The most difficult part of the capital budgeting process is accurately estimating cash flows and cost of capital. a. True b. False | Homework.Study.com (2024)

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• Estimating the cost of common equity using the discounted cash flow approach may be difficult to evaluate because the proper growth rate is difficult to establish. True False
• The capital budgeting decision-making process involves measuring the incremental cash flows of an investment proposal and evaluating the attractiveness of these cash flows relative to the project's cost. True False Explain.
• Estimating the cost of common equity using the discounted cash flow approach may be difficult to evaluate because the dividend yield is extremely difficult to estimate. True False
• Estimating the cost of common equity using the discounted cash flow approach may be difficult to evaluate because the current price of the common equity is always changing making it difficult to determine. True False
• A cash flow budget can be used to analyze the feasibility of a new capital investment. True or False?
• A cash purchase is similar to a capital budgeting decision. a. True. b. False.
• Payback period approach in the capital budgeting evaluation process fails to consider all cash flows and the time value of money. a. True b. False
• In the flow-to-equity (FTE) valuation method, the cash flows to equity holders are discounted using the weighted average cost of capital. True False
• Because depreciation is a 'non-cash' expense, it has no impact on a capital budgeting analysis. True False
• True or False: Sophisticated firms use only the NPV method in capital budgeting decisions. a. False b. True
• Because of improvements in forecasting techniques, estimating the cash flows associated with a project has become the easiest step in the capital budgeting process. True False Explain.
• True or False: Because depreciation is a 'non-cash' expense, it has no impact on a capital budgeting analysis.
• Accrual accounting is more complex than the cash basis. a.True b.False
• 1. True or False - Opportunity costs are relevant to the capital budgeting decision. 2. True or False - Accrual basis income and cash basis income are often the same amount for each period. 6. True
• True or false? While capital budgeting measures are easy to calculate, their results are only as good as the estimates of the future cash inflows provided as input.
• True or False: The calculation of the cost of capital depends upon the historical cost of funds.
• a. The net present value would be the best capital budgeting method; why or why not? b. The NPV is the most valuable tool because it is the most accurate. True or false? Explain.
• Accounting profits, adjusted for taxes and differences in accounting methods, provide the best measure of relevant cash flows for capital budgeting purposes. a. True b. False
• When calculating stock value, we must account for all cash flows except for those beyond the horizon point. True or False?
• When using the discounted free cash flow model, we should use a firm's equity cost of capital. True or False?
• In estimating the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue. True or false?
• In the flow-to-equity (FTE) valuation method, we explicitly calculate the free cash flow available to equity holders taking into account all payments to and from debt holders. True False
• The NPV rule "assumes that cash flows are reinvested at the opportunity cost of capital." True False
• The first step in the FTE method is to determine the project's free cash flow to equity (FCFE). True False
• To prepare a cash flow statement, the cash inflows and outflows are categorized under cash from operations, cash from investing, and cash from financing. True False
• Free cash flow=Cash flow from operations-Capital expenditures+Disposition of property and equipment. True or false?
• The statement of cash flows is the addition of cash flows from operations, investing, and financing. (i) True (ii) False
• Which of the following statements is false? A) The break-even level of an input is the level for which the investment has an internal rate of return (IRR) of zero. B) The most difficult part of capital budgeting is deciding how to estimate the cash flows
• Working capital is used to pay current operating costs and expenses. True False
• Accounting profits include non-cash expenses like depreciation. These non-cash expenses are "added back" when we calculate the cash flows. True or False? Explain.
• In relation to the price-cash flow ratio, cash flow is commonly defined as net income plus depreciation. True or False?
• State true or false and justify your answer: "Cash flow" consists of illiquid cash equivalents that are difficult to convert to cash within 90 days.
• IRR measures the average return of the investment and the sensitivity of the NPV to any estimation error in the cost of capital. (True or False)
• In order to start a new product line, inventories must be built up. This increase entails a cash outflow that should be included in a capital budgeting analysis. a) True b) False
• Depreciation expense produces a cash flow of funds, because it reduces the firm earrings. True False
• Even though EBITDA excludes the non-cash expenses of depreciation and amortization, it should not be considered a measure of cash flow. a. True b. False
• When using the Free Cash Flow method, the value of the entire firm is calculated. (True or false)
• True or false? To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.
• Determine if the following is true, false, or insufficient data and explain: A capital expenditure flows through a company's income statement as a cash expense.
• State true or false and justify your answer: Depreciation is an accounting entry and does not involve a cash expense.
• State true or false and justify your answer: Cash flow consists of illiquid cash equivalents which are difficult to convert to cash within 90 days.
• Both the net present value method and the internal rate of return method can be used as screening tools in capital budgeting decisions. True or false?
• Companies with large capital expenditures, relative to earnings, have low free cash flows. a. True b. False
• Financial statements are prepared after the trial balance is prepared. a. True b. False
• The main source of cash in a cash budget is collection on accounts receivable. O True O False Depreciation is not included in sources of cash because it is an expense. O True O False
• Which of the following statements about capital budgeting cash flows is false? a. Sunk costs are not incremental flows and hence should not be included in capital budgeting analysis. b. Net working capital changes affect both the initial investment and
• Cash-flow is one measure of profitability. It answers the question "Am I making money?" A. True B. False
• When calculating the cash flow of an investment project, we estimate the change in accounts receivable, inventory and accounts payable for each year of the project. True or false?
