Principles of Finance


When making investment decisions, we focus on after-tax cash flows because: (Points : 1)

  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 2.2. Which of the following is true when a company has very little debt? (Points : 1)

  The expected costs of bankruptcy will be moderate.
  The expected costs of bankruptcy will be about zero.
  The risk of bankruptcy is still significant.
  Managers will work very hard to avoid bankruptcy.

Question 3.3. 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: (Points : 1)

  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 4.4. 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

Question 5.5. 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.

Question 6.6. Sunk costs are best described as: (Points : 1)

  money that has been lost.
  an expenditure that did not produce a profitable product.
  an expenditure on a product that was later discontinued.
  expenditures on a proposed project that cannot be recovered whether the project is implemented or not.

Question 7.7. The appropriate cash flows for evaluating a corporate investment decision are: (Points : 1)

  incremental additional cash flows.
  marginal after-tax cash flows.
  incremental after-tax cash flows.
  investment after-tax cash flows.

Question 8.8. Debt financing is called leverage because, like a lever in mechanics, it: (Points : 1)

  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.

Question 9.9. Chapter 7 introduced 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)

Question 10.10. The appropriate cash flows for evaluating a corporate investment decision are: (Points : 1)

  incremental additional cash flows.
  marginal after-tax cash flows.
  incremental after-tax cash flows.
  investment after-tax cash flows.

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