Reference no: EM13791139

1. The primary function of the capital budget is to forecast the funds required for future investments that must be raised through external funding, that is, by selling stock or bonds.

2. When considering two mutually exclusive projects, the financial manager should always select that project whose internal rate of return is the highest provided the projects have the same initial cost.

3. Corporate risk does not take into consideration the effects of stockholder's diversification; it is measured by a project's effect on the firm's earnings variability.

4. The beta risk of a project is that part of the project's that cannot be eliminated by diversification. Investors are not concerned about this type of since it cannot be diversified.

5. The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt.

6. The cost of debt, rd, is always less than rs, so rd(1 - T) will certainly be less than rs. Therefore, since a firm cannot be 100% debt financed, the weighted average cost of capital will always be greater than rd(1 - T).

7. The fact that interest is tax deductible makes corporate debt less expensive than common of preferred stock.

8. If the firm's actual debt ratio is below its target level, expansion capital should be raised by issuing equity in order to preserve the firm's borrowing capacity.

9. On a 2-for-1 stock split, the shares outstanding are doubled, and the stock's par value is halved.

10. A firm with a current ratio equal to four will have its current ratio increase if both current assets and current liabilities increase by the same amount.

11. The sale of common stock for cash will increase the current assets for a firm.

12. If you receive some goods on April 1 with the terms 3/20, net 30, June 1 dating, it means that you will receive a 3 percent discount if the bill is paid on or before June 20 and that the full amount must be paid 30 days after receipt of the goods.

13. Collections float offsets disbursement float. If a firm's collections float is greater than its disbursement float then a firm is said to operate with positive net float.

14. When a firm pledges its accounts receivable, if a customer that purchased goods from the firm does not pay, the selling firm must take the loss.

15. Breakeven analysis can involve determining the magnitude of the firm's profit or losses at output levels on and around the point where revenues equal costs.