Which TWO of the following statements are correct? i)Tax allowable depreciation is a relevant cash flow when evaluating borrowing to buy compared to leasing as a financing choice ii) Asset replacement decisions require relevant cash flows to be discounted by the after-tax cost of debt iii) If capital is rationed, divisible investment projects can be ranked by the profitability index when determining the optimum investment schedule iv) Government restrictions on bank lending are associated with hard capital rationing a. ii & iii b. i & ii c. i & iii d. iii & iv

Which TWO of the following statements are correct? i)Tax allowable depreciation is a relevant cash flow when evaluating borrowing to buy compared to leasing as a financing choice ii) Asset replacement decisions require relevant cash flows to be discounted by the after-tax cost of debt iii) If capital is rationed, divisible investment projects can be ranked by the profitability index when determining the optimum investment schedule iv) Government restrictions on bank lending are associated with hard capital rationing a. ii & iii b. i & ii c. i & iii d. iii & iv

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 7QTD

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Which of the following statements relating to working capital financing is not correct? A. A conservative policy uses long-term debt to finance non-current assets. B. Short-term debt is cheaper than long-term debt. C. An aggressive policy uses long-term debt to finance fluctuating current assets. D. Long-term debt is less risky that short-term debt.
All of the following are factors that may complicate capital investment analysis except a.changes in price levels b.sunk costs c.possible leasing alternatives d.federal income tax ramifications
Which of the following scenario shows the financial manager’s financing function? a. Prioritizing investments based on properly computed capital rationing method. b. Capital budgeting computation and decision with regards to the planned acquisition. c. Assessing and selecting a long-term and short-term financing tools that has a low cost. d. Monitoring trends in operating expenses for the purpose of budget allocation.
The entity has several high-cost.non-profitgenerating assets. It also has:avcost of debt and equity significantly higher than the industry average. In creating and executing a financial policy, the financial manager may do the following EXCEPT: a. Suggest a cost-benefit analysis using capital budgeting techniques on the non-profit-generating assets.b. Request for a more conservative investing and financing policy.c. Determine the cause of the high cost of financing.d. Determine whether these non-profit-generating assets be sold and be used to purchase other non-operating assets that can provide a return higher than the cost to finance these.
What is opportunity cost and why is it an important concept in the capital budgeting process? The opportunity cost concept applies to almost every financial decision we make as individuals. Can you give an example from your own experience? What is capital rationing from the perspective of capital budgeting? Give an example of a strength and a weakness of the accounting rate of return approach.
Which of the following is most correct about the cost of capital? The cost of debt reflects the interest rates on debt capital before taking into account the tax effects. Cost of capital is affected by the required rates of return of each of the source of capital, regardless of the capital structure. The capital asset pricing model is the most widely used model to estimate the cost of common equity. To minimize the cost of capital, firms should borrow more than their capacity because increasing the lower cost of debt yields the lowest cost of capital, thus, enhances shareholder value.
Which of the following is NOT an advantage of the capital budget process? Cautious review of infrastructure projects to prevent mistakes Routine purchase of infrastructure assets Facilitate borrowing to finance all infrastructure projects Improve equity across generations
. Qualitative considerations that may influence capital investment analysis include the investment proposal's impact on all of the following except ________. product quality manufacturing flexibility employee morale income taxes The process by which management allocates funds among competing capital investment proposals is called ________. competitive analysis fund analysis capital rationing None of these choices are correct. With capital rationing, alternative proposals are initially screened by establishing minimum standards and applying which of the following methods? Cash payback and net present value methods Net present value and internal rate of return methods Cash payback and average rate of return methods Net present value and average rate of return methods
Which of the following statements is CORRECT? Group of answer choices Since debt capital can cause a company to go bankrupt but equity capital cannot, debt is riskier than equity, and thus the after-tax cost of debt is always greater than the cost of equity. The tax-adjusted cost of debt is always greater than the interest rate on debt, provided the company does in fact pay taxes. If a company assigns the same cost of capital to all of its projects regardless of each project’s risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject. Because no flotation costs are required to obtain capital as retained earnings, the cost of retained earnings is generally lower than the after-tax cost of debt. Higher flotation costs tend to reduce the cost of equity capital.
Why do equity investors often use borrowed funds? Explain positive and negative financial leverage and the risks to the borrower of using borrowed funds.What is a real estate investment trust? Explain the difference between public and private REITs. How is performance measured for REITs? Choose three common investment ratios in real estate. Explain what the ratio measures and why an investor might consider the ratio. What is the difference between unlevered and levered cash flows? What discount rate must be applied when using unlevered cash flows versus levered cash flows? What is lease assignment? What is subletting? Explain at least one main difference between these methods.
Which, if any, of the following statements is (are) correct?1. Financial risk has to do with the amount of leveraging or the use of borrowed funds that a firm utilizes to structure its investment and finance its asset.2. Debenture bonds are backed by the income from a specific project.a. 1 only.b. 2 only.c. Both 1 and 2.d. Neither 1 nor 2.
Bradley Co. is expanding its operations and is in the process of selecting the method of financing this program. After some investigation, the company determines that it may (1) issue bonds and with the proceeds purchase the needed assets or (2) lease the assets on a long-term basis. Without knowing the comparative costs involved, answer these questions: a. What might be the advantages of leasing the assets instead of owning them? b. What might be the disadvantages of leasing the assets instead of owning them? c. In what ways will the Statement of Financial Position be differently affected by leasing the assets as opposed to issuing bonds and purchasing the assets?