Answer Options:
a. True
b. False
Answer:
a. True
Question: Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them, and no flotation costs are required to raise them, but capital raised by selling new stock or bonds does have a cost. a. True b. False
Answer:
b. False
Question: The amount shown on the December 31, 2015, balance sheet as “retained earnings” is equal to the firm’s net income for 2015 minus any dividends it paid.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Which of the following statements is most correct? A) Retained earnings, as reported on the balance sheet, represents the amount of cash a company has available to pay out as dividends to shareholders. B) 70% of the interest received by corporations is excluded from taxable income. C) 70% of the dividends received by corporations is excluded from taxable income. D) Because taxes on long-term capital gains are not paid until the gain is realized, investors must pay the top individual tax rate on that gain. E) The corporate tax system favors equity financing, as dividends paid are deductible from corporate taxes.
Answer:
C
Question: Which of the following statements is CORRECT? A) Since depreciation increases the firm’s cash provided by operating activities, the more depreciation a company has, the larger its retained earnings will be, other things held constant. B) A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments. C) Common equity includes common stock and retained earnings, less accumulated depreciation. D) The retained earnings account as reported on the balance sheet shows the amount of cash that is available for paying dividends. E) If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.
Answer:
B
Question: The cost of debt, rd, is normally less than rs, so rd(1 – T) will normally be much less than rs. Therefore, as long as the firm is not completely debt financed, the weighted average cost of capital (WACC) will normally be greater than rd(1 – T). a. True b. False
Answer:
a. True
Question: Firms raise capital at the total corporate level by retaining earnings and by obtaining funds in the capital markets. They then provide funds to their different divisions for investment in capital projects. The divisions may vary in risk, and the projects within the divisions may also vary in risk. Therefore, it is conceptually correct to use different risk-adjusted costs of capital for different capital budgeting projects. a. True b. False
Answer:
a. 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: If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.
Answer Options:
a. True
b. False
Answer:
False
Question: The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don’t know which IRR is relevant.
Answer Options:
a. True
b. False
Answer:
False
Question: When considering two mutually exclusive projects, the firm should always select the project whose internal rate of return is the highest, provided the projects have the same initial cost. This statement is true regardless of whether the projects can be repeated or not.
Answer Options:
a. True
b. False
Answer:
False
Question: The cost of equity raised by retaining earnings can be less than, equal to, or greater than the cost of external equity raised by selling new issues of common stock, depending on tax rates, flotation costs, the attitude of investors, and other factors. a. True b. False
Answer:
a. True
Question: A conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects’ cost of capital is less than the rate at which the projects’ NPV profiles cross.
Answer Options:
a. True
b. False
Answer:
True
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: Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them, and no flotation costs are required to raise them, but capital raised by selling new stock or bonds does have a cost. a. True b. False
Answer:
b. False