Poblemanswer the following true t or false f questions1

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Problem

Answer the following True (T) or False (F) questions:

1. To account for the time value of money, we must multiply a future cash flow in year n by the factor [n(1 + r)], where r is the interest rate.

2. For continuous compounding, the monthly discount rate is equal to the annual nominal discount rate divided by 12.

3. The annual compound interest rate corresponding to a credit card simple annual interest rate of 18%, continuously-compounded is more than 20%.

4. Beta (b) equals the covariance of a company's and SP500 returns, divided by the variance of SP500 returns.

5. In the CAPM, a higher b implies higher sensitivity to systematic risk.

6. A series of non-uniform cash flows can be shown to be economically equivalent to another series of uniform cash flows.

7. If money can be invested at a 10% annual interest rate, it is better to receive $100,000 now than $13,000 at the end each year for 10 years.

8. The IRR should be used if the cash flows change sign multiple times so long as the number of sign changes is even.

9. To compute the MIRR we need a finance rate and an reinvestment rate.

10. Both a finance and a reinvestment rate are needed to compute the return on invested capital (RIC) for non-simple cash flows.

11. A project with zero NPW has a Benefit/Cost Ratio (BCR) of zero.

12. The incremental Benefit/Cost Ratio (BCR) is the difference between the BCRs of two mutually-exclusive alternatives.

13. Depreciation is a real cost that must be subtracted from EBIT when computing FCF.

14. Depreciation has no effect on free cash flow if the tax rate is zero.

15. The Horizon Value is $10.5M for an enterprise whose discount rate is 15% and whose horizon year FCF is $1M, growing perpetually at 5% per annum.

16. Book value is an accurate measure of the real worth of an enterprise.

17. In capital budgeting, we should always select the projects that provide the highest "bang for the buck", i.e., the highest BCR.

18. A risk-adjusted hurdle rate should not be used as a discount rate to select worthy R&D projects based on their NPW.

19. Working Capital is the difference between a company's total assets and its total liabilities.

20. The Free Cash Flow (FCF) can be calculating by adding to EBITDA the Tax, then subtracting the capital expenses and the year-over-year increase in working capital.

Reference no: EM13374986

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