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- 1. Multiple Choice
Compounding is the process of calculating the:
Present value of future cash flows
Future value of present cash flows
Present value of preset cash flows
Future value of future cash flows
- 2. Multiple Choice
Discounting is the process of calculating the:
Future value of present cash flows
Present value of preset cash flows
Present value of future cash flows
Future value of future cash flows
- 3. Multiple Choice
If the discounting factor of year 3 is $0.8, it means that:
$0.8 is the future value of $1 now
$1 is the present value of $0.8 in 3 years
$0.8 is the present value of $1 in 5 years
$0.8 is the present value of $1 in 3 years
- 4. Multiple Choice
If the discounting factor of year 5 and assuming cost of capital of 5% is $0.8, it means that:
$0.8 is the present value of $1 in 5 years with annual compounding of 3%
$0.8 is the present value of $1 in 5 years with annual compounding of 5%
$0.8 is the present value of $1 in 3 years with annual compounding of 3%
$0.8 is the present value of $1 in 3 years with annual compounding of 5%
- 5. Multiple Choice
Net Present Value (NPV) is:
Total discounted free cash flows to all capital providers minus total invested capital
Total undiscounted free cash flows to all capital providers minus total invested capital
Total discounted net profits minus total invested capital
Total discounted free cash flows to all capital providers minus invested equity capital
- 6. Multiple Choice
Using the NPV approach, an investment is lucrative when the:
Aggregate free cash flows to all capital providers discounted by the cost of equity is higher than total invested capital
Aggregate free cash flows to equity capital providers discounted by the weighted average cost of capital is higher than total invested capital
Aggregate free cash flows to equity capital providers discounted by the cost of equity is higher than total invested capital
Aggregate free cash flows to equity capital providers discounted by the cost of equity is higher than invested equity capital
- 7. Multiple Choice
Internal Rate of Return (IRR) is:
The discount rate that makes NPV positive
The discount rate that makes NPV negative
The discount rate that makes NPV zero
The discount rate that makes total undiscounted free cash flows zero
- 8. Multiple Choice
Internal Rate of Return (IRR) is equal to:
The hurdle rate of return
The cost of equity
The cost of debt
The actual return of the investment
- 9. Multiple Choice
Internal Rate of Return (IRR) to equity capital providers is equal:
The hurdle rate of return to equity capital providers
The cost of equity
The actual return on equity capital
The total discounted free cash flows to equity capital providers
- 10. Multiple Choice
Internal Rate of Return (IRR) to all capital providers is equal:
The hurdle rate of return to all capital providers
The actual return on total capital
The cost of capital
The total discounted free cash flows to all capital providers
- 11. Multiple Choice
An investment is lucrative when:
The equity IRR is higher than NPV to equity capital providers
The NPV is higher than cost of investment
The equity IRR is higher than cost of equity
The NPV to equity capital providers is higher than cost of equity
- 12. Multiple Choice
An investment is indifferent when:
The NPV to all capital providers is equal to the weighted average cost of capital
The NPV to all equity providers is equal to the cost of equity
Equity IRR is equal to the cost of equity
Equity IRR is equal to the weighted average cost of capital
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