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Finance Test 2 Fill in the Blanks Chapter 4 1 Always assume that the timing of the cash flows is at the of the period unless otherwise specified 2 A is an infinite series of constant payments this does not mean same amount can be different amounts growing at same rate 3 Perpetuity is an that lasts forever 4 The perpetuity calculation brings the value back time period 5 The perpetuity calculation of cash flows 5 to infinity s CF5 r g The value of 6 7 this calculation sits in year are the series of equal cash flows that occur at regular intervals If the first payment occurs at the beginning of the period it is called 8 If the cash flow is at the end of the period it is considered an 9 Under special case annuities annuities due For PVA all cash flows have been one too many times Therefore multiplying by 1 r gives this back 10 Under special case annuities annuities due For FVA all cash flows have been shorted one period Therefore multiplying by 1 r gives them that extra period 11 If you know the payment amount for a loan the interest rate and the number of years and you want to know how much was borrowed do you compute a present value or future value 12 There is no taken into account in an APR 13 The is the actual rate paid or received after accounting for compounding that occurs during the year 14 APR is the rate 15 If you are investing your money you want to choose the EAR with the rate 16 If you are bowering money you want to choose an EAR with a rate 17 Constant growth and no growth are two types of 18 Interest rates are typically stated as Chapter 5 19 What are the two things that make a good evaluation or analysis tool 20 Explain the shortcomings of Payback Which of these shortcomings does Discounted Payback overcome 21 Which analysis tool will always lead you to the right decision 22 involve the question should we buy a company 23 involve the question should we sell a company 24 The NPV rule says to accept investments that have NPVs and reject ones with NPVs 25 If NPV is it means the outflows were greater than the inflows 26 A firm with unlimited capital should all positive NPV projects 27 The exception to firms with unlimited capital in reference to accepting all positive NPV projects is 28 The the r the more risky the project is 29 Given the same stream of cash flows the higher the r the the NPV 30 As the rate goes up NPV goes Inflows get and outflows investment stay the same 31 True of False If I make an NPV of 0 this means I lost money 32 True or False The IRR is the most important alternative to NPV 33 the project if the IRR is greater than the required return 34 True or False You choose the IRR it is not inherent 35 True or False You do choose the required return which is based on the risk level project 36 What two things in an IRR can lead to an incorrect decision 37 When the cash flows change signs more than once there is more than one 38 When you have an Unconventional cash flow use the to evaluate the 39 With projects you must reject one of the projects even if both 40 is a good communication tool and non financial managers tend to 41 If the NPV is greater than 0 the IRR is than the discount rate used in have positive NPVs understand return better the NPV calculation 42 The period is how long it takes to get the initial cost back 43 Decision Rule Accept if the payback period is than some preset limit 44 True or False The payback rule accounts for the time value of money 45 True or False The payback rule accounts for the risk of cash flows 46 What does Discounted Payback mean and what decisions does it drive 47 In a limited capital situation tells me my bang for my buck than 1 48 Profitability Index Decision Rule an investment if its PI is greater 49 A profitability index of 1 1 implies that for every dollar of investment we create an additional in value 50 Profitability Index accounts for TVM by Finance Test 2 Fill in the Blank Answers Chapter 4 1 End 2 Perpetuity 3 Annuity 4 One 5 Four 6 Annuities 7 Annuity Due 8 Ordinary Annuity 9 Discounted 10 Compounding 11 Present Value 12 Compounding 13 Effective Annual Rate EAR 14 Quoted 15 Higher 16 Lower 17 Perpetuities 18 APRs Chapter 5 19 Time value of money risk 20 Sometimes payback can ignore the time value of money and project risk We can fix this using discounted payback Another shortcoming of Payback is that it can be biased against long term projects such as research and development Also it requires an arbitrary cutoff point and ignores cash flows beyond this cut off date 21 NPV 22 Acquisitions 23 Divestitures 24 Positive Negative 25 Negative 26 Accept 27 Mutually Exclusive Projects 28 Higher 29 Lower 30 Down Smaller 31 False 32 True 33 Accept 34 False 35 True 36 Mutually Exclusive Projects or Unconventional Cash Flows 37 IRR 38 NPV 39 Mutually Exclusive 40 IRR 41 Higher 42 Payback 43 Less 44 False 45 False 46 Discounted payback overcomes TVM problems and can place a risk factor on cash flows It discounts back each of the cash flows and compares to initial project cost Will lead to a longer payback period Still is short term focused and can lead to poor decisions 47 Profitability Index 48 Accept 49 0 10 50 Discounting

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