20 mcqs
1. Capital
budgeting involves planning and justifying how money is spent on short-term
items like inventory, and payroll as well as on long-term projects such as new
business ventures, equipment replacement, and expansion. (Points : 5)
True
False
False
2. The cost of capital is a single rate that reflects the average return paid
to investors who provide the firm's capital. (Points : 5)
True
False
False
3. The NPV decision rules are based on the following statements that follow
from the definition of NPV.
NPV > 0 , adds shareholder wealth
NPV > 0 , adds shareholder wealth
NPV = 0, no
change in shareholder wealth
NPV < 0,
reduces shareholder wealth (Points : 5)
True
False
False
4. The internal rate of return is analogous to the yield on a bond, because
both are rates that equate inflows with outflows on a present value basis.
(Points : 5)
True
False
False
5. An assumption implicit in the net present value technique is that all cash
flows are reinvested at the cost of capital. (Points : 5)
True
False
6. Although
the NPV method is technically superior, the IRR method is used more frequently.
(Points: 5)
True
False
7. The least
risky capital projects are replacements. Expansions and new business ventures
are progressively more risky. (Points : 5)
True
False
8. Which of
the following is not a cash flow consideration in evaluating capital budgeting
projects? (Points : 5)
income taxes
on incremental earnings
identifiable
incremental overhead
incremental
accounting profit (net income)
depreciation
9. When
estimating cash flows for capital budgeting projects, (Points : 5)
interest
expenses incurred to finance the project are included
interest
expense is considered in the cash flow estimates only if the financing is
principally from debt
interest
expense is never included in the cash flow estimates
none of the
above
10. The most
difficult part of the capital budgeting process is: (Points : 5)
estimation
of the incremental project cash flows
application
of evaluation techniques such as NPV or IRR
interpreting
the results of the application of NPV or IRR
none of the
above
11. Because
depreciation is a non-cash expense item, it is not necessary to consider
depreciation in estimating cash flows for a new capital project. (Points : 5)
True
False
12. An
increase in net working capital increases operating cash flows. (Points : 5)
True
False
13. The
incremental cash flow principle claims that sunk costs must be taken into
account in the firm's decision whether to accept or reject a project. (Points :
5)
True
False
14. Basic
overheads are usually considered fixed and left out of project analysis.
(Points : 5)
True
False
15. The
terms "acquisition" and "takeover" are often used to refer
to a merger because the stock of the firm that goes out of existence is usually
acquired by the continuing firm. (Points : 5)
True
False
16. A
consolidation occurs when all of the combining legal entities dissolve, and a
new entity with a new name is XXXXX XXXXX continue into the future. (Points :
5)
True
False
17.
Acquiring firms rarely pay more than a small premium over their target's
premerger market price, because to do so would be an irrational transfer of
wealth to the target's stockholders. (Points : 5)
True
False
False
18. If Company F and Company G merge and become Company F, what happens to the stockholders of Company G? (Points : 5)
They become
stockholders of Company F.
They are
paid for their shares of Company G.
They lose
their investment.
Either a. or
b.
Any of the
above could occur.
19. The
category of business combination where the firms have a supplier-customer
relationship is known as a (Points : 5)
vertical
merger.
horizontal
merger. conglomerate merger.
none of the
above
20. A
combination of companies that compete directly is a (Points : 5)
conglomerate
merger.
vertical
merger.
horizontal
merger.
takeover
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