21. The longer the life of an investment A. the more significant the discount rate. B. the less significant the discount rate. C. Makes no difference. D. None of these.

22. You buy a new piece of equipment for $7,360, and you receive a cash inflow of $1,000 per year for 10 years. What is the internal rate of return? A. 5% B. 6% C. 7% D. More than 7%

23. Assume a project has earnings before amortization and taxes of $15,000, amortization of $25,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project? A. $18,000 B. $19,000 C. A loss of $21,000 D. None of these

24. The profitability index will give the same investment decision as A. the payback period. B. the average accounting return. C. the net present value. D. It can be different from each of these techniques.

Chapter 13 25. Risk is not only measured in terms of losses, but also in terms of variability. A. True B. False

26. Sensitivity analysis helps the financial planner to determine how sensitive shareholders will be to changes in investment strategy. A. True B. False

27. Choosing projects with returns equal to the company norm but having a higher level of risk will most likely lower the company's share price. A. True B. False 28. Combining assets that have highly correlated returns will reduce portfolio risk. A. True B. False

14. Each project should be judged against A. the specific means of financing used to support its implementation. B. the going interest rate at that point in time. C. the cost of new common stock equity. D. the weighted average cost of capital

15. When both the tax deductibility of debt and the present value of potential bankruptcy costs are included, the cost of capital for a firm tends to A. be constant regardless of the level of debt usage. B. decrease as the level of debt increases. C. increase as the level of debt increases. D. decrease up to some debt-value ratio, then increase as bankruptcy costs become significant.

16. A firm's debt to equity ratio varies at times because A. a firm will want to sell common stock when prices are low and bonds when interest rates are high. B. a firm will want to take advantage of timing its fund-raising in order to minimize costs over the long run. C. the market allows extensive leeway in the debt to equity ratio before penalizing the firm with a higher cost of capital. D. all of the above answers are correct

Chapter 12

17. The internal rate of return is the interest rate that equates the cash outflows of an investment with the subsequent inflows. A. True B. False

18. Under the net present value method, cash flows are assumed to be reinvested at the firm's weighted average cost of capital. A, True B. False

19. With nonmutually exclusive events and no capital rationing, we will usually arrive at the same conclusions using either the net present value or internal rate of return methods. A. True B. False

20. The payback period is easy to understand and places a heavy emphasis on liquidity. A. True B. False