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BUS 401 Week 3 Quiz

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1.) 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.

2.) 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.

3.) 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

4.) 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.

5.) 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)

6.) 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.

7.) 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.

8.) 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.

9.) 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.

10.) Two important aspects of debt financing are its tax advantages and the threat of bankruptcy. As a company shifts to more and more debt financing:

these factors reinforce one another, implying that more debt is always better.

the tax advantage always outweighs bankruptcy risk.

the threat of bankruptcy makes only very low levels of debt acceptable.

the threat of bankruptcy eventually completely offsets the tax advantage of debt.

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