True or false: 1) other things the same, the use of debt financing rdeuces the f

Question

True or false: 1) other things the same, the use of debt financing rdeuces the firm's total tax bill resulting in a higher market value. 2) accounting profits are used to make capital budgeting decisions because generally accepted accounting principles ensure that profits are the best measure of a company's economic activity. 3) as production levels increase, fixed costs stay the same in total, but decrease on a per unit basis 4) a decrease in the level of production results in decreased fixed cost per unit 5) a company that sells common stock and uses the money to pay off a loan is increasing its use of financial leverage. 6) the initial outlay for a new project is an example of an opportunity cosr 7) the guiding rule in deciding if a free cash flow is incremental is to look at a company with, versus without, the new project 8) a company that sells preferred stock and uses the money to pay off a loan is decreasing its amount of financial leverage 9) Jones Blanket Co. Sells blankets for $25 each. The variable cost per blanket is $10 each. If fixed cost is $4,500,000 then the break-even point is 300,000 units. 10) if a project is acceptable using the net present value criteria, then it will also be acceptable under the less stringent criteria of the payback period 11) if a firm imposes a capital constraint on investment projects, the appropriate decision criterion is to select the set of projects that has the highest positive net present value subject to the capital constraint. True or false: 1) other things the same, the use of debt financing rdeuces the firm's total tax bill resulting in a higher market value. 2) accounting profits are used to make capital budgeting decisions because generally accepted accounting principles ensure that profits are the best measure of a company's economic activity. 3) as production levels increase, fixed costs stay the same in total, but decrease on a per unit basis 4) a decrease in the level of production results in decreased fixed cost per unit 5) a company that sells common stock and uses the money to pay off a loan is increasing its use of financial leverage. 6) the initial outlay for a new project is an example of an opportunity cosr 7) the guiding rule in deciding if a free cash flow is incremental is to look at a company with, versus without, the new project 8) a company that sells preferred stock and uses the money to pay off a loan is decreasing its amount of financial leverage 9) Jones Blanket Co. Sells blankets for $25 each. The variable cost per blanket is $10 each. If fixed cost is $4,500,000 then the break-even point is 300,000 units. 10) if a project is acceptable using the net present value criteria, then it will also be acceptable under the less stringent criteria of the payback period 11) if a firm imposes a capital constraint on investment projects, the appropriate decision criterion is to select the set of projects that has the highest positive net present value subject to the capital constraint. 1) other things the same, the use of debt financing rdeuces the firm's total tax bill resulting in a higher market value. 2) accounting profits are used to make capital budgeting decisions because generally accepted accounting principles ensure that profits are the best measure of a company's economic activity. 3) as production levels increase, fixed costs stay the same in total, but decrease on a per unit basis 4) a decrease in the level of production results in decreased fixed cost per unit 5) a company that sells common stock and uses the money to pay off a loan is increasing its use of financial leverage. 6) the initial outlay for a new project is an example of an opportunity cosr 7) the guiding rule in deciding if a free cash flow is incremental is to look at a company with, versus without, the new project 8) a company that sells preferred stock and uses the money to pay off a loan is decreasing its amount of financial leverage 9) Jones Blanket Co. Sells blankets for $25 each. The variable cost per blanket is $10 each. If fixed cost is $4,500,000 then the break-even point is 300,000 units. 10) if a project is acceptable using the net present value criteria, then it will also be acceptable under the less stringent criteria of the payback period 11) if a firm imposes a capital constraint on investment projects, the appropriate decision criterion is to select the set of projects that has the highest positive net present value subject to the capital constraint.

Explanation / Answer

Ans 1) True - Debt finances carries interest expenses with them and profits are calculated after charging intrest against them leads to less net profit hence tax payble on net profits will be less, which will ultimately increase EPS on the share, hence increasing the market value of the share.

Ans 2) Fales - Capital budgeting decision are made with an aim of future creating of wealth.

Ans 3) True - Fixed cost rmains same with the increase in level of production, hence per unit fixed cost increases becasue the constant fixed cost will be distributed among more units resulting lessor fixed cost per unit.

Ans 4) Fales - A decrease in level of production does not necessarily mean in decrease in fix cost, hence fixed will remain same and with the decrease in prodcution fixed will increase per unit.

Ans 5) False - Financial leverage is the usage of debt to achieve an ideal capital structure

Ans 6) False - An opportunity cost is the cost which is forgiven with a selection of an alternative over others.

Ans 7) Fales - Free cash flow is the cash flow from operations after deducting capex and is available for distribution to the share holder, other stake holder.

Ans 8) False - Financial leverage is the usage of debt to achieve an ideal capital structure

Ans 9) True - BEP = Fixed cost/(Unit price - Variable unit cost) = 4500000/(25-10)=300000 Units

Ans 10) False - NPV is the present value of all cash in flow - present value of all cash out flow, pay back period = Initial investment/cash in flow per period, both are different

Ans 11) True - Higher NPV should always be selected. Since it reflects future earning at present level.

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