Q26:

A.

Daico is a levered firm. The discount rate of the firm's projects should be based on

I. the firm's interest rate

II. none of the given options is correct

III. the current overall risk level of the firm

IV. the firm's actual sources of funding used for the individual projects

V. an average of the firm's overall cost of capital for the past five years

Multiple Choice

• V only

• III and IV only

• II only

• I only

• III and V only

B.

When conducting capital budgeting analysis, from the information of a particular investment project, we should see:

I. The depreciation tax shield creates a cash outflow for the project.

II. The project must create a positive operating cash flow without affecting sales.

III. All interest expense are excluded from the cash flow estimation.

IV. Project analysis should only include the cash flows that affect the income statement.

V. The opportunity cost of the company-owned building that is going to be used in the project should not be included as a cash outflow to the project.

Multiple Choice

• I, II, III and V only

• III only

• III, IV and V only

• III and V only

• I, III and V only

C.

In teaching her Finance classes, Jane tells her students that the dividend growth model:

I. does not work when a firm pays no dividend.

II. is not as reliable as the estimated rate of growth.

III. can only be used if historical dividend information is available.

IV. uses standard deviation to measure the systematic risk of a firm.

V. does not consider the risk that future dividends may vary from their estimated values.

Multiple Choice

• III only

• I, II and IV only

• II and III only

• I only

• II, III and V only

D.

Which of the following statements related to cash dividends is/are incorrect?

I. Extra cash dividends can be repeated by a firm. II. Regular cash dividends are paid out of net income. III. A dividend is never a liability until it has been declared. IV. The dividend yield expresses the annual dividend as a percentage of current stock price. V. If a firm has paid regular quarterly dividends for at least five consecutive years, it is legally obligated to continue doing so.

Multiple Choice

• III only

• I, II, III and IV only

• V only

• I and III only

• II and V only

Note: ONly final answers needed. Explanations not needed