TRUE / FALSE QUESTIONS
Enter “True” or “False” on the blank preceding each question.
______ 1. In general, a firm should invest only in projects that have a rate of return that exceeds the project’s cost of capital.
______ 2. The firm’s cost of capital is typically measured on a pre-tax basis.
______ 3. Interest paid to bondholders is not a tax-deductible expense for a corporation.
______ 4. Almost always, the cost of long-term debt for a given firm is greater than the cost of preferred stock or common stock.
______ 5. The cost of new common stock is normally greater than the cost of any other type of financing.
______ 6. With a “mutually exclusive” capital budgeting project, the acceptance of one project eliminates from further consideration all other projects that serve a similar function.
______ 7. If a firm has unlimited funds for investment, then all independent projects that will provide an acceptable rate of return can be accepted.
______ 8. For a corporation, the maximum acceptable payback period (when using the payback period method in capital budgeting) is typically set by the Securities & Exchange Commission (SEC).
______ 9. If the payback period for a given project is greater than the maximum acceptable payback period the firm would then typically accept the project.
______ 10. One major weakness of the payback period capital budgeting methods is that the appropriate payback period is a subjectively determined number.
______ 11. The “Net Present Value” (NPV) capital budgeting method is more sophisticated than the “payback period” method, as NPV takes into account the time value of money.
______ 12. Generally, increases in the use of leverage will result in increases in both risk and return for a firm.
______ 13. In general, fixed costs vary with the level of sales and are a function of volume, not time.
______ 14. ABC Corporation’s operating costs exceeded its sales revenue for the most recent fiscal year. This indicates that ABC Corporation is operating above its operating breakeven point.
______ 15. An increase in the selling price per unit (P) will typically cause a firm’s operating breakeven point to decrease.