A benefit of debt financing.
Question 1. 1. A benefit of debt financing is that: (Points : 1) not making scheduled debt payments can lead to bankruptcy. interest paid on debt is tax-deductible. loans must be repaid. debt magnifies bad outcomes (i.e., makes earnings more variable). Question 2. 2. 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 3. 3. The typical corporate investment requires a large cash outlay followed by several years of cash inflows. To make these cash flows comparable, we do which of the following? (Points : 1) Adjust both cash outflows and inflows for taxes. Subtract interest charges to reflect the time value of money. Adjust both outflows and inflows for the effects of depreciation. Apply time value of money concepts and compare present values. Question 4. 4. The appropriate cash flows for evaluating a corporate investment decision are: (Points : 1) incremental additional cash flows. marginal after-tax cash flows. incremental after-tax cash flows. investment after-tax cash flows. Question 5. 5. Which of the following is a problem associated with bankruptcy? (Points : 1) It is embarrassing for managers to work at a firm that fails. Bankruptcy shifts assets to more highly valued uses. The costs associated with bankruptcy further reduce cash flows to shareholders. A company immediately ceases to be able to conduct business once it has filed for bankruptcy. Question 6. 6. All else being equal, as debt replaces equity in a profitable companys capital structure, which of the following occurs? (Points : 1) Interest expense increases, reducing taxable income and reducing taxes. Interest expense increases, reducing net income and earnings per share. Interest expense increases, reducing cash flows available to shareholders. Interest expense increases, reducing profitability and the wealth of shareholders. Question 7. 7. When determining the cash flows for a proposed investment, we generally ignore overhead. Many overhead costs are fixed and will be paid whether the project is accepted or not, so they are not incremental. Which item on the following list, though similar to overhead, would be included as an incremental cash flow? (Points : 1) the cost of a new managerial position specifically for a proposed project the allocation of factory floor space by square feet or square meters utilized by a proposed project the allocation of time that salaried managers used developing a proposed project the allocation of headquarters rent or lease expense based on anticipated revenue of a proposed project Question 8. 8. Capital structure refers to a companys: (Points : 1) investment of capital. management of working capital—current assets and liabilities. mix of debt and equity used to fund the firms assets. mix of marketable securities. Question 9. 9. Chapter 7 introduced three methods for evaluating a corporate investment decision. Which of the following is not one of those methods? (Points : 1) payback period net present value (NPV) return on assets (ROA) internal rate of return (IRR) Question 10. 10. You receive an annual raise of $4,000. If you tax rate is 22%, how much will this increase your after-tax earnings? (Points : 1) $880.00 $3,120.00 $4,000.00 $4,880.00 •
