BUS 401 Multiple Choice Questions Quiz

A. the discount rate at which the NPV is maximized.

B. the discount rate used by people within the company to evaluate projects

C. the rate of return that a project must exceed to be acceptable.

D. the discount rate that equates the present value of benefits to the present value of costs.

A. companies that have some optimal level of debt that maximizes firm value.

B. all companies having a debt-to-equity ratio close to 50%.

C. all companies having a debt-to-equity ratio close to 30%.

D. capital structure being irrelevant.

A. There is no theoretically correct way to tie an acceptance criterion to shareholder wealth creation.

B. It is simple to compute.

C. It ignores all cash flows after the payback period.

D. It ignores the time value of money. have cash flows that increase over time with product market penetration.

A. choose investments that maximize a company’s net income.

B. not exceed the budget.

C. choose investments that have the shortest payback period.

D. choose investments whose present value of expected benefits exceed the present value of their expected costs, and so are value creating.

A. because depreciation expense reduces taxable income, so reduces the amount of taxes paid

B. because depreciation expense offsets part of the initial cash outlay for depreciable assets

C. because depreciation expense reduces net income

D. because depreciation expense is a method for allocating costs

A. legal fees, managerial time shifted away from value creation, and loss of brand value.

B. legal fees, additional inventory costs from sales growth, and loss of brand value.

C. legal fees, managerial time shifted away from value creation, and increased market share.

D. legal fees, employees leaving the company, and cost savings from lower labor costs.

A. incremental additional cash flows.

B. marginal after-tax cash flows.

C. incremental after-tax cash flows.

D. investment after-tax cash flows.

A. Adjust both cash outflows and inflows for taxes.

B. Subtract interest charges to reflect the time value of money.

C. Adjust both outflows and inflows for the effects of depreciation.

D. Apply time value of money concepts and compare present values.

A. the cash flows of the investment with tax adjustments to the cash flows without tax adjustments.

B. the cash flows of the investment with depreciation to the cash flows without depreciation.

C. the cash flows of the company with the investment to the cash flows without the investment.

D. all financing costs except for sunk costs.

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

B. the tax advantage always outweighs bankruptcy risk.

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

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