Reference no: EM13746603

Question 1: GMX Resources, an independent oil and gas exploration and production company, has a tax rate of 38%. If it purchases $2,000,000 of drilling pipe, what is the after-tax cost of this expenditure?

• $760,000
• $1,240,000
• $2,000,000
• $2,760,000

Question 2: All else being equal, as debt replaces equity in a profitable company's capital structure, which of the following occurs?

• Interest expense increases, reducing taxable income and reducing taxes.
• Interest expense increases, reducing net income and earnings per share.
• Interest expense increases, reducing cash flows available to shareholders.
• Interest expense increases, reducing profitability and the wealth of shareholders.

Question 3: The most obvious leakage or capital market imperfection affecting the debt and equity choice is:

• bankruptcy risk.
• differential taxation of cash flows between debt and equity.
• the obligatory payment of interest and discretionary payment of dividends.
• the inability of bond rating agencies to perfectly foresee risk.

Question 4: Rather than just add up all the costs associated with a proposed investment, the with-and-without principle recognizes that some cash flows might not be incremental. Examples of nonincremental project costs are:

• sunk costs, additional revenues, and COGS of new products.
• sunk costs, allocation of overhead, and cannibalism of sales.
• sunk costs, allocation of overhead, and depreciation of new equipment.
• allocation of overhead, additional revenues, and costs.

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: 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 7: Which of the following is a problem associated with bankruptcy?

• It is embarrassing for managers to work at a firm that fails.
• Bankruptcy shifts assets to more highly valued uses.
• The costs associated with bankruptcy further reduce cash flows to shareholders.
• A company immediately ceases to be able to conduct business once it has filed for bankruptcy.

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: If depreciation expense is a noncash charge, why do we consider it when determining cash flows?

• because depreciation expense reduces taxable income, so reduces the amount of taxes paid
• because depreciation expense offsets part of the initial cash outlay for depreciable assets
• because depreciation expense reduces net income
• because depreciation expense is a method for allocating costs

Question 10: 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.