QUESTION 18 Which of the following statements is CORRECT? The faster an asset is depreciated, the lower the projected NPV from investing in the asset. Using accelerated depreciation rather than straight-line normally has no effect on a project's total projected cash flows nor would it affect the timing of those cash flows or the resulting NPV of the project. Corporations must use the same depreciation method for both stockholder reporting and tax purposes. Using accelerated depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a project's forecasted NPV. Depreciation is a non-cash item so completely irrelevant for capital budgeting QUESTION 19 Morales Publishing's tax rate is 40%, its beta is 1.10, and it uses no debt. However, the CFO is considering moving to a capital structure with 30% debt and 70% equity. If the risk-free rate is 5.0% and the market risk premium is 6.0%, by how much would the capital structure shift change the firm's cost of equity? O a 1.53% b. 1.70% Oc 2.26% d. 2.0596 Oe 1.87% QUESTION 20 Multiple Correct Answers: Which of the following statements concerning capital structure theory are CORRECT (choose all correct answers, avoid checking incorrect ones)? (MM Modigliani and Millier) To maximize ROE and share prices, whenever possible, companies should avoid using debt at all because it requires paying interest Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt. (VLV VUI Personal taxes on debt income decrease the value of using corporate debe Under MM with zero taxes, financial leverage has no effect on a firm's value. Apple company is likely to use more debt financing than Walmart because Apple's revenues and operating incomes are likely to remain more stable than Walmart's. QUESTION 21 Everything else remaining the same, buying becomes preferable to leasing when of a lease agreement is easier to break (abandonment option) If the asset can be depreciated at a higher rate early on The asset's value at the end of the project lease agreement) is likely to be lower and/or more uncertain If lease payments are tax deductible When the lessor bears the maintenance costs