D076 Study Guide Questions
What is the effect of debt financing on a firm's income?
Income is taxed at a lower rate when a firm has no debt.
Debt interest payments reduce taxable income.
Income is taxed at a lower rate when a firm has more debt.
Debt interest payments have no effect on taxable income. -Correct
Answer ✔ ✔ Debt interest payments reduce taxable income.
An investor is reviewing the bonds of four different companies:
Company A issues AA-rated bonds. Company B issues A-rated bonds.
Company C issues BB-rated bonds. Company D issues C-rated bonds.
Which company is likely to provide the lowest rate of return to the
investor?
,Company A
Company B
Company C
Company D -Correct Answer ✔ ✔ Company A
How is the cost of capital used in the decision-making process for a
capital investment project?
It is input into cash flow calculations.
It is used as the discount rate of cash flows.
It is compared to the NPV.
It is part of the initial investment. -Correct Answer ✔ ✔ It is used
as the discount rate of cash flows.
,A pharmaceutical company recently spent $2 million developing a
new drug. The company then conducts capital budgeting analysis to
determine if it should produce the newly developed drug. The net
present value (NPV) of the project is $1.5 million.
Why should this company produce the drug?
Because the NPV is greater than zero
Because the losses due to cannibalization are less than the value of
the project
Because the development costs are greater than the value of the
project
Because the project will provide a total value of $3.5 million to the
company -Correct Answer ✔ ✔ Because the NPV is greater than
zero
, What is the term for an individual's beliefs concerning what is and is
not acceptable to personally do?
Laws
Morals
Ethics
Honesty -Correct Answer ✔ ✔ Morals
Which factor contributes to the inflation of the prices of goods and
services over time?
Decrease in costs of production
Increase in demand for goods and services
Decrease in employee demand for higher wages
What is the effect of debt financing on a firm's income?
Income is taxed at a lower rate when a firm has no debt.
Debt interest payments reduce taxable income.
Income is taxed at a lower rate when a firm has more debt.
Debt interest payments have no effect on taxable income. -Correct
Answer ✔ ✔ Debt interest payments reduce taxable income.
An investor is reviewing the bonds of four different companies:
Company A issues AA-rated bonds. Company B issues A-rated bonds.
Company C issues BB-rated bonds. Company D issues C-rated bonds.
Which company is likely to provide the lowest rate of return to the
investor?
,Company A
Company B
Company C
Company D -Correct Answer ✔ ✔ Company A
How is the cost of capital used in the decision-making process for a
capital investment project?
It is input into cash flow calculations.
It is used as the discount rate of cash flows.
It is compared to the NPV.
It is part of the initial investment. -Correct Answer ✔ ✔ It is used
as the discount rate of cash flows.
,A pharmaceutical company recently spent $2 million developing a
new drug. The company then conducts capital budgeting analysis to
determine if it should produce the newly developed drug. The net
present value (NPV) of the project is $1.5 million.
Why should this company produce the drug?
Because the NPV is greater than zero
Because the losses due to cannibalization are less than the value of
the project
Because the development costs are greater than the value of the
project
Because the project will provide a total value of $3.5 million to the
company -Correct Answer ✔ ✔ Because the NPV is greater than
zero
, What is the term for an individual's beliefs concerning what is and is
not acceptable to personally do?
Laws
Morals
Ethics
Honesty -Correct Answer ✔ ✔ Morals
Which factor contributes to the inflation of the prices of goods and
services over time?
Decrease in costs of production
Increase in demand for goods and services
Decrease in employee demand for higher wages
