Capital Budgeting Quiz 2

1. Although the payback method ignores the time value of money, relying solely on this capital budgeting method will always lead to value maximizing decision.

False

1. Two of the post-audit main purposes are to improve forecasts and to improve operations.

True

1. Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them, but capital raised by selling new stock or bonds does have a cost.

False

1. Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.

True

1. The after-tax cost of debt is used to calculate the weighted average cost of capital since we are concerned with the after-tax cash flows of the firm.

True

1. Capital budgeting decisions must be based on the accounting income the project generates since stockholders are primarily concerned with the reported net income the firm generates.

False

1. The ability of a firm to raise sufficient capital on competitive terms under adverse conditions in order to sustain steady operations is referred to as financial flexibility.

True

1. In the real world, the type of security that generates a return that is nearest to a risk-free rate of return is a Treasury bill.

True

1. Corporate risk does not take into consideration the effects of stockholder's diversification; it is measured by a project's effect on the firm's earnings variability.

True

1. The primary function of the capital budget is to forecast the funds required for future investments that must be raised solely through external funding, that is, by selling stock or bonds.

False

1. With the current techniques available, estimating cash flows is the easiest step in the analysis of a capital budgeting project.

False

1. The securities exchange commission is the U.S. government agency that regulates the issuance and trading of stocks and bonds.

True

1. A publicly owned corporation is simply a company whose shares are held by the investing public, which may include other corporations and institutions.

True

1. The degree of operating leverage is defined as the percentage change in operating earnings associated with a given percentage change in sales.

True

1. The correct discount rate for a firm to use in capital budgeting, assuming that new investments are of the same degree of risk as the firm's existing assets, is its marginal cost of capital.

True

1. Under a best efforts arrangement, the investment bank purchases all of the shares from the firm and then resells the share to the public. Under this arrangement the investment banks assume significant risk.

False

1. If a firm can shift its capital structure so as to change its weighted average cost of capital (WACC), which of the following results would be preferred?                              (a)

1. A major disadvantage of the payback period method is it                   (e)

1. Which of the following statements concerning cash flow evaluation in capital budgeting is incorrect?       (d)