1. Capital budgeting involves planning and justifying how money is spent on short-term items like inventory, and payroll as well as on long-term projects such as new business ventures, equipment replacement, and expansion.
True
False
2. The cost of capital is a single rate that reflects the average return paid to investors who provide the firm's capital.
True
False
3. The NPV decision rules are based on the following statements that follow from the definition of NPV.
NPV > 0 , adds shareholder wealth
NPV = 0, no change in shareholder wealth
NPV < 0, reduces shareholder wealth
True
False
4. The internal rate of return is analogous to the yield on a bond, because both are rates that equate inflows with outflows on a present value basis.
True
False
5. An assumption implicit in the net present value technique is that all cash flows are reinvested at the cost of capital.
True
False
6. Although the NPV method is technically superior, the IRR method is used more frequently.
True
False
7. The least risky capital projects are replacements. Expansions and new business ventures are progressively more risky.
True
False
8. Which of the following is not a cash flow consideration in evaluating capital budgeting projects?
- income taxes on incremental earnings
- identifiable incremental overhead
- incremental accounting profit (net income)
- depreciation
9. When estimating cash flows for capital budgeting projects,
- interest expenses incurred to finance the project are included
- interest expense is considered in the cash flow estimates only if the financing is principally from debt
- interest expense is never included in the cash flow estimates
- none of the above
10. The most difficult part of the capital budgeting process is:
- estimation of the incremental project cash flows
- application of evaluation techniques such as NPV or IRR
- interpreting the results of the application of NPV or IRR
- none of the above
11. Because depreciation is a non-cash expense item, it is not necessary to consider depreciation in estimating cash flows for a new capital project.
True
False
12. An increase in net working capital increases operating cash flows.
True
False
13. The incremental cash flow principle claims that sunk costs must be taken into account in the firm's decision whether to accept or reject a project.
True
False
14. Basic overheads are usually considered fixed and left out of project analysis.
True
False
15. The terms "acquisition" and "takeover" are often used to refer to a merger because the stock of the firm that goes out of existence is usually acquired by the continuing firm.
True
False
16. A consolidation occurs when all of the combining legal entities dissolve, and a new entity with a new name is formed to continue into the future.
True
False
17. Acquiring firms rarely pay more than a small premium over their target's premerger market price, because to do so would be an irrational transfer of wealth to the target's stockholders.
True
False
18. If Company F and Company G merge and become Company F, what happens to the stockholders of Company G?
- They become stockholders of Company F.
- They are paid for their shares of Company G.
- They lose their investment.
- Either a. or b.
- Any of the above could occur.
19. The category of business combination where the firms have a supplier-customer relationship is known as a
- vertical merger.
- horizontal merger.
- conglomerate merger.
- none of the above
20. A combination of companies that compete directly is a
- conglomerate merger.
- vertical merger.
- horizontal merger.
- takeover