• The present value (PV)of a stream of cash flows is just the sum of the present values of each individual cash flow. a. True b. False
• In order to purchase new equipment, a firm must borrow money. The interest expense and its tax consequences should both be included in a capital budgeting analysis. True False
• Free cash flows represent the benefits generated from accepting a capital-budgeting proposal. True False
• The present value of a cash flow will never be greater than the future dollar amount of the cash flow. True or false?
• Taxes do not enter into the equation for the degree of cash flow of operating leverage because both fixed costs and pretax operating cash flows are measured on a pretax basis. True or False? Explain.
• The net working capital of a firm will decrease when accrued wages are paid with cash. a. True b. False
• True or False: Multiples are of limited importance as long as the valuator has produced their Discounted Cash Flow analysis.
• Free Cash Flow is calculated in the same manner as is Cash Flow from Assets - it is the same value. (True or false)
• NPV assumes reinvestment of intermediate free cash flows at the cost of capital, while IRR assumes reinvestment of intermediate free cash flows at the IRR. True False
• A cash flow budget for a whole farm can be prepared on an annual, quarterly, or monthly basis. True or False?
• True or False: Seasonality is introduced into financial ratios by averaging monthly account balances, and thus it is recommended that ending account balances be used. True or False: The after-tax cost
• What is the use of capital budgeting when cash flows, i.e. the basic inputs, are not accurate and are just estimates? Are the estimates reliable for decision making?
• Changing the discount rate is equivalent to adjusting the expected cash flows as a method of accounting for risk. a. True b. False
• Nominal cash flows should be discounted with nominal r, and real cash flows should be discounted with real r. a. True. b. False.
• When calculating the cash flows for a project, you should include interest expenses. True or False?
• We can calculate future cash flows precisely and obtain an exact value for the NPV of an investment. True False Explain.
• Three ratios of liquidity are net working capital, current ratio, and acid-test ratio. a. True b. False
• 1) Which of the following is the most difficult step in the capital budgeting process? a) Estimating cash flows. b) Applying capital budgeting techniques. c) Interpreting the results. d) Determini
• The statement of cash flows is helpful in determining the capacity of a firm to meet obligations for cash. True or false?
• When calculating free cash flow, it is important to include interest and principal payments. True or False
• True or False: All assets and liabilities whose cash flows are not included in the Discounted Cash Flow value of operations must be separately valued and added to or subtracted from the Discounted Cash Flow valuation. This is true for both on and off bala
• A statement of cash flows reports on cash flows for operating, investing, and financing activities at a point in time. a. True b. False
• State true or false and justify your answer: Cash flow is equal to earnings before taxes minus depreciation.
• The cash flow effect from a change in Net Working Capital is always equal in size and opposite in sign to the changes in Net Working Capital. a. True b. False
• True or false? Cash budgets provide less specific financial information than the percentage-of-sales method and the statement of cash flows.
• The free cash flow hypothesis for borrowing money makes more sense for firms in which there is a separation of ownership and management. a. True b. False
• The data needed for cost-volume-profit analysis is readily available if the income statement is prepared using a contribution format. a. True b. False
• State true or false and justify your answer: Cash flow from operations is equal to earnings before taxes minus depreciation.
• In the Statement of Cash Flows, cash operations are cash flows directly related to the purchase and sale of fixed assets. True or false?
• True or False: Factoring is the process of putting up accounts receivable as collateral to obtain cash.
• One unique characteristic of the capital acquisition and repayment cycle is that relatively few transactions affect the account balances, but each transaction is often highly material in amount. a. False. b. True.
• A firm's statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period. a. True b. False
• State true or false and justify your answer: The purchase of a new factory would reduce the cash flows from investing activities on the statement of cash flows.
• State true or false and justify your answer: A cash flow statement is correct if the net cash flow ties to the ending cash balance.
• All cash budgets contain beginning and ending cash balances. a. True b. False
• A $ 125,000 credit sale could be a part of a firm's cash flow from operations if paid off within the firm's fiscal year. True or False?
• True or false? The three sections of a cash budget, in order, are the cash collections schedule, the disbursem*nts schedule, and the cash balance reconciliation.
• True or False: Net present value can be helpful in deciding what capital equipment to purchase.
• State true or false and justify your answer: The cash budget approach to financial forecasting assumes that balance sheet accounts maintain a constant relationship to cash.
• Capital budgeting is generally done with real or nominal cash flows and rates?
• State true or false and justify your answer: A cash budget is unnecessary under level production since we know how much will be produced every month.
• After-tax cash flows will always be less than before-tax cash flows. a. True b. False
• The amount of any LT debt must be subtracted from that value prior to calculating the stock's intrinsic value. (True or false)ing the Free Cash Flow method, the value of the entire firm is calculated.... True or false: -When using the Free Cash Flow metho
• True or false? The cash ratio is a more conservative measure of liquidity than the quick ratio.
• Say True or False for each of the following statements: a. The cash budget can be used to provide an estimate of the firm's future financing needs. b. Cash budgets do not provide reasonable predictio
• Why do capital budgeting evaluation methods use cash flows rather than accounting income?
• In the payback method, depreciation is added back to net operating income when computing the net annual cash flow. True or false?
• State true or false and justify your answer: Financial leverage breakeven occurs when the return on total assets is equal to the cost of borrowed funds.
• Labor can be either a cash expense or an opportunity cost. True or False?
• Determine if the following is true or false and explain: In project appraisal, errors are more likely to arise from cash flow forecasting than in estimating the discount rate.
• Accountants do not deduct capital expenditure when calculating a year's income but instead they depreciate it over several years. As a result, net income is reduced by depreciation charges, which are not cash flows at all. a. True b. False
• When calculating the cash flows for a project, you should include interest payments. a) True b) False