Read the summary and the most important questions on Corporate Finance, Global Edition | 9780273792062 | Jonathan Berk; Peter DeMarzo

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• 1.1 Maart 2015

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• Assume perfect capital markets without taxes. One way to calculate whether a firm should use debt or equity to finance a project is to see which type of financing leads to the lowest WACC.

  False

• Risk shifting refers to the concept that managers, who perceive the firm’s equity to be underpriced, prefer to fund investments with retained earnings, or debt, rather than equity.

  False

• Holding cash has the opposite effect on risk and return of equity claims than leverage.

  Tue

• Since sunk costs have already been realized, a company should include them when making their investment decision.

  False

• In which direction will a company’s (after-tax) WACC rate change when it sells off a business unit with lower systematic risk and uses all proceeds to retire debt?

  The WACC rate increases

• Using the WACC method, the value of a project is based on free cash flows, which ignore interest and debt payments.

  True

• The Flow-to-Equity (FTE) method is based on free cash flows to equity holders, which takes all payments from and to debt holders into account.

  True

• The FTE Method uses the weighted average cost of capital to discount cash flows to equity holders.

  False

• Implementing the APV method with a constant debt-equity ratio is complicated because it requires simultaneous solving for a projects debt and total value.

  True

• If capital gains are taxed at a higher rate than dividends, which has been true until the most recent change to the tax code in the US, shareholders will prefer share repurchases over dividends.

  False