for Fundamentals ofCorporate Finance Ch. 10 (6th edition by
Jonathan Berk)
Incremental Cash Flows - ANSthe difference between a firm's future cash flows with a project
and those without the project
Stand-Alone Principle - ANSthe assumption that evaluation of a project may be based on the
project's incremental cash flows
Opportunity Cost - ANSthe most valuable alternative that is given up if a particular investment is
undertaken
Erosion - ANSthe cash flows of a new project that come at the expense of a firm's existing
projects
Accelerated Cost Recovery System (ACRS) - ANSa depreciation method under U.S. tax law
allowing for the accelerated write-off of property under various classifications
Equivalent Annual Cost (EAC) - ANSthe present value of a project's costs calculated on an
annual basis
beta - ANSmeasures the responsiveness of a security's returns to movements in the market
(systematic)
determined by the cyclicality of a firm's revenues.
cyclicality is magnified by the firm's operating and financial leverage.
three factors will impact the firm's beta - ANS1. revenues (cyclicality of sales)
2. Operating leverage (higher = higher beta)
3.Financial leverage (higher = lower b
e, firms whose revenues are more responsive to movements in the economy will generally
have higher betas than firms with less-cyclical revenues - ANStrue
Operating leverage - ANSthe percentage change in earnings before interest and taxes (EBIT)
for a percentage change in sales.
Financial leverage - ANSarises from the use of debt in the firm's capital structure. A levered firm
must make fixed interest payments regardless of its revenues.
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