A+ Answers of the following Questions

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Question 1
The reason cash flow is used in capital budgeting is because:
A. cash rather than income is used to purchase new machines.
B. cash outlays need to be evaluated in terms of the present value of the resultant cash inflows.
C. to ignore the tax shield provided from depreciation ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines.
D. All of the above


Question 2
The first step in the capital budgeting process is:
A. collection of data.
B. idea development.
C. assign probabilities.
D. determine cashflow.

Question 3
Capital budgeting is primarily concerned with:
A. capital formation in the economy.
B. planning future financing needs.
C. evaluating investment alternatives.
D. minimizing the cost of capital.

Question 1
The longer the life of an investment:
A. the more significant the discount rate.
B. the less significant the discount rate.
C. makes no difference.
D. None of the above


Question 2
If projects are mutually exclusive:
A. they can only be accepted under capital rationing.
B. the selection of one alternative precludes the selection of other alternatives.
C. the payback method should be used.
D. the net present-value should be used.


Question 3
The internal rate of return and net present value methods:
A. always give the same investment decision answer.
B. never give the same investment decision answer.
C. usually give the same investment decision answer.
D. always give answers different from the payback method.

Question 1
A characteristic of capital budgeting is:
A. a large amount of money is always involved.
B. $456.00the internal rate of return must be less than the cost of capital.
C. the internal rate of return must be greater than the cost of capital.
D. the time horizon is at least five years.


Question 2
The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method:
A. assumes that cash flows are reinvested at the project's internal rate of return.
B. concentrates on the liquidity aspects of investment projects.
C. assumes that cash flows are reinvested at the firm's weighted average cost of capital.
D. None of the above


Question 3
The __________ assumes returns are reinvested at the cost of capital.
A. payback method
B. internal rate of return
C. net present value
D. capital rationing

Question 1
In using the internal rate of return method, it is assumed that cash flows can be reinvested at:
A. the cost of equity.
B. the cost of capital.
C. the internal rate of return.
D. the prevailing interest rate

Question 2
The internal rate of return and net present value methods:
A. always give the same investment decision answer.
B. never give the same investment decision answer.
C. usually give the same investment decision answer.
D. always give answers different from the payback method.

Question 3
The reason cash flow is used in capital budgeting is because:
A. cash rather than income is used to purchase new machines.
B. cash outlays need to be evaluated in terms of the present value of the resultant cash inflows.
C. to ignore the tax shield provided from depreciation ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines.
D. All of the above

Question 1
Why is the cost of debt normally lower than the cost of preferred stock?
A. Preferred stock dividends are tax deductions.
B. Interest is tax deductible.
C. Preferred stock dividends must be paid before common stock dividends.
D. Common stock dividends are not tax deductible.


Question 2
If flotation costs go down, the cost of new preferred stock will:
A. go up.
B. go down.
C. stay the same.
D. slowly increase.


Question 3
A firm's debt to equity ratio varies at times because:
A. a firm will want to sell common stock when prices are high and bonds when interest rates are low.
B. a firm will want to take advantage of timing its fund raising in order to minimize costs over the long run.
C. the market allows some leeway in the debt to equity ratio before penalizing the firm with a higher cost of capital.
D. All of the above

    • 7 years ago
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