When evaluating two mutually exclusive project, the best method to use for capital budgeting analysis is the: _____

	internal rate of return
	net present value
	payback rule
	discounted payback

Which of following variable can be used to measure business risk for a firm? _____.

	Standard deviation of the earnings before interest and tax (ROA).
	Standard deviation of the return on equity (ROE).
	Standard deviation of the return on invested capital (ROIC).
	All of the above

The trade-off theory tells us that the capital structure decision involves a tradeoff between the costs of debt financing and the benefits of debt financing. _____

True

False

The MM irrelevance capital structure theory proved that a firm's value is unaffected by its capital structure. But their study was based on some strong assumptions that: _____

	There are no brokerage costs, no corporate taxes and personal taxes.
	There are no bankruptcy costs and agency costs.
	There is no asymmetric information problem, and all investors can borrow at the same rate as corporations.
	All of the above.

Which of the following items are expected to have a constant relationship with sales when we use the percent of sale method to construct pro forma financial statements? ______

	Common stock
	Preferred stock
	Long-term debt
	Accounts payables

Which of the following statements does NOT correctly explain the effect of additional debt on the weighted average cost of capital (WACC)? ____

	Debtholders' prior and "fixed" claim increases the risk of stockholders' "residual" claim, so the cost of stock (rs) goes up.
	Additional debt also increases the pre-tax of cost of debt (rd) because the increased risk of bankruptcy.
	The net effect of additional debt on WACC is to increase WACC.
	The net effect of additional debt on WACC is uncertain.

Project selection ambiguity can arise if you rely on the internal rate of return (IRR) instead of the net present value (NPV) when _____.

	A project's cash flows are non-normal.
	There are multiple IRRs.
	Projects are mutually exclusive.
	All of the statements above are correct.

How does debt financing help reduce agency problems which arise when managers and shareholders have different objectives? _____

	Debt financing can help prevent managers from using excess cash on perquisites.
	Debt financing may make managers too risk-averse, therefore causing "underinvestment" in some risky but positive NPV projects.
	Debt financing can help prevent managers from using excess cash on non-value adding acquisitions.
	Both A and C are correct.

A firm sells paperback books for $6 each. The variable cost per book is $5. The fixed costs are $20,000. What's the publisher's breaking- even sales volume? ____

	8,000 books.
	10,000 books.
	20,000 books.
	40,000 books.

Investors often perceive an additional issuance of stock as a negative signal and push the stock price to fall because the information asymmetry problem exists between inside managers and outside investors. _____

True

False