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The key to successful capital budgeting is to: (Points : 1) choose investments that maximize a company's net income. not exceed the budget.

The key to successful capital budgeting is to: (Points : 1)
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 2. 2. The internal rate of return is: (Points : 1)
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. 3. The payback period has several weaknesses. From the list below, identify the item that is NOT necessarily a weakness of the payback period method. (Points : 1)
There is no theoretically correct way to tie an acceptance criterion to shareholder wealth creation.
It is simple to compute.
It ignores all cash flows after the payback period.
It ignores the time value of money.
d. have cash flows that increase over time with product market penetration.


Question 4. 4. Net present value (NPV) is best defined as: (Points : 1)
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 5. 5. The most obvious leakage or capital market imperfection affecting the debt and equity choice is: (Points : 1)
bankruptcy risk.
differential taxation of cash flows between debt and equity.
the obligatory payment of interest and discretionary payment of dividends.
the inability of bond rating agencies to perfectly foresee risk.


Question 6. 6. Debt financing is called leverage because, like a lever in mechanics, it: (Points : 1)
makes the company stronger.
magnifies the influence a company has.
has a magnifying effect on financial performance.
can lift a company out of mediocre performance.


Question 7. 7. The irrelevance of capital structure in perfect capital markets helps us because: (Points : 1)
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 8. 8. According to the NPV acceptance criterion, projects: (Points : 1)
with a positive NPV should be accepted, since they are value increasing.
with the highest NPV should be accepted.
with an NPV over $10,000 should be accepted, since value increases less than that are trivial.
are acceptable only if the ratio of benefits to costs is greater than zero.


Question 9. 9. 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: (Points : 1)
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 10. 10. In perfect capital markets, the capital structure decision is: (Points : 1)
important because it affects the cash flows to shareholders.
important because debt and equity are taxed differently.
irrelevant because the decision has no effect on cash flows.

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