Question 1.The irrelevance of capital structure in perfect capital markets helps us because: 

•   if something is irrelevant, we can ignore it.   
•   it applies to real-world capital markets.   
•   it simplifies a complex subject.   
•   it shows us which assumptions, when relaxed, may make capital structure relevant. 

Question 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.   

Question 3.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.

Question 4.You receive an annual raise of $4,000. If you tax rate is 22%, how much will this increase your after-tax earnings? 

•   $880.00   
•   $3,120.00   
•   $4,000.00   
•   $4,880.00

Question 5.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.   

Question 6.The key to successful capital budgeting is to: 

•   choose investments that maximize a company's net income.   
•   not exceed the budget.   
•   choose investments that have the shortest payback period.   
•   choose investments whose present value of expected benefits exceed the present value of their expected costs, and so are value creating.   

Question 7.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.   

Question 8.When making investment decisions, we focus on after-tax cash flows because: 

•   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 9.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)

Question 10.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.