Essay About Capital Budgeting Quiz And Time Value Of Money

Capital Budgeting Quiz 2
Although the payback method ignores the time value of money, relying solely on this capital budgeting method will always lead to value maximizing decision.FalseTwo of the post-audit main purposes are to improve forecasts and to improve operations.True 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.FalseConflicts 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 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.TrueCapital 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.FalseThe 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.TrueIn 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.TrueCorporate risk does not take into consideration the effects of stockholders diversification; it is measured by a projects effect on the firms earnings variability.True 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.FalseWith the current techniques available, estimating cash flows is the easiest step in the analysis of a capital budgeting project.FalseThe securities exchange commission is the U.S. government agency that regulates the issuance and trading of stocks and bonds.TrueA publicly owned corporation is simply a company whose shares are held by the investing public, which may include other corporations and institutions.TrueThe degree of operating leverage is defined as the percentage change in operating earnings associated with a given percentage change in sales.TrueThe correct discount rate for a firm to use in capital budgeting, assuming that new investments are of the same degree of risk as the firms existing assets, is its marginal cost of capital.TrueUnder 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.FalseIf 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)a.The firm should try to decrease the WACC because such an action will increase the value of the firm.b.The firm should try to increase the WACC because such an action will increase the value of the firm.c.The firm should try to decrease the WACC because such an action will decrease the value of the firm.d.The firm should try to increase the WACC because such an action will decrease the value of the firm.e.The firm should not try to change the WACC because changing the WACC will not change the value of the firm.A major disadvantage of the payback period method is it                   (e)a.Is useless as a risk indicator.b.Ignores cash flows beyond the payback period.c.Does not directly account for the time value of money.d.All of the above are correct.e.Only answers b and c are correct.Which of the following statements concerning cash flow evaluation in capital budgeting is incorrect?       (d)a.When determining a projects terminal cash flows, it is generally assumed that the firms operations return to the same level as they were before the project was purchased.b.If a depreciable asset is sold at a price different than its book value, taxes will affect the net cash received from the disposal of the asset at the end of its life.c.The relevant marginal cash flows associated with a project should always include depreciation, because depreciation is an annual operating expense that requires a cash payment. d.If an asset is depreciated using the Modified Accelerated Cost Recovery System (MACRS), its depreciable basis is the amount that can be depreciated over the assets useful life, which generally includes the purchase price plus any shipping and installation charges or other costs that are incurred in order to prepare the asset for use.e.The sunk costs associated with an investment proposal are not relevant cash flows for capital budgeting analysis, so they should not be included in the computation of the marginal cash flows.