Principles of Managerial Finance Brief 7th Edition By Gitman – Test Bank

Principles of Managerial Finance Brief 7th Edition By Gitman – Test Bank

Principles of Managerial Finance, Brief Ed., 8e (Zutter/Smart)
Chapter 11 Capital Budgeting Cash Flows and Risk Refinements

11.1 Project cash flows

1) Accounting figures and cash flows are not necessarily the same due to the presence of certain non-cash expenditures on a firm’s income statement.
Answer: TRUE
Diff: 1
Topic: Relevant Cash Flows
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

2) Relevant cash flows are the incremental cash outflows and inflows associated with a proposed capital expenditure.
Answer: TRUE
Diff: 1
Topic: Relevant Cash Flows
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

3) The relevant cash flows for a proposed capital expenditure are the incremental after-tax cash outflows and resulting subsequent inflows.
Answer: TRUE
Diff: 1
Topic: Relevant Cash Flows
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Reflective Thinking

4) Please explain the difference between a sunk cost and an opportunity cost and give an example of each type of cost.
Answer: Sunk costs are cash outlays that have already been made (past outlays) and cannot be recovered. Sunk costs have no effect on the cash flows relevant to the current decision. As a result, sunk costs should not be included in a project’s incremental cash flows.

Opportunity costs are cash flows that could be realized from the best alternative use of an asset that is already in place. They, therefore, represent cash flows that will not be realized as a result of employing that asset in the proposed project. Thus, any opportunity costs should be included as cash outflows when one is determining a project’s incremental cash flows.
Diff: 1
Topic: Sunk Costs and Opportunity Costs
Learning Obj.: LG 2
Learning Outcome: F-08
AACSB: Analytical Thinking

5) Incremental cash flows represent the additional cash flows expected as a direct result of the proposed project.
Answer: TRUE
Diff: 1
Topic: Relevant Cash Flows
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Reflective Thinking

6) The three major cash flow components include the initial investment, operating cash flows, and terminal cash flow.
Answer: TRUE
Diff: 1
Topic: Major Cash Flow Components
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

7) The three major cash flow components include the initial investment, nonoperating cash flows, and terminal cash flow.
Answer: FALSE
Diff: 1
Topic: Major Cash Flow Components Principles of Managerial Finance, Brief, 7e (Gitman)
Chapter 6 Interest Rates and Bond Valuation

6.1 Describe interest rate fundamentals, the term structure of interest rates, and risk premiums.

1) An interest rate or a required rate of return represents the cost of money.
Answer: TRUE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
Question Status: New
AACSB Tag: Analytic Skills

2) Longer the maturity of a Treasury security, the smaller the interest rate risk.
Answer: FALSE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
Question Status: Previous Edition
AACSB Tag: Analytic Skills

3) A real rate of interest is the compensation paid by the borrower of funds to the lender.
Answer: FALSE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
Question Status: Revised
AACSB Tag: Analytic Skills

4) A nominal rate of interest is equal to the sum of the real rate of interest plus the risk free rate of interest.
Answer: FALSE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
Question Status: Revised
AACSB Tag: Analytic Skills

5) Risk-free rate of interest is equal to the sum of the real rate of interest plus an inflation premium.
Answer: TRUE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
Question Status: Revised
AACSB Tag: Analytic Skills
6) Nominal rate of interest is equal to the sum of the real rate of interest plus an inflation premium plus a risk premium.
Answer: TRUE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
Question Status: Revised
AACSB Tag: Analytic Skills

7) The nominal rate of interest on a bond is 7% and an inflation premium of 3%. This results in a real rate of interest of 4% on the bond.
Answer: FALSE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
Question Status: New
AACSB Tag: Analytic Skills

8) In theory, the rate of return on U.S. Treasury bills should always exceed the rate of inflation as measured by the consumer price index.
Answer: TRUE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
Question Status: Previous Edition
AACSB Tag: Analytic Skills

9) The nominal rate of interest is the actual rate of interest charged by the supplier of funds and paid by demander.
Answer: TRUE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 5
Learning Outcome: F-05
Question Status: New
AACSB Tag: Analytic Skills

Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

8) Initial cash outflows and subsequent operating cash inflows for a project are referred to as ________.
A) necessary cash flows
B) relevant cash flows
C) perpetual cash flows
D) ordinary cash flows
Answer: B
Diff: 1
Topic: Relevant Cash Flows
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

9) Relevant cash flows for a project are best described as ________.
A) incidental cash flows
B) incremental cash flows
C) sunk cash flows
D) contingent cash flows
Answer: B