FINANCIAL MANAGEMENT 2

QUIZ
APRIL 8, 2021

Mojana, Geralf Jade B.

Explain briefly and in your own words the following:

1. Industry attractiveness and competitive advantage are principal sources of value creation.
more favorable these are, the more likely the company is to have expected returns in excess of what the
financial markets require for the risk involved.

2. The rationale behind the use of a weighted average cost of capital is that, by financing in the
proportions specified and accepting projects yielding more than the weighted average
required return, the firm is able to increase the market price of its stock.

3. Friendship Industries plans on financing all of its new capital budgeting projects this
year with long-term debt. Therefore, its cost of capital this year should be the after tax
of its new debt – right?

4. What is the distinction between evaluating the expected value of net present value and
standard deviation for an individual investment project and those for a group or combination
of projects?

5. What is the distinction between evaluating the expected value of net present value and
standard deviation for an individual investment project and those for a group or combination
of projects?

6. Economic Value Added (EVA) enjoys growing popularity because it serves as a constant reminder to
managers that they have not really done a good job unless and until they have earned a return that covers
their cost of capital. To the extent a company finds that the EVA concept better links corporate
and investments with shareholder value, it is a useful device.
 Answers:

1. Industry attractiveness and competitive advantage are both big factors that can affect
the company and its income. Because the result would greatly affect on how the
company is attractive or famous to the people and its competitiveness within the
company’s field of work

2. An organizations capital structure is based on the proportion of equity, debt, and preferred
stock it has. The sole purpose of Weighted Average Cost of Capital is to determine the cost of
each section of the company’s capital structure.

3. Correct. Because it is a new financer which is the friendship industries.

4. The standard deviation of a probability distribution is used to measure the variability of

possible outcomes while the expected value of net present value or mean, of a discrete
random variable predicts the long-term results of a statistical experiment that has been
repeated many times.

5. The standard deviation of a probability distribution is used to measure the variability of

possible outcomes while the expected value of net present value or mean, of a discrete
random variable predicts the long-term results of a statistical experiment that has been
repeated many times.

6. The main idea behind EVA is that businesses are only truly profitable when they create
wealth for their shareholders, and the measure of this goes beyond calculating net
income. It is important because it is used as an indicator of how profitable company
projects are and it therefore serves as a reflection of management performance.