The most obvious leakage or capital market imperfection affecting the debt and equity choice is: (Points : 1) bankruptcy risk. differential taxation of cash flows between debt and equity. the obligatory payment of interest and discretionary payment of dividends. the inability of bond rating agencies to perfectly foresee risk. Question 10. 10. The key to successful capital budgeting is to: (Points : 1) choose investments that maximize a companys net income. not exceed the budget. choose investments that have the shortest payback period. choose investments whose present value of expected benefits exceed the present value of their expected costs, and so are value creating. Debt financing is called leverage because, like a lever in mechanics, it: (Points : 1) makes the company stronger. magnifies the influence a company has. has a magnifying effect on financial performance. can lift a company out of mediocre performance. Question 7. 7. The appropriate cash flows for evaluating a corporate investment decision are: (Points : 1) incremental additional cash flows. marginal after-tax cash flows. incremental after-tax cash flows. investment after-tax cash flows. Net present value (NPV) is best defined as: (Points : 1) the difference between a projects benefits and its costs. the difference between the present value of a projects benefits and the present value of its costs. the present value of a projects benefits. the ratio of the present value of a projects benefits and its costs