1. The fact that, in real life, investors don’t have identical desires about the taxability and timing of firm payments is known as the
A. bird-in-the-hand theory.
B. dividend irrelevance theorem.
C. information effect.
D. clientele effect.
2. The tendency of stockholders in firms where the equity is close to being worthless to gamble by investing in an arguably bad project is known as the
A. clientele effect.
B. overinvestment problem.
C. capital structure irrelevance hypothesis.
D. underinvestment problem.
3. Which is the most popular rate-based capital budgeting technique?
A. Capital asset pricing model (CAPM)
B. Internal rate of return (IRR)
C. Net present value (NPV)
D. Discount period (DP)
4. You’re evaluating the proposed acquisition of a new machining tool for $88,000 by your company. The tool falls into the MACRS three-year class, and it will be fully depreciated after three years and sold at that time for $26,000. use of the tool requires an increase in NWC (spare parts inventory) of $3,500. The tool will have no effect on revenues, but it’s expected to save the firm $24,000 per year in before-tax operating costs, mostly labor. The firm’s marginal tax rate is 38 percent. What will be the adjusted total cash flow (ATCF) from the sale of the machining tool?
5. A common criticism of the payback (PB) benchmark is that it doesn’t
A. take into account NPV.
B. account for the time value of money (TVM).
C. receive complementing information from discount payback (DPB).
D. consider a project’s IRR.