True and False

1. Before- and after-tax cost of common stock are the same because common stock dividends are not tax deductible for the firms.

2. The managers of a firm should understand the notion that the retained earnings on hand are free because the cost of retained earnings is equal to the cost of common equity with flotation costs added.

3. In capital budgeting process with a replacement decision (e.g., replacing an existing machine with a newer model) there is often significant amount of salvage value for the old machine and when an asset is sold for less than book value, there will be substantial amount of taxes to be paid

4. With capital budgeting, cash flows should be absolute and not incremental in the sense that these cash flows are not in addition to those that the firm already has.

5. If the NPV is negative, the project should be rejected.