There are three methods for evaluating a corporate

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Reference no: EM13863403

There are three methods for evaluating a corporate investment decision. Which of the following is not one of those methods? (Points : 1)

       payback period
       net present value (NPV)
       return on assets (ROA)
       internal rate of return (IRR)

You receive an annual raise of $4,000. If you tax rate is 22%, how much will this increase your after-tax earnings? (Points : 1)

       $880.00
       $3,120.00
       $4,000.00
       $4,880.00

To determine incremental cash flows, we apply the with-and-without principle, which compares: (Points : 1)

       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.

The irrelevance of capital structure in perfect capital markets helps us because: (Points : 1)

       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.

In perfect capital markets, the capital structure decision is: (Points : 1)

       important because it affects the cash flows to shareholders.
       important because debt and equity are taxed differently.
       irrelevant because the decision has no effect on cash flows.
       important sometimes.

Net present value (NPV) is best defined as: (Points : 1)

       the difference between a project's benefits and its costs.
       the difference between the present value of a project's benefits and the present value of its costs.
       the present value of a project's benefits.
       the ratio of the present value of a project's benefits and its costs.

The interplay of the tax advantages of debt and the threat of bankruptcy results in: (Points : 1)

       companies that have some optimal level of debt that maximizes firm value.
       all companies having a debt-to-equity ratio close to 50%.
       all companies having a debt-to-equity ratio close to 30%.
       capital structure being irrelevant.

According to the NPV acceptance criterion, projects: (Points : 1)

       with a positive NPV should be accepted, since they are value increasing.
       with the highest NPV should be accepted.
       with an NPV over $10,000 should be accepted, since value increases less than that are trivial.
       are acceptable only if the ratio of benefits to costs is greater than zero.

Costs associated with bankruptcy include: (Points : 1)

       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.

Capital structure refers to a company's: (Points : 1)

       investment of capital.
       management of working capital-current assets and liabilities.
       mix of debt and equity used to fund the firm's assets.
       mix of marketable securities.

The Hamada Equation allows the firm to: (Points : 1)

       solve for a company's total risk.
       adjust the beta of a pure-play firm for its use of debt financing.
       estimate its asset beta.
       Both b and c are correct.

The weighted average cost of capital is: (Points : 1)

       the average return for the company's stock over the past several years.
       the average cost, including commissions, for raising capital for the firm.
       an average required return for each of the sources of capital used by the firm to finance its projects, weighted by the amount contributed by each source.
       interest payments and dividends, divided by the price of bonds and stock, respectively.

If a firm just paid a dividend equal to $4.00 a share, then for the WACC, in order to find the cost of equity, $4 should be: (Points : 1)

       divided by the current price of the stock, and the quotient should be added to the dividend growth rate.
       divided by the current price of the stock.
       multiplied by one minus the tax rate, and the difference divided by the current price of the stock.
       multiplied by the sum of one plus the growth rate, and then divided by the current price of the stock; this quotient should be added to the dividend growth rate.

A bond pays semiannual coupon payments of $30 each. It matures in 20 years and is selling for $1,200. What is the firm's cost of debt if the bond's par value is $1,000? (Don't forget this is a semiannual coupon.) (Points : 1)

       2.23%
       4.48%
       1.80%
       3.60%

Which of the following best describes a pure-play? (Points : 1)

       a private firm that is held in isolation in a one-company investment portfolio
       a publicly traded firm that is similar to the company or project being analyzed
       Both a and b are correct.
       Neither a nor b is correct.

Which of the following is true of flotation costs? (Points : 1)

       They include expenses like investment banker fees and commissions.
       They include the underwriting spread.
       They tend to raise the cost of capital.
       all of the above

Investors will make an investment if: (Points : 1)

       the historical rate of return exceeds the expected rate of return.
       the required rate of return exceeds the expected rate of return.
       the expected rate of return exceeds the actual rate of return.
       the expected rate of return exceeds the required rate of return.

Suppose a zero-coupon bond is selling for $614.00 today. It promises to pay $1,000 in exactly 10 years with annual compounding. What is the firm's after-tax cost of debt if this is its sole debt outstanding (assuming the firm is in the 20% tax bracket)? (Points : 1)

       4%
       5%
       6%
       7%

Which of the following is beta is used for? (Points : 1)

       estimating a regression line
       estimating a firm's total risk to be used in the WACC
       estimating a firm's market risk and used with the CAPM
       estimating the amount of leverage used by the firm

One reason why we are not concerned with idiosyncratic risk (also called firm-specific risk) is that: (Points : 1)

       most risk is not firm-specific, so we can ignore it.
       through hedging and insurance, investors may now invest in stocks with almost no risk exposure of any kind.
       it is easy and almost costless to diversify one's portfolio and eliminate idiosyncratic risk.
       investing in bonds can offset the idiosyncratic risks of shares of stock.

Reference no: EM13863403

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