Part I. Choose options or fill in the boxes with appropriate words/figures following the instructions. Choose the statement that is not appropriate regarding the comparison between finance and accounting. 1. Finance and accounting both attempts to paint a picture of how a business is performing. 2. Finance focuses on cashflows instead of profits regarding economic returns. 3. Accounting focuses on historical cost regarding how to value assets. 4. Finance focuses on book value regarding how to value equity. 5. Finance is forward-looking whereas accounting is backward-looking. Choose all that are appropriate 1. Even if Pfizer have valuable patents developed in-house for its COVID-19 vaccine, they would not appear on the firm's balance sheet. 2. Companies in stable, predictable industries with reliable cash flows are likely to have low leverage. 3. Retail companies are likely to have relatively short receivables collection periods. 4. United Airlines, an airline, is likely to have high inventory turnover. 5. A firm's suppliers would be very interested in the firm's current ratio. An automobile manufacturer, such as Toyota, could owe monev to a steel manufacturer, such as Nippon Steel, and such money would appear as on the balance sheet of the steel manufacturer. Finance adds back depreciation and amortization in its measure of economic returns because depreciation is not a expense. Choose the statement that is not appropriate 1. EBITDA is the most precise measure for cashflow. 2. Free cash flow is relevant to all capital providers and is tax adjusted. 3. Increased leverage allows companies to control more assets and increase their ROE. 4. Shareholders will be interested in a company's ROE 5. Many managerial decisions are involved in profit calculation. Choose the statement that is not appropriate 1. EBITDA is the most precise measure for cashflow. 2. Free cash flow is relevant to all capital providers and is tax adjusted. 3. Increased leverage allows companies to control more assets and increase their ROE. 4. Shareholders will be interested in a company's ROE 5. Many managerial decisions are involved in profit calculation. If a firm has a receivables collection period of 30 days, a days inventory of 62 days, and a payables period of 40 days, its cash conversion cycle is days. Choose all that are appropriate. 1. Returns to capital that exceed costs of capital should result in value creation. 2. Increased leverage will not necessarily result in enhanced firm value. 3. A project with a higher internal rate of return (IRR) is not necessarily superior to a project with lower IRR. 4. The present value (PV) of cashflows from a project is not sufficient to determine if the project creates value for a business. 5. Price to earnings ratio is an example of a valuation multiple. Choose all that are appropriate 1. A firm whose ROE is 5% and cost of capital is 10% is creating value. 2. Positive NPV projects will have rates of return greater than the cost of capital. 3. If a division of a firm has lower risks than other divisions, the firm has a risk of underinvesting in that division 4. A company with sustainable returns to capital of 15% and a cost of capital of 12% will maximize its value by offering dividends at 3% of par value. 5. Management should prioritize payment of dividends because that would create value for Suppose you are evaluating a project to establish a new car factory. Having analyzed several scenarios, you come up with three outcomes. First, the worst-case scenario (probability of 25% ) the expected cashflow is $50 billion. The cashflow for the base-case scenario (probability of 50% ) is $100 billion. Finally, the best-case scenario (probability of 25% ), would result in a cashflow of $200 billion. From the following present values of outlays for establishing the factory, choose all that does make sense as an investment decision. 1.2.3.4.5.$50billion$100billion$150billion$200billion$250billion If current trades of 5-year AA bonds show that investors expect an yield of 1.2%, the price of a 10 year AA bond with a coupon of 0.5% issued 5 years ago will be 100.00. A firm has to choose how to allocate free cash flows among organic growth, dividends, and share buybacks. If a firm that has a free cashflow of $1 million has the opportunity to: invest $1 million in a new product that will earn cashflow with a present value of $0.9 million; offer a $1 dividend to each of its one million shareholders; or buy back 100,000 shares at $10 each, choose all options that are not value-creating. 1. Conduct the share buyback program costing $1 million. 2. Offer a $0.50 dividend and use the remaining $500,000 to purchase 50,000 shares. 3. Distribute $1 million in dividends. 4. Use the $1 million to invest in the new product. 5. Retain $1 million for other investment opportunities. When the price of a firm's shares moves 5% when the whole market moves 2%, it is said that the shares of the firm has a beta of In such a situation, the firm should have costs of equity than a firm whose share price would move at the same rate as the whole market. Part I. Choose options or fill in the boxes with appropriate words/figures following the instructions. Choose the statement that is not appropriate regarding the comparison between finance and accounting. 