Finc341

Exam 3

Cost of Capital & Capital Budgeting

  • 25 questions
  • 75 minutes
  • Formula sheet + financial calculator

Topics

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  1. 01Component Costs of CapitalLockedFind what each source of money costs the firm: after-tax debt, preferred stock, retained earnings, and new common stock.
  2. 02WACC, the Break Point & the MCCLockedBlend component costs into WACC1 and WACC2, find where retained earnings run out, and size the new stock a budget needs.
  3. 03The Optimal Capital BudgetLockedRank projects by IRR, stack them against the MCC step, and price a project that straddles the break point.
  4. 04Payback & Discounted PaybackLockedFind how long a project takes to earn back its cost, with and without discounting, and know what that number hides.
  5. 05NPV & IRRLockedCompute NPV and IRR, turn a quarterly IRR into an annual rate, and know which rule to trust when they disagree.
  6. 06Modified IRR (MIRR)LockedCompute MIRR by discounting costs and compounding inflows at the cost of capital, even with several negative cash flows, and know how it relates to IRR and NPV.
  7. 07NPV Profiles, Crossover & Multiple IRRsLockedRead an NPV profile, find where two profiles cross, and decide what to do when NPV and IRR disagree or a project has two IRRs.
  8. 08Relevant Cash Flows, MACRS & Expansion ProjectsLockedDecide which cash flows count, depreciate with MACRS, and build a full expansion project's cash flows and NPV.
  9. 09Replacement ProjectsLockedBuild a replacement project's incremental cash flows: the initial outlay, depreciation differences, the missed sale and missed tax effect, and the NPV decision.
  10. 10Unequal Lives & Optimal Economic LifeLockedCompare mutually exclusive projects with different lives using the EAA, and find how long to keep an asset before selling it.
  11. 11Stand-Alone Risk: Sensitivity, Scenarios, Monte CarloLockedMeasure how uncertain a project's NPV is with sensitivity analysis, scenario analysis (expected NPV, σ, CV) and Monte Carlo simulation, and know what each one misses.
  12. 12Investment Timing Options & Capital RationingLockedValue the choice to wait with a decision tree, recognize the main real options, and pick the best set of projects under a fixed budget.

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