Answer Options:
a. True
b. False
Answer:
False
Question: The lower the firm’s tax rate, the lower will be its after-tax cost of debt and also its WACC, other things held constant. a. True b. False
Answer:
b. False
Question: The phenomenon called “multiple internal rates of return” arises when two or more mutually exclusive projects that have different lives are being compared.
Answer Options:
a. True
b. False
Answer:
False
Question: When estimating the cost of equity by use of the DCF method, the single biggest potential problem is to determine the growth rate that investors use when they estimate a stock’s expected future rate of return. This problem leaves us unsure of the true value of rs. a. True b. False
Answer:
a. True
Question: Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings.
Answer Options:
a. True
b. False
Answer:
b. False
Question: The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders’ claims against the firm’s existing assets. Put another way retained earnings are stockholders’ reinvested earnings.
Answer Options:
a. True
b. False
Answer:
a. True
Question: One advantage of the payback method for evaluating potential investments is that it provides information about a project’s liquidity and risk.
Answer Options:
a. True
b. False
Answer:
True
Question: Consider the following balance sheet for Games Inc. Because Games has $800,000 of retained earnings, we know that the company would be able to pay cash to buy an asset with a cost of $200,000.
Answer Options:
a. True
b. False
Answer:
b. False
Question: For capital budgeting and cost of capital purposes, the firm should always consider retained earnings as the first source of capital (i.e., use these funds first) because retained earnings have no cost to the firm. a. True b. False
Answer:
b. False
Question: If a firm’s marginal tax rate is increased, this would, other things held constant, lower the cost of debt used to calculate its WACC. a. True b. False
Answer:
a. True
Question: Typically, the statement of stockholders’ equity starts with total stockholders’ equity at the beginning of the year, adds net income, subtracts dividends paid, and ends up with total stockholders’ equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and will result in a substantial amount of retained earnings shown on the balance sheet.
Answer Options:
a. True
b. False
Answer:
a. True
Question: For planning purposes, managers must forecast the total capital budget because the amount of capital raised affects the WACC.
Answer Options:
a. True
b. False
Answer:
True
Question: Small businesses make less use of DCF capital budgeting techniques than large businesses. This may reflect a lack of knowledge on the part of small firms’ managers, but it may also reflect a rational conclusion that the costs of using DCF analysis outweigh the benefits of these methods for very small firms.
Answer Options:
a. True
b. False
Answer:
True
Question: The reason why retained earnings have a cost equal to rs is because investors think they can (i.e., expect to) earn rs on investments with the same risk as the firm’s common stock, and if the firm does not think that it can earn rs on the earnings that it retains, it should pay those earnings out to its investors. Thus, the cost of retained earnings is based on the opportunity cost principle. a. True b. False
Answer:
a. True
Question: In general, firms should use their weighted average cost of capital (WACC) to evaluate capital budgeting projects because most projects are funded with general corporate funds, which come from a variety of sources. However, if the firm plans to use only debt or only equity to fund a particular project, it should use the after-tax cost of that specific type of capital to evaluate that project. a. True b. False
Answer:
b. False
Question: When evaluating mutually exclusive projects, the modified IRR (MIRR) always leads to the same capital budgeting decisions as the NPV method, regardless of the relative lives or sizes of the projects being evaluated.
Answer Options:
a. True
b. False
Answer:
False
Question: The cost of debt is equal to one minus the marginal tax rate multiplied by the interest rate on new debt. a. True b. False
Answer:
a. True
Question: Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings.
Answer Options:
a. True
b. False
Answer:
b. False
Question: The lower the firm’s tax rate, the lower will be its after-tax cost of debt and also its WACC, other things held constant. a. True b. False
Answer:
b. False