Chapter 15 True or False Quiz

. Investment decisions involve costs and revenues that extend over a number of years.

. One of the reasons that capital budgeting is so important is that major capital investment projects are generally irreversible.

. A firm should continue to increase its level of capital investment so long as the rate of return on the least profitable investment project that the firm undertakes is less than the marginal cost of capital.

. In calculating net cash flows, depreciation is treated as a cost.

. In general, a firm should undertake a project only if its net present value is positive.

. In general, a firm should undertake any project that has an internal rate of return that is positive.

. If the internal rate of return is used to discount all cash flows associated with a project, the net present value of the project will be equal to zero.

. Calculation of the internal rate of return incorporates the implicit assumption that net cash flows from a project can be reinvested at the internal rate of return.

. If the net present value method and the internal rate of return method yield contradictory results, the latter should be followed rather than the former.

. A house that is owned by an individual is referred to as human capital, whereas a house that is owned by a corporation is referred to as non-human capital.

. The profitability per dollar invested is referred to as the profitability index.

. One problem with the profitability index is that it ignores the time value of money.

. In the absence of capital rationing, a firm should undertake all projects with a profitability index greater than zero.

. One advantage of using internal funding to support investment projects is that the firm experiences no economic cost of capital for internal funding.

. The cost of debt should generally be figured on an after-tax basis.

. The difference between the external and internal cost of raising equity capital is due to flotation costs.

. The cost of raising equity capital should generally be figured on an after-tax basis.

. The rate of return that stockholders require to invest in a firm is the cost of equity capital.

. The cost of debt is generally greater than the cost of equity capital.

. The difference between the rate of return on debt issued by the government and the rate of return on equity capital is referred to as a risk premium.

. According to the dividend valuation model, the price of a share of stock will increase if the rate of return required by investors increases.

. The capital asset pricing model determines the beta coefficient for a firm by regressing the variability in the firm's common stock against the variability in an index of all common stocks.

. A firm with a beta coefficient that is equal to zero has the same degree of risk as a broad-based portfolio of stocks.

. A firm with a beta coefficient that is equal to two is twice as risky as a broad-based portfolio of stocks.

. Firms generally use only one of the three equity capital valuation methods.

. The risk encountered by a firm when raising funds by issuing debt is greater than the risk from issuing common stock.

. The risk encountered by an investor when holding debt is greater than the risk from holding common stock.

. The composite cost of capital reflects the debt to equity ratio preferred by the firm.

. During most of the 1980s, the cost of capital in the United States was below the cost of capital in Japan.

. According to the 1977 study by Gitman and Forrester, the single most commonly used capital budgeting technique among the firms surveyed was the internal rate of return method.

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