A benefit of debt financing is that:
not making scheduled debt payments can lead to bankruptcy.
interest paid on debt is tax-deductible.
loans must be repaid.
debt magnifies bad outcomes (i.e., makes earnings more variable).


Question 2.2. 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.


Question 3.3. Net present value (NPV) is best defined as:
the difference between a project's benefits and its costs.
the difference between the present value of a project's benefits and the present value of its costs.
the present value of a project's benefits.
the ratio of the present value of a project's benefits and its costs.


Question 4.4. 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.


Question 5.5. When making investment decisions, we focus on incremental cash flows because: (Points : 1)
we want to avoid double counting.
sometimes a new product erodes sales of existing products.
we want to compare the additional cash flows to the cost of the investment.
we want to make sure that the cash flows are positive.


Question 6.6. 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 7.7. 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:
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 8.8. Which of the following is a problem associated with bankruptcy?
It is embarrassing for managers to work at a firm that fails.
Bankruptcy shifts assets to more highly valued uses.
The costs associated with bankruptcy further reduce cash flows to shareholders.
A company immediately ceases to be able to conduct business once it has filed for bankruptcy.


Question 9.9. 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 10.10. 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)