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Unformatted text preview: Test Bank Chapter 11: RISK, RETURN, AND CAPITAL BUDGETING EFS I. True or False (Definitions Concepts) F 1. With an imperfect capital market environment, the cost of capital would be the investors’ required return for the project. (FALSE: Should be With a perfect instead of With an imperfect.) T 2. If a firm undertakes a project, it creates an opportunity cost: It gives up the chance to make other investments—including investments in publicly traded financial securities. T 3. At any one time, there is only one required return for a given risk level in an efficient capital market. F 4. The value of a firm can be expressed as the value of the claims on its short-term assets. (FALSE: Should be on all of its assets instead of on its short-term assets.) T 5. Equity is the current value of all of the firm's outstanding shares of stock. F 6. An asset must be expected to earn at least its cost of debt to justify its inclusion in the firm's asset portfolio. (FALSE: Should be cost of capital instead of cost of debt.) F 7. The present value of a project cannot remain constant even if there are changes in both the expected cash flows and the cost of capital. (FALSE: Should be can remain instead of cannot remain.) T 8. Financial risk comes from how the firm is financed; it’s based on the firm’s capital structure (its proportions of debt and equity), which is the firm’s liabilities and owners’ equity or right-hand side of its balance sheet. F 9. The main part of nondiversifiable risk is often called financial risk. (FALSE: Should be business or operating risk instead of financial risk.) T 10. Operating leverage is the relative mix of fixed and variable costs used to produce a product or service. T 11. An increase in fixed cost is an increase in operating leverage. F 12. A firm's choice of operating leverage is never limited by the number of possible different methods of producing a product and/or service. (FALSE: Should be is limited instead of is never limited.) F 13. The realized return to the shareholders (owners) in an all-equity-financed firm is not the same as the realized return to the firm. (FALSE: Should be is the same instead of is not the same.) T 14. Technological considerations may force a firm to use certain processes that have a large component of either fixed or variable expense. T 15. A project's cost of capital must reflect its own risk, not the risk of a firm's past or existing operations. II. Multiple Choice (Definitions and Concepts) b 16. Whenever a firm splits itself into separate units, with each unit having limited liability with respect to its financing, the capital structure of each unit becomes . a. an irrelevant consideration for a cost of capital....
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This note was uploaded on 01/21/2011 for the course ACC 452 taught by Professor Mr.cula during the Spring '10 term at Abraham Baldwin Agricultural College.
- Spring '10