Please indicate whether each statement is true or false.

1.False. The capital budget is used to forecast the funds required for future investments, but it also includes deciding how those funds should be raised and allocating them to specific projects.

1. True. If the initial cost is the same, the financial manager should choose the project with the higher internal rate of return.
2. False. Corporate risk takes into consideration the effects of stockholder’s diversification and is measured by the firm’s earnings variability.
3. False. Beta risk is that part of the project’s risk that cannot be eliminated by diversification and investors are concerned about it.
4. True. The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt.
5. True. The cost of debt is always less than rs, so rd(1 – T) will certainly be less than rs. Therefore, the weighted average cost of capital will always be greater than rd(1 – T).
6. True. The fact that interest is tax deductible makes corporate debt less expensive than common or preferred stock.
7. False. If the firm’s actual debt ratio is below its target level, expansion capital should be raised by issuing debt to preserve the firm’s borrowing capacity.
8. True. On a 2-for-1 stock split, the shares outstanding are doubled and the stock’s par value is halved.
9. False. If both current assets and current liabilities increase by the same amount, the current ratio will decrease.
10. True. The sale of common stock for cash will increase the current assets for a firm.
11. True. If you receive some goods on April 1 with the terms 3/20, net 30, June 1 dating, it means that you will receive a 3 percent discount if the bill is paid on or before June 20 and that the full amount must be paid 30 days after receipt of the goods.
12. False. If a firm’s collections float is greater than its disbursement float, then a firm is said to operate with negative net float.
13. False. When a firm pledges its accounts receivable, the lender takes on the risk of nonpayment by the customer, not the selling firm.
14. True. Breakeven analysis involves determining the magnitude of the firm’s profit or losses at output levels on and around the point where revenues equal costs.
15. d. Answers a and b are both correct.
16. c. If the required rate of return is less than the crossover rate for two mutually exclusive projects’ NPV profiles, a NPV/IRR conflict will not occur.
17. a. The general price level in a nation is the same thing as its GDP deflator.