The irrelevance of capital structure in perfect capital markets helps us because

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?

$880.00

$3,120.00

$4,000.00

$4,880.00

 

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.

Answer

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