Question

T/F

_____ The cost of equity reflects the return required for investors to own the stock.

_____ Having higher correlation between stocks in a diversified portfolio reduces the average return.

_____ An investment that has an NPV or 1 should be accepted because it is positive.

_____ Adding dividends to net income makes it net cash flow.

When making investment decisions, which of these cash flows are relevant

I.   Money paid for building repairs made in the past.

II. The cost of the building already owned by the company used in the project.

III. Variable costs associated with a different project that change because of this one.

IV. Interest payments on the debt used to finance the project.

            a. All of the above

            b. III only

            c. I, and III

            d. II only

            e. Other

Answer 1

Answer(1): True. The cost of equity reflects the return required for investors to own the stock.

Cost of equity is the required return on an investment in equity.

Answer(2): True. Having higher correlation between stocks in a diversified portfolio reduces the average return.

If there is higher correlation between two assets or stocks, the average return will be lower because they will move in the same direction.

Answer(3): False. A project should be accepted when it has a positive Net present value (NPV). A positive NPV is the difference between the present value of future cash inflows and initial cost.

Answer(4): False. Net cash flow is calculated by adjusting non cash expenses (depreciation & amortization) and change in working capital in the Net income.

Cash flow from operations = Net income + Non cash expenses + Change in working capital