Question 1.The irrelevance of capital structure in perfect capital markets helps us because:
- if something is irrelevant, we can ignore it.
- it applies to real-world capital markets.
- it simplifies a complex subject.
- it shows us which assumptions, when relaxed, may make capital structure relevant.
Question 2.The internal rate of return is:
- the discount rate at which the NPV is maximized.
- the discount rate used by people within the company to evaluate projects.
- the rate of return that a project must exceed to be acceptable.
- the discount rate that equates the present value of benefits to the present value of costs.
Question 3.The appropriate cash flows for evaluating a corporate investment decision are:
- incremental additional cash flows.
- marginal after-tax cash flows.
- incremental after-tax cash flows.
- investment after-tax cash flows.
Question 4.You receive an annual raise of $4,000. If you tax rate is 22%, how much will this increase your after-tax earnings?
Question 5.The typical corporate investment requires a large cash outlay followed by several years of cash inflows. To make these cash flows comparable, we do which of the following?
- Adjust both cash outflows and inflows for taxes.
- Subtract interest charges to reflect the time value of money.
- Adjust both outflows and inflows for the effects of depreciation.
- Apply time value of money concepts and compare present values.
Question 6.The key to successful capital budgeting is to:
- choose investments that maximize a company’s net income.
- not exceed the budget.
- choose investments that have the shortest payback period.
- choose investments whose present value of expected benefits exceed the present value of their expected costs, and so are value creating.
Question 7.Costs associated with bankruptcy include:
- legal fees, managerial time shifted away from value creation, and loss of brand value.
- legal fees, additional inventory costs from sales growth, and loss of brand value.
- legal fees, managerial time shifted away from value creation, and increased market share.
- legal fees, employees leaving the company, and cost savings from lower labor costs.
Question 8.When making investment decisions, we focus on after-tax cash flows because:
- taxes must be paid.
- those are the cash flows available to shareholders.
- taxes can have a significant effect on profits.
- tax rates differ across companies.
Question 9.Chapter 7 introduced three methods for evaluating a corporate investment decision. Which of the following is not one of those methods?
- payback period
- net present value (NPV)
- return on assets (ROA)
- internal rate of return (IRR)
Question 10.To determine incremental cash flows, we apply the with-and-without principle, which compares:
- the cash flows of the investment with tax adjustments to the cash flows without tax adjustments.
- the cash flows of the investment with depreciation to the cash flows without depreciation.
- the cash flows of the company with the investment to the cash flows without the investment.
- all financing costs except for sunk costs.
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