Reference no: EM132421752

True {T) or False (F}

(a) The current risk premium is found as the difference between an estimate of the current expected rate of return on common stocks, and the current expected yield on T-Bills/Bonds. (      )

(b) The component cost of debt is the after-tax cost of new debt. (  )

(c) To obtain the cost of common stock, you (a) take the firm's estimated beta, {b} multiply this beta by the market risk premium to determine the firm's risk premium, and (c) add the firm's risk premium to the risk free rate and this will provide the cost of common stock. (   )

{d) The payback period is the number of years required to recover a project cost/investment. This period ignores cash flows beyond the payback period, and it does not consider the time-value of money. (   )

{e) The NPV and IRR methods make the same accept/reject decisions for independent projects, but if projects are mutually exclusive, then ranking conflicts can arise. If conflicts arise, the IRR should be used. (   )

(f) capital rationing occurs when management removes constraints on the size of the firm's capital budget during a particular period. (   )

{g) A project's true value may be greater than the NPV based on its physical life if it can be terminated at the end of its economic life

(h) Inflation effects must be considered in project analysis. Using the T-Bill rate would include that inflation factors. ( )                                    '

(i) Total risk and firm risk do not affect the required return on a project but could affect revenues and costs and therefore alter project returns. (    )

(j) Most firms finance their investment projects via debt and equity, but mainly equity. (   ).