1. Finance and accounting both attempts to paint a picture of how a business is performing. 2. Finance focuses on cashflows instead of profits regarding economic returns. 3. Accounting focuses on historical cost regarding how to value assets. 4. Finance focuses on book value regarding how to value equity. 5. Finance is forward-looking whereas accounting is backward-looking. Choose all that are appropriate 1. Even if Pfizer have valuable patents developed in-house for its COVID-19 vaccine, they would not appear on the firm's balance sheet. 2. Companies in stable, predictable industries with reliable cash flows are likely to have low leverage. 3. Retail companies are likely to have relatively short receivables collection periods. 4. United Airlines, an airline, is likely to have high inventory turnover. 5. A firm's suppliers would be very interested in the firm's current ratio. An automobile manufacturer, such as Toyota, could owe monev to a steel manufacturer, such as Nippon Steel, and such money would appear as on the balance sheet of the steel manufacturer. Finance adds back depreciation and amortization in its measure of economic returns because depreciation is not a expense. Choose the statement that is not appropriate 1. EBITDA is the most precise measure for cashflow. 2. Free cash flow is relevant to all capital providers and is tax adjusted. 3. Increased leverage allows companies to control more assets and increase their ROE. 4. Shareholders will be interested in a company's ROE 5. Many managerial decisions are involved in profit calculation. Choose the statement that is not appropriate 1. EBITDA is the most precise measure for cashflow. 2. Free cash flow is relevant to all capital providers and is tax adjusted. 3. Increased leverage allows companies to control more assets and increase their ROE. 4. Shareholders will be interested in a company's ROE 5. Many managerial decisions are involved in profit calculation. If a firm has a receivables collection period of 30 days, a days inventory of 62 days, and a payables period of 40 days, its cash conversion cycle is days. Choose all that are appropriate. 1. Returns to capital that exceed costs of capital should result in value creation. 2. Increased leverage will not necessarily result in enhanced firm value. 3. A project with a higher internal rate of return (IRR) is not necessarily superior to a project with lower IRR. 4. The present value (PV) of cashflows from a project is not sufficient to determine if the project creates value for a business. 5. Price to earnings ratio is an example of a valuation multiple. Choose all that are appropriate 1. A firm whose ROE is 5% and cost of capital is 10% is creating value. 2. Positive NPV projects will have rates of return greater than the cost of capital. 3. If a division of a firm has lower risks than other divisions, the firm has a risk of underinvesting in that division 4. A company with sustainable returns to capital of 15% and a cost of capital of 12% will maximize its value by offering dividends at 3% of par value. 5. Management should prioritize payment of dividends because that would create value for Suppose you are evaluating a project to establish a new car factory. Having analyzed several scenarios, you come up with three outcomes. First, the worst-case scenario (probability of 25% ) the expected cashflow is $50 billion. The cashflow for the base-case scenario (probability of 50% ) is $100 billion. Finally, the best-case scenario (probability of 25% ), would result in a cashflow of $200 billion. From the following present values of outlays for establishing the factory, choose all that does make sense as an investment decision. 1.2.3.4.5.$50billion$100billion$150billion$200billion$250billion If current trades of 5-year AA bonds show that investors expect an yield of 1.2%, the price of a 10 year AA bond with a coupon of 0.5% issued 5 years ago will be 100.00. A firm has to choose how to allocate free cash flows among organic growth, dividends, and share buybacks. If a firm that has a free cashflow of $1 million has the opportunity to: invest $1 million in a new product that will earn cashflow with a present value of $0.9 million; offer a $1 dividend to each of its one million shareholders; or buy back 100,000 shares at $10 each, choose all options that are not value-creating. 1. Conduct the share buyback program costing $1 million. 2. Offer a $0.50 dividend and use the remaining $500,000 to purchase 50,000 shares. 3. Distribute $1 million in dividends. 4. Use the $1 million to invest in the new product. 5. Retain $1 million for other investment opportunities. When the price of a firm's shares moves 5% when the whole market moves 2%, it is said that the shares of the firm has a beta of In such a situation, the firm should have costs of equity than a firm whose share price would move at the same rate as the whole market