1. The efficient market hypothesis says that at any time the security price full

Question

1. The efficient market hypothesis says that at any time the security price fully reflects all the information, so the price changes are not predictable. True False

2. When we have two mutually exclusive projects, if NPV and IRR lead to inconsistent rankings, we should follow the NPV rule.

True

False

3. The after-tax cost of debt is found by multiplying the cost of new debt by (1-T), where T is the firm's marginal tax rate.

True

False

4.

The cost of newly issued common stock is usually higher than the cost of retained earnings because of the flotation costs.

True

False

Explanation / Answer

1-

TRUE

because price contains effects of all information whether it is past, present or future information

2-

TRUE

We should follow NPV criteria because IRR is based on assumption of reinvestment of cash flow which is practically not possible

3-

TRUE

after tax cost of debt = before tax cost*(1-tax rate)

4-

TRUE

As flotation cost increases the cost of equity

1-

TRUE

because price contains effects of all information whether it is past, present or future information

2-

TRUE

We should follow NPV criteria because IRR is based on assumption of reinvestment of cash flow which is practically not possible

3-

TRUE

after tax cost of debt = before tax cost*(1-tax rate)

4-

TRUE

As flotation cost increases the cost of equity

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