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1. BUS 401 Week 3 Quiz
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1.) The appropriate cash flows for evaluating a
corporate investment decision are:
incremental additional cash flows.
marginal after-tax cash flows.
incremental after-tax cash flows.
investment after-tax cash flows.
2.) The typical corporate investment requires a
large cash outlay followed by several years of cash
inflows. To make these cash flows comparable, we
do which of the following?
Adjust both cash outflows and inflows for taxes.

2. Subtract interest charges to reflect the time value
of money.
Adjust both outflows and inflows for the effects of
depreciation.
Apply time value of money concepts and compare
present values.
3.) If depreciation expense is a noncash charge,
why do we consider it when determining cash
flows?
because depreciation expense reduces taxable
income, so reduces the amount of taxes paid
because depreciation expense offsets part of the
initial cash outlay for depreciable assets
because depreciation expense reduces net income
because depreciation expense is a method for
allocating costs
4.) The internal rate of return is:
the discount rate at which the NPV is maximized.

3. the discount rate used by people within the
company to evaluate projects.
the rate of return that a project must exceed to be
acceptable.
the discount rate that equates the present value of
benefits to the present value of costs.
5.) Chapter 7 introduced three methods for
evaluating a corporate investment decision. Which
of the following is not one of those methods?
payback period
net present value (NPV)
return on assets (ROA)
internal rate of return (IRR)
6.) In perfect capital markets, the capital structure
decision is:
important because it affects the cash flows to
shareholders.
important because debt and equity are taxed
differently.

4. irrelevant because the decision has no effect on
cash flows.
important sometimes.
7.) The interplay of the tax advantages of debt and
the threat of bankruptcy results in:
companies that have some optimal level of debt
that maximizes firm value.
all companies having a debt-to-equity ratio close
to 50%.
all companies having a debt-to-equity ratio close
to 30%.
capital structure being irrelevant.
8.) Costs associated with bankruptcy include:
legal fees, managerial time shifted away from
value creation, and loss of brand value.
legal fees, additional inventory costs from sales
growth, and loss of brand value.
legal fees, managerial time shifted away from
value creation, and increased market share.

5. legal fees, employees leaving the company, and
cost savings from lower labor costs.
9.) All else being equal, as debt replaces equity in a
profitable company’s capital structure, which of
the following occurs?
Interest expense increases, reducing taxable
income and reducing taxes.
Interest expense increases, reducing net income
and earnings per share.
Interest expense increases, reducing cash flows
available to shareholders.
Interest expense increases, reducing profitability
and the wealth of shareholders.
10.) Two important aspects of debt financing are
its tax advantages and the threat of bankruptcy. As
a company shifts to more and more debt financing:
these factors reinforce one another, implying that
more debt is always better.

6. the tax advantage always outweighs bankruptcy
risk.
the threat of bankruptcy makes only very low
levels of debt acceptable.
the threat of bankruptcy eventually completely
offsets the tax advantage of debt.

7. the tax advantage always outweighs bankruptcy
risk.
the threat of bankruptcy makes only very low
levels of debt acceptable.
the threat of bankruptcy eventually completely
offsets the tax advantage of debt.