Reference no: EM132984521

Question 1. The discount rate that equates present value of cash inflows and outflows is called the:
a. component cost of capital.
b. weighted average cost of capital.
c. after-tax weighted average cost of capital.
d. IRR.

Question 2. Generally, a firm's estimated component cost of debt:
a. accurately estimates the firm's true opportunity cost of debt.
b. equals the firm's weighted cost of capital.
c. underestimates the firm's true opportunity cost of debt.
d. overestimates the firm's true opportunity cost of debt.

Question 3. Net present value is the:
a. current-dollar difference between marginal revenues and marginal costs.
b. change in net cash flows due to an investment project.
c. change in before-tax cash flows due to an investment project.
d. change in net after-tax cash flows due to an investment project.

Question 4. When net present value is positive:
a. the internal rate of return equals the cost of capital.
b. the internal rate of return exceeds the cost of capital.
c. the internal rate of return is less than the cost of capital.
d. the internal rate of return equals zero.

Question 5. flows include depreciation:
a. to account for taxes effects.
b. as a cash expense.
c. if accelerated depreciation is chosen.
d. to reduce projected cash flows.

Question 6. The internal rate of return can be calculated by solving for ki after setting net present value equal to:
a. zero.
b. the initial investment cost or outlay.
c. the cost of capital.
d. expected cash flows.

Question 7. A firm must choose between two projects, X and Y. Project X has the highest net present value, but project Y has the highest profitability index. The firm should choose project Y if:
a. the firm is a risk seeker.
b. the firm is risk averse.
c. the firm has substantial investment resources.
d. the firm has limited investment resources.

Question 8. If the tax rate is 25% and the prevailing interest rate is 12%, the after tax cost of debt is:
a. 3%.
b. 9%.
c. 16%.
d. 37%.

Question 9. Markets sometimes fail to allocate resources efficiently. Under such circumstances, it always makes sense for the government to impose taxes in the case of negative externalities or subsidies in the case of positive externalities.
a. True
b. False

Question 10. A negative externality exists when a voluntary market transaction between two parties imposes involuntary costs on a third party.
a. True
b. False

Question 11. Efficiency mandates that the prices of goods and services reflects all incremental costs of production, including the cost of inputs, the value of producer time and effort, and any spillover effects.
a. True
b. False

Question 12. With a Pigou tax, the costs that pollution imposes on the public will be considered when the firm decides where to locate a plant, which technologies to use, or how much to produce.
a. True
b. False

Question 13. In all cases, the best remedy for externalities is to define property rights and allow the affected parties to transact privately to achieve mutually beneficial outcomes.
a. True
b. False