1. How is capital budgeting similar to security valuation? How is it different?
2. Why is the NPV the primary capital budgeting decision criterion?
3. Explain briefly how a sensitivity analysis is done and what the analysis is designed to show.
4. Explain operating leverage.
5. Calculate the operating breakeven for the following Plans:
Plan A. Fixed cost of $40,000. Variable cost per unit is $4.00 and fixed cost is $2.00 per unit.
Plan B. Fixed cost of $120,000, Variable cost of $3.00 per unit and fixed cost of $1.50 per unit.
6. Calculate the Weighter Average Cost of Capital:
Source of Capital Amount of funds Percent of Total
Bonds $1,750,000 35%
Preferred stock $250,000 5%
Common stock $3,000,000 60%
7. Explain the ideas behind the dividend irrelevance theory?
8. Why is the declaration date importnat to share holders when dividends are being paid out?
9. How can a company reward shareholders, when the capital appreciation is non-existence?
10. What are the two ways shareholders benefit from owning stocks?