# If depreciation expense is a noncash charge, why do we consider it when determining cash flows?

1. Question : The appropriate cash flows for evaluating a corporate investment decision are:

Student Answer: incremental additional cash flows.

marginal after-tax cash flows.

incremental after-tax cash flows.

investment after-tax cash flows.

Instructor Explanation: The answer can be found in Section 6.1: How to Compute Cash Flows.

Points Received: 1 of 1

Comments:

2. Question : The typical corporate investment requires a large cash outlay followed by several years of cash inflows. To make these cash flows comparable, we do which of the following?

Student Answer: Adjust both cash outflows and inflows for taxes.

Subtract interest charges to reflect the time value of money.

Adjust both outflows and inflows for the effects of depreciation.

Apply time value of money concepts and compare present values.

Instructor Explanation: The answer can be found in Section 6.1: How to Compute Cash Flows.

Points Received: 1 of 1

Comments:

3. Question : If depreciation expense is a noncash charge, why do we consider it when determining cash flows?

Student Answer: because depreciation expense reduces taxable income, so reduces the amount of taxes paid

because depreciation expense offsets part of the initial cash outlay for depreciable assets

because depreciation expense reduces net income

because depreciation expense is a method for allocating costs

Instructor Explanation: The answer can be found in Section 6.1: How to Compute Cash Flows.

Points Received: 1 of 1

Comments:

4. Question : The internal rate of return is:

Student Answer: the discount rate at which the NPV is maximized.

the discount rate used by people within the company to evaluate projects.

the rate of return that a project must exceed to be acceptable.

the discount rate that equates the present value of benefits to the present value of costs.

Instructor Explanation: The answer can be found in Section 7.1: Capital Budgeting Methods.

Points Received: 1 of 1

Comments:

5. Question : Chapter 7 introduced three methods for evaluating a corporate investment decision. Which of the following is not one of those methods?

Student Answer: payback period

net present value (NPV)

return on assets (ROA)

internal rate of return (IRR)

Instructor Explanation: The answer can be found in Section 7.1: Capital Budgeting Methods.

Points Received: 1 of 1

Comments:

6. Question : In perfect capital markets, the capital structure decision is:

Student Answer: important because it affects the cash flows to shareholders.

important because debt and equity are taxed differently.

irrelevant because the decision has no effect on cash flows.

important sometimes.

Instructor Explanation: The answer can be found in Section 8.1: Perfect Capital Markets.

Points Received: 1 of 1

Comments:

7. Question : The interplay of the tax advantages of debt and the threat of bankruptcy results in:

Student Answer: companies that have some optimal level of debt that maximizes firm value.

all companies having a debt-to-equity ratio close to 50%.

all companies having a debt-to-equity ratio close to 30%.

capital structure being irrelevant.

Instructor Explanation: The answer can be found in Section 8.1: Perfect Capital Markets.

Points Received: 1 of 1

Comments:

8. Question : Costs associated with bankruptcy include:

Student Answer: legal fees, managerial time shifted away from value creation, and loss of brand value.

legal fees, additional inventory costs from sales growth, and loss of brand value.

legal fees, managerial time shifted away from value creation, and increased market share.

legal fees, employees leaving the company, and cost savings from lower labor costs.

Instructor Explanation: The answer can be found in Section 8.1: Perfect Capital Markets.

Points Received: 1 of 1

Comments:

9. Question : All else being equal, as debt replaces equity in a profitable company’s capital structure, which of the following occurs?

Student Answer: Interest expense increases, reducing taxable income and reducing taxes.

Interest expense increases, reducing net income and earnings per share.

Interest expense increases, reducing cash flows available to shareholders.

Interest expense increases, reducing profitability and the wealth of shareholders.

Instructor Explanation: The answer can be found in Section 8.1: Perfect Capital Markets.

Points Received: 0 of 1

Comments:

10. Question : Two important aspects of debt financing are its tax advantages and the threat of bankruptcy. As a company shifts to more and more debt financing:

Student Answer: these factors reinforce one another, implying that more debt is always better.

the tax advantage always outweighs bankruptcy risk.

the threat of bankruptcy makes only very low levels of debt acceptable.

the threat of bankruptcy eventually completely offsets the tax advantage of debt.

Instructor Explanation: The answer can be found in Section 8.1: Perfect Capital Markets.