Exam (elaborations)
HCAD 760 Exam 2 Questions And Correct Answers A+ Graded
- Course
- Institution
HCAD 760 Exam 2 Questions And Correct Answers A+ Graded...
[Show more]
Content preview
HCAD 760 Exam 2 Questions And CorrectAnswers A+ Graded
What does the "Trade Off" model tell you about the amount of debt or equity to use? -
ANSWER o Higher risk businesses should borrow less money to avoid financial distress.
o Businesses with tangible assets should borrow more money. (Because the tangible
assets are less likely to lose value during financial distress) o Businesses at high tax
rates should borrow more money (to take advantage of tax reductions of interest)
Financial Risk - ANSWER Additional risk due to debt financing
Business Risk - ANSWER General risk of a business earning a profit.
In other words, the risk inherent in the business' asset base, assuming they were all
equity-financed
What are the steps of capital investment financial analysis? - ANSWER 1. Estimate the
expected project cash flows
-Capital outlay or cost
-Operating cash flow
-Terminal (ending) cash flow
2. Risk Analysis
3. Estimate the project's cost of capital
-Its operating costs or discount rate
-This represents the aggregate risk of an asset (risk inherent in average project)
-If it doesn't have an average risk, the CCC has to be adjusted
*NPV & IRR both used to calculate cost of a project or how much profit the project will
generate.
Dollar Return - ANSWER NPV shows a projects _________ ______________.
, Rate of Return - ANSWER IRR reflects a project's ___ ___ ___
Net Present Value - ANSWER NPV stands for _____________ _____________ _______
Internal Rate of Return - ANSWER IRR stands for _____________________ _________ ___
_____________
Any value over ZERO - ANSWER What does NPV reflect a good investment?
Any value over the COST OF CAPITAL - ANSWER What does IRR reflect a good
investment?
NPV - ANSWER • Sum of all cash flows of a project
discounted at the cost of capital rate
• Represented in dollars, easier to
understand, more commonly used,
used in excel
IRR - ANSWER •.shown in percentage, rate of return
the investment will make, used in excel
•. evaluate capital budgeting
• Know formula to calculate return on assets and interpret/explain results of calculation
- ANSWER ** Shows how a business is using their assets.
** Measures ability to both control expenses and use its assets to generate revenue.
** Higher ROA= greater net income on each dollar invested in assets
• Know formula to calculate the current ratio and interpret/explain results of calculation.
- ANSWER ** The current ratio is an indication of a firm's liquidity.
** Measures the company being able to pay back short term obligations
** The higher current ratio is better than a low current ratio, because a high current
ratio shows a company is more likely to pay the creditor back.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Easton. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $9.99. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
72001 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now