1. We can identify the cash costs and cash inflows to a company that will result from a project. These could be called "direct inflows and outflows," and the net difference is the direct net cash flow. If there are other costs and benefits that do not flow from or to the firm, but to other parties, these are called externalities, and they need not be considered as a part of the capital budgeting analysis.
a. True
b. False
2. A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.
a. True
b. False
3. Which of the following statements is CORRECT? As a firm increases the operating leverage used to produce a given quantity of output, this
a. normally leads to an increase in its fixed assets turnover ratio.
b. normally leads to a decrease in its business risk.
c. normally leads to a decrease in the variability of its expected EPS.
d. normally leads to a reduction in its fixed assets turnover ratio.
e. normally leads to a decrease in the standard deviation of its expected EBIT.