TIF_ch08 - Test Bank Chapter 8 CAPITAL BUDGETING IN...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Test Bank Chapter 8: CAPITAL BUDGETING IN PRACTICE EFS I. True or False (Definitions and Concepts) T 1. Capital rationing places limits on what a firm spends, such as placing a cap on the amount available to spend on projects this year. T 2. Options are valuable, but there are certain problems associated with combining option values. T 3. Future investment opportunities are options to identify additional, more valuable investment possibilities in the future that result from a current investment. F 4. The NPV of a project is simply the salvage value from terminating the project by selling or scrapping its assets. (FALSE: Should be abandonment value instead of NPV.) F 5. One obvious consequence of using a lower discount rate for conventional projects is that the project's NPV will be understated. (FALSE: Should be higher instead of lower.) F 6. One obvious consequence of using a higher discount rate for conventional projects is that the project's NPV will be overstated. (FALSE: Should be understated instead of overstated.) T 7. Asymmetric information is a situation where information is known to some participants but not others. T 8. Agency costs create pitfalls for the use of capital rationing, but other market imperfections can make capital rationing beneficial. F 9. A firm can get a good picture of the trade-offs among alternative projects using sensitivity analysis, which entails varying the minimum expenditure limit. (FALSE: Should be maximum instead of minimum.) T 10. Lowering the level of decision-making authority within a firm may reduce the net cost of making decisions, including the opportunity cost of delay when time is critical. T 11. Sometimes the opportunity costs of forgone alternatives and options are simply impossible to measure. F 12. Capital rationing cannot reduce problems associated with asymmetric information. (FALSE: Should be can reduce instead of cannot reduce.) T 13. When transaction costs must be incurred to identify and hire additional employees, those costs decrease the project's NPV. F 14. It is easier to abandon projects that have tangible assets. (FALSE: Should be intangible instead of tangible.) T 15. Sometimes the most cost-efficient information is what you already have.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
II. Multiple Choice (Definitions and Concepts) c 16. Under capital rationing, a good tool to use is the . a. IRR method. b. payback method. c. PI method. d. NPV method. a 17. “Hard” capital rationing refers to the rationing . a. imposed by external factors. b. imposed internally by the shareholders. c. always imposed by competitors. d. always imposed by debtholders. b 18. Due to asymmetric information, the market fears that a firm issuing securities will do so when the stock is .
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

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.

Page1 / 22

TIF_ch08 - Test Bank Chapter 8 CAPITAL BUDGETING IN...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online