Busıness Fınance Iı

Yanıt Açıklaması: Decision rule for internal rate of return technique is as follows: If a project is independent, approve the project(s) that provides IRR that is greater than the expected rate of return (discount rate used in NPV technique). If a project is mutually exclusive, choose the project that provides the highest IRR (that is greater than the expected rate of return (discount rate used in NPV technique)). The correct answer is A.

Yanıt Açıklaması: The main differences between debt and equity are the following: • Debt is not an ownership interest in the firm. Creditors do not generally have votingpower. • The corporation’s payment of interest ondebt is considered a cost of doing business and is fully tax deductible. Dividends paid to stockholders are not tax deductible. • Unpaid debt is a liability of the firm. If itis not paid, the creditors can legally claim the assets of the firm. This action can result in liquidation or reorganization, two of the possible consequences of bankruptcy. Thus, one of the costs of issuing debt is the possibility of financial failure. This possibility does not arise when equity is issued.

Yanıt Açıklaması: The marginal cost of capital (MCC) is the composite cost of the last dollar of new capital raised.

Yanıt Açıklaması: Most of the time, because of the nature of risk, making adjustments to cash flows or discount rates is not enough for financial managers. They want to know the sources and possible effects of certain risks of a project. They want to measure a project’s risks coming from various sources rather than in general manner. Sensitivity analysis, scenario and simulation analysis, and decision trees are used for this purpose. However, one or more of these analyses sometimes lead(s) financial managers to consider real options available in a capital investment project because in reality there are various types of uncertainties that exist about these projects. The correct answer is E.

Yanıt Açıklaması: Retained earnings are another method of internal sources of finance and it is basically an accumulation of profits by a company for its expansion and diversification activities. The advantages of retained earnings are stated below: Retained earnings are most useful to expansion and diversification of the business activities. Retained earnings are one of the least costly sources of finance since it does not involve any floatation cost as in the case of raising funds by issuing different types of securities. If the companies use equity finance they have to pay a dividend. Instead, if the companies use debt finance, they have to pay interest. However, if the company uses retained earnings as sources of finance, they need not pay any fixed obligation regarding the payment of dividend or interest. Retained earnings allow the financial structure to remain completely flexible. The company need not raise loans for further requirements if it has retained earnings. When the company uses the retained earnings as the sources of finance for their financial requirements, the cost of capital is very cheaper than the other sources of finance. Hence the value of the share will increase. Retained earnings provide opportunities for evasion of excessive tax in a company when it has a small number of shareholders. As can also be understood from the information given the statements in the options I, II, III and V are correct, so the correct answer is D. The statement “When the company uses the retained earnings as the sources of finance for their financial requirements, the cost of capital is more expensive than the other sources of finance.” is not correct, because “when the company uses the retained earnings as the sources of finance for their financial requirements, the cost of capital is very cheaper than the other sources of finance.” Hence the value of the share will increase.

Yanıt Açıklaması: The weighted average cost of capital (WACC) is the average cost of the different types of capital employed by the firm. Where wD is the weight of the debt component, wCE is the weight of the equity component. T is the tax rate and after-tax cost of debt component is calculated by multiplying the before-tax cost of debt (kD) by the tax deductibility. Cost of equity component is denoted as kCE in the above equation. The correct answer is E.

Yanıt Açıklaması: "Retained earnings" and "Lower cost of capital" are among the advantages of common stock.

Yanıt Açıklaması: The WACC estimation should be based on the market values of the capital components. The weights of the capital components should not be computed on book values. In the evaluation of the capital budgeting projects, the WACC of the firm should be used as a decision criterion. All of the statements above are true about weighted average cost of capital.

Yanıt Açıklaması: The bond-yield-plus-risk-premium approach provides a practical but highly subjective solution to the estimation of the cost of equity. The approach is based upon adding up a risk premium over the firm’s bond yield. Thus, the cost of equity is calculated straightforward by the following simple computation: k= 0.0845 + 0.0315= 0.1160 According to the bond-yield-plus-risk-premium approach, XLM’s expected cost of equity is 11.60%. The correct answer is C.

Yanıt Açıklaması: Discounted payback period technique tells the length of time it takes cumulative present values of cash inflows will be equal to the initial cash outflow.

Yanıt Açıklaması: For funding investments and/or other cash uses by medium and long-term sources, the companies have four different alternatives. These are generally in the forms of bank borrowing, borrowing from special institutions, debt issuance and equity finance, securitization. Therefore, the correct option is D.

Yanıt Açıklaması: ROIC=NOPAT/Capital (ROIC means return on invested capital)

Yanıt Açıklaması: The signaling theory asserts that investors regard an equity issue negatively and usually the stock price falls.

Yanıt Açıklaması: The bank overdraft is based on the same principle as the revolving loans, but the limit of the credit is set as a debit of a company’s current account. If the limit is overdrawn, the borrower pays a penalty interest rate. Loans are granted by financial institutions after a client presents anapplication form.

Yanıt Açıklaması: Relative state of the investments regarding dependence on each other may be one of the following: Mutually exclusive projects: the type of projects in which selecting one project prevents other projects from being undertaken. Independent projects: the type of projects in which projects are not in direct competition with one another. Contingent projects : the type of projects in which approval or rejection of a project is contingent on approval or rejection of another project. The correct answer is E.

Yanıt Açıklaması: Maximizing the value of the firm is the main objective and the key to wealth maximization lies in the capital structure decisions. In an attempt to find the best practice in attaining this goal, academicians brought up a number of theoretical models: Net income approach Net operating income approach Traditional approach Modigliani and Miller Capital Structure Theory Trade-off theory Signaling theory Agency theory The correct answer is D.

Yanıt Açıklaması: The advantages of retained earnings are stated below: • Retained earnings are most useful to expansion and diversification of the business activities. • Retained earnings are one of the least costly sources of finance since it does not involve any floatation cost as in the case of raising funds by issuing different types of securities. • If the companies use equity finance they have to pay a dividend. Instead, if the companies use debt finance, they have to pay interest. However, if the company uses retained earnings as sources of finance, they need not pay any fixed obligation regarding the payment of dividend or interest. • Retained earnings allow the financial structure to remain completely flexible. The company need not raise loans for further requirements if it has retained earnings. • When the company uses the retained earnings as the sources of finance for their financial requirements, the cost of capital is very cheaper than the other sources of finance. Hence the value of the share will increase. • Retained earnings provide opportunities for evasion of excessive tax in a company when it has a small number of shareholders. The correct answer is D.

Yanıt Açıklaması: Estimating cash flows is the first step of calculating the Net Present Value.

Yanıt Açıklaması: LIBOR is a benchmark rate that represents the interest rate at which banks offer to lend funds to one another in the international interbank market for short-term loans.

Yanıt Açıklaması: The par value of a bond is almost always the same as the face value, and the terms are used interchangeably, so the correct answer is A. Common stock, also named as equity shares, represnts equity or an ownership position in a corporation. Collateral is a general term that frequently means securities that are pledged as security for payment of debt. A lease is a contractual agreement between a lessee and lessor establishing that the lessee has the right to use an asset and in return must make periodic payments to the lessor who is the owner of the asset.