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

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.

3-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)

4-Debt financing is called leverage because, like a lever in mechanics, it: makes the company stronger.

magnifies the influence a company has.

has a magnifying effect on financial performance.

can lift a company out of mediocre performance

5-In perfect capital markets, the capital structure decision is: 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.

6-The interplay of the tax advantages of debt and the threat of bankruptcy results in: 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.

7-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.

8-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.

9-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.

10-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.

 

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