chp 17 test bank - CHAPTER 17CAPITAL BUDGETING MULTIPLE...

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CHAPTER 17—CAPITAL BUDGETING MULTIPLE CHOICE 1. Holding all else equal, the profitability index will fall following an increase in the: a. cost of capital. b. benefit-cost ratio. c. IRR. d. NPV. ANS: A 2. The discount rate that equates present value of cash inflows and outflows is called the: a. component cost of capital. b. weighted average cost of capital. c. after-tax weighted average cost of capital. d. IRR. ANS: D 3. Acceptance of investment projects where IRR > MCC: a. will increase the value of the firm. b. will decrease the value of the firm. c. have no impact on the value of the firm. d. none of these. ANS: A 4. Acceptance of new investment projects will increase the value of the firm provided that: a. IRR > ROE. b. ROE < IRR. c. ROE = IRR. d. none of these. ANS: D 5. The change in net cash flows due to an investment project is called: a. marginal profit. b. marginal revenue. c. incremental cash flow. d. marginal cash flow. ANS: C 6. Generally, a firm's estimated component cost of debt: a. accurately estimates the firm's true opportunity cost of debt. b. equals the firm's weighted cost of capital. c. underestimates the firm's true opportunity cost of debt. d. overestimates the firm's true opportunity cost of debt. ANS: C 7. An estimate of the firm's cost of equity capital is: a. the market return on common stocks.
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b. the market return on common stocks multiplied by beta, the firm's risk index. c. expected dividend yield plus projected growth. d. expected dividend yield. ANS: C 8. The pattern of returns for all potential investment projects is the: a. investment opportunity schedule. b. marginal cost of capital. c. optimal capital budget. d. optimal capital structure. ANS: A 9. Examples of mandatory nonrevenue-producing investments are provided by: a. cost reduction projects. b. expansion projects. c. replacement projects. d. safety and environmental projects. ANS: D 10. Net present value is the: a. current-dollar difference between marginal revenues and marginal costs. b. change in net cash flows due to an investment project. c. change in before-tax cash flows due to an investment project. d. change in net after-tax cash flows due to an investment project. ANS: A 11. Capital budgeting is the process of planning investment expenditures when returns are expected to: a. be earned at any time in the future. b. be earned within one year. c. extend beyond one generation. d. extend beyond one year. ANS: D 12. When net present value is positive: a. the internal rate of return equals the cost of capital. b. the internal rate of return exceeds the cost of capital. c. the internal rate of return is less than the cost of capital. d. the internal rate of return equals zero. ANS: B
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chp 17 test bank - CHAPTER 17CAPITAL BUDGETING MULTIPLE...

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