Explain why net operating working capital is included in a capital budgeting analysis and how it is recovered at the end of a project’s life.

"Every firm should use the EOQ model to determine the optimal level of inventory to maintain." Discuss the accuracy of this statement with respect to the form of the EOQ model presented in this chapter.

Define each of the following terms:

Stockholders' equity; retained earnings; working capital; net working capital; net operating working capital (NOWC); total debt

Give an explanation why sunk costs should not be included in a capital budgeting analysis but opportunity costs and externalities should be included. Give an example of each.

Distinguish among beta (or market) risk, within-firm (or corporate) risk, and stand-alone risk for a project being considered for inclusion in the capital budget.

In theory, market risk should be the only “relevant” risk. However, companies focus as much on stand-alone risk as on market risk. What are the reasons for the focus on standalone risk?

Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 11% and 14%, respectively. The beta of A is .8 while that of B is 1.5. The T-bill rate is currently 6%, while the expected rate of return of the S&P 500 Index is 12%. The standard deviation of portfolio A is 10% annually, while that of B is 31%, and that of the index is 20%. a. If you currently hold a market-index portfolio, would you choose to add either of these portfolios to your holdings? Explain. b. If instead you could invest only in bills and one of these portfolios, which would you choose?

Most firms generate cash inflows every day, not just once at the end of the year. In capital budgeting, should we recognize this fact by estimating daily project cash flows and then using them in the analysis? If we do not, are our results biased? If so, would the NPV be biased up or down? Explain.

What would happen to the U.S. standard of living if people lost faith in the safety of the financial institutions? Explain.

Discuss the pros and cons of having the directors formally announce a firm’s future dividend policy.

Relationships determined from a firm’s financial information and used for comparison purposes are known as:

A. financial ratios.

B. identities.

C. dimensional analysis.

D. scenario analysis.

E. solvency analysis.

What reinvestment rate assumptions are built into the NPV, IRR, and MIRR methods? Give an explanation for your answer.

$$\begin{matrix} \text{} & \text{X} & \text{Y} & \text{Z} & \text{Totals}\\ \text{S} & \text{.10} & \text{.25} & \text{.15} & \text{.50}\\ \text{T} & \text{.05} & \text{.20} & \text{.02} & \text{.27}\\ \text{R} & \text{.05} & \text{.15} & \text{.03} & \text{.23}\\ \text{Totals} & \text{.20} & \text{.60} & \text{.20} & \text{1.00}\\ \end{matrix}$$

Find $P(R | Z)$.

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