ACF Study Guide.

If a firm wants to increase its share price, it must cut its dividend and invest more. -correct answer False A firm can increase its growth rate by retaining more of its earnings. -correct answer True If the firm retains more earnings, it will be able to pay out less of those earnings, which means that the firm will have to increase its dividend. -correct answer False Cutting the firm's dividend to increase investment will raise the stock price if, and only if, the new investments have a positive NPV. -correct answer True Relevant to FCF? interest payments on debt raised specifically for project -correct answer No Relevant to FCF? cost of marketing survey conducted last year -correct answer No Relevant to FCF? tax savings brought about by project's depreciation expense -correct answer Yes Relevant to FCF? r&d expenditures you made in the past -correct answer No Simplifying assumption for capital budgeting? Firm pays out all earnings as dividends -correct answer No Simplifying assumption for capital budgeting? project has average risk -correct answer Yes Simplifying assumption for capital budgeting? corporate taxes are only market imperfection -correct answer Yes Simplifying assumption for capital budgeting? firm's d:e ratio is constant -correct answer No Plug is entry that helps us balance the balance sheet and avoid embarrassing mistakes -correct answer True Cash plug if pre-determined dividend policy and debt repayment policy -correct answer True Debt plug if firm's debt as a fixed pre-determined repayment schedule -correct answer False Smaller the cost of waiting, less attractive the option to delay becomes -correct answer False It's always better to wait to invest unless there is cost of doing so -correct answer True Aside from current NPV, other factors affect value of investment and decision to wait -correct answer True Option to wait is more valuable when there is great deal of uncertainty regarding value of investment in future -correct answer True What is wrong with policy to maximize RONA? Nothing -correct answer False What is wrong with policy to maximize RONA? Encourage managers to forego good projects if RONA is less than firm's current RONA -correct answer True What is wrong with policy to maximize RONA? May encourage managers to sometimes accept projects that may reduce shareholder wealth -correct answer True What is wrong with policy to maximize RONA? Encourage managers to work too hard at identifying good projects -correct answer False How to create economic value? Taking bold risks for greater payoff. Risk-return trade-off -correct answer False