BEC Financial Management and Capital Budgeting 1

Question 1

The weighted average cost of capital (WACC) represents:

Accepted Answer

The average rate a company must earn to satisfy all capital providers

Answer

The interest rate on the company's long-term debt

Answer

The return required by common equity shareholders only

Answer

The company's effective tax rate on earnings

Question 2

Net Present Value (NPV) of a project is calculated as:

Accepted Answer

Present value of future cash inflows minus the initial investment

Answer

Total undiscounted cash inflows minus total cash outflows

Answer

Future value of cash inflows divided by the cost of capital

Answer

Annual operating income divided by total assets

Question 3

A company's Internal Rate of Return (IRR) decision rule states: accept a project if:

Accepted Answer

IRR exceeds the required rate of return (hurdle rate)

Answer

IRR is less than the cost of debt

Answer

IRR equals zero

Answer

IRR is less than the NPV

Question 4

Working capital is defined as:

Accepted Answer

Current assets minus current liabilities

Answer

Total assets minus total liabilities

Answer

Cash and cash equivalents only

Answer

Long-term assets minus long-term debt

Question 5

The payback period method evaluates a project based on:

Accepted Answer

How long it takes to recover the initial investment from cash flows

Answer

The present value of all future cash flows

Answer

The project's average accounting return on investment

Answer

The difference between IRR and WACC

Question 6

Financial leverage refers to the use of:

Accepted Answer

Debt financing to amplify returns on equity

Answer

Short-term borrowing to fund current operations

Answer

Accounts receivable to secure a line of credit

Answer

Retained earnings to fund capital expenditures