True/False Indicate whether the statement is true or false. 1. Financial risk refers to the extra risk borne by stockholders as a result of a firm's use of debt as compared with their risk if the firm had used no debt If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio, 2. 3. The primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the total amount of depreciation that can be taken, assuming the asset is used for its full tax life, is greater 4. Estimating project cash flows is generally the most important, but also the most difficult, step in the capital budgeting process. Methodology, such as the use of NPV versus IRR, is important, but less so than obtaining a reasonably accurate estimate of projects' cash flows. 5. Other things held constant, the lower a firm's tax rate, the more logical it is for the firm to use debt. In cash flow estimation, the existence of externalities should be taken into account if those externalities have any effects on the firm's long-run cash flows. 6. 7. If a firm's projects differ in risk, then one way of handling this problem is to evaluate each project with the appropriate risk-adjusted discount rate. 8. If a firm borrows moncy, it is using financial leverage. 9. Other things held constant, firms with more stable and predictable sales tend to use more debt than firms with less stable sales. The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price. 10. 11. If debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis. 12. Opportunity costs include those cash inflows that could be generated from assets the firm already owns if 13. A firm's business risk is largely determined by the financial characteristics of its industry, especially by the 14, A 100% stock dividend and a 2:1 stock split should, at least conceptually, have the same effect on the firm's those assets are not used for the project being evaluated. amount of debt the average firm in the industry uses. stock price