A shift toward more fixed costs increases business risk, which in turn causes earnings before interest and taxes to increase by less for a given increase in sales. Indicate whether the statement is true or false ANSWER FALSE
Date: September 19th, 2020
Explain why one must be careful when accounting for erosion costs. What will be an ideal response? ANSWER Answer: Erosion costs occur whenever a company’s new product competes against its existing products, thereby reducing the sales of these existing products. One must be careful in including the reduced sales. This is because the […]
Date: September 19th, 2020
The current value of levered firm ABC, Inc is $100 million. Its capital structure consists of equity and pure discount debt on which a payment of $80 mn. is due in 5 years. The risk-free rate is 5%. Using the Black-Scholes Option Pricing Model, the value of the firm’s equity is (i) if =20%, and […]
Date: September 19th, 2020
There are two main reasons why we need to deal with depreciation. Which of the below is one of these reasons? A) The gain but not the loss when a capital asset is disposed B) The loss but not the gain when a capital asset is disposed C) The tax flow implications from the OCF […]
Date: September 19th, 2020
________ is the process of “expiring” the cost of a long-term tangible asset over its useful life. A) Expiration B) Depreciation C) Economic recovery D) Salvaging ANSWER Answer: B
Date: September 19th, 2020
When considering fixed operating cost increases, a financial manager must weigh the increased financial risk associated with greater operating leverage against the expected increase in returns. Indicate whether the statement is true or false ANSWER FALSE
Date: September 19th, 2020
Which of the below statements is FALSE? A) Whenever a new product competes against a company’s already existing products and reduces the sales of other products, opportunity costs occur. B) Erosion can provide cost savings. C) A synergy gain occurs when a new product can be introduced that complements another current product so that sales […]
Date: September 19th, 2020
Whenever a new product competes against a company’s already existing products and reduces the sales of the other products, net working capital increases occur. Indicate whether the statement is true or false. ANSWER Answer: FALSE Explanation: Whenever a new product competes against a company’s already existing products and reduces the sales of these […]
Date: September 19th, 2020
If the company had a large depreciation expense during the period, the income statement could show a loss for the period, even though the cash account may have grown during the same period. Indicate whether the statement is true or false. ANSWER Answer: TRUE
Date: September 19th, 2020
Effective capital structure decisions can lower the cost of capital, resulting in higher NPVs and more acceptable projects, thereby increasing the value of a firm. Indicate whether the statement is true or false ANSWER TRUE
Date: September 19th, 2020
