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Module 4 Quiz (LT2)

1) Capital is sometimes defined as funds supplied to a firm by investors. 2) For capital budgeting during the current year, the appropriate marginal cost of capital for a small publicly-traded corporation raising additional funds through debt is the after-tax cost of debt. 3) The component costs of capital are market-determined variables based on investors' required returns.

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100 views

Module 4 Quiz (LT2)

1) Capital is sometimes defined as funds supplied to a firm by investors. 2) For capital budgeting during the current year, the appropriate marginal cost of capital for a small publicly-traded corporation raising additional funds through debt is the after-tax cost of debt. 3) The component costs of capital are market-determined variables based on investors' required returns.

Uploaded by

marriette joy abad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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QUIZ - Module 4: Capital Budgeting

*The answers are in red color.

1. "Capital" is sometimes defined as funds supplied to a firm by investors.”


a. True
b. False
2. Suppose you are the president of a small, publicly-traded corporation. Since you believe
that your firm's stock price is temporarily depressed, all additional capital funds required
during the current year will be raised using debt. In this case, the appropriate marginal
cost of capital for use in capital budgeting during the current year is the after-tax cost of
debt.
a. True
b. False
3. The component costs of capital are market-determined variables in the sense that they
are based on investors' required returns.
a. True
b. False
4. For capital budgeting and cost of capital purposes, the firm should always consider
retained earnings as the first source of capital (i.e., use these funds first) because
retained earnings have no cost to the firm.
a. True
b. False
5. It is extremely difficult to estimate the revenues and costs associated with large, complex
projects that take several years to develop. This is why subjective judgment is often
used for such projects along with discounted cash flow analysis.
a. True
b. False
6. The two cardinal rules that financial analysts should follow to avoid errors are: (1) in the
NPV equation, the numerator should use income calculated in accordance with generally
accepted accounting principles, and (2) all incremental cash flows should be considered
when making accept/reject decisions for capital budgeting projects.
a. True
b. False
7. Opportunity costs include those cash inflows that could be generated from assets the
firm already owns if those assets are not used for the project being evaluated.
a. True
b. False
8. Suppose Walker Publishing Company is considering bringing out a new finance text
whose projected revenues include some revenues that will be taken away from another
of Walker's books. The lost sales on the older book are a sunk cost and as such should
not be considered in the analysis for the new book.\
a. True
b. False
9. Sensitivity analysis measures a project's stand-alone risk by showing how much the
project's NPV (or IRR) is affected by a small change in one of the input variables, say
sales. Other things held constant, with the size of the independent variable graphed on
the horizontal axis and the NPV on the vertical axis, the steeper the graph of the
relationship line, the more risky the project, other things held constant.
a. True
b. False
10. Because "present value" refers to the value of cash flows that occur at different points in
time, a series of present values of cash flows should not be summed to determine the
value of a capital budgeting project.
a. True
b. False

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