Question

Which of the following is FALSE?
Select one:
a. The cost to maturity that a firm pays on its existing bonds equals the rate of return required by the market.
b. The cost of retained earnings is always lower than the cost of a new issue of common stock due to the absence of flotation costs when financing projects with retained earnings.
c. The net proceeds used in calculation of the cost of long-term debt are funds actually received from the sale after paying for flotation costs and taxes.
d. The cost of retained earnings is generally higher than both the cost of debt and cost of preferred stock.

Which of the following is FALSE?
Select one:
a. The accept-reject approach involves the ranking of capital expenditure projects on the basis of some predetermined measure, such as the rate of return.
b. If a firm is subject to capital rationing, it has only a fixed number of dollars available for capital expenditures and numerous projects compete for these dollars.
c. If a firm has unlimited funds, it is able to accept all independent projects that provide an acceptable return.
d. The ranking approach involves the ranking of capital expenditure projects on the basis of some predetermined measure such as the rate of return.

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Abdul-Rahim Taysir

Answer 1

1) a. The cost to maturity that a firm pays on its existing bonds equals the rate of return required by the market.

The cost of maturity that firm pays on existing bonds will differ drom the rate of return required by the market and this results in the bond being quoted for a discount or premium in the market. All the other statements are true

2) a. The accept-reject approach involves the ranking of capital expenditure projects on the basis of some predetermined measure, such as the rate of return

The Ranking approach involves the ranking on basis of some predetermined measure and not the accept-reject approach. All the other statements are true.