T or F: The equivalent annual annuities (EAA) method is preferred to the replace
ID: 2732447 • Letter: T
Question
T or F: The equivalent annual annuities (EAA) method is preferred to the replacement chains method because 1) it is easier to explain the EAA method to those who are responsible for approving capital budgets, and 2) it is easier to build inflation and other modifications into a spreadsheet and go on to do the calculations
T or F: A projects economic life is the lift that maximizes the projects IRR
T or F: Is it possible that two firms could have identical financial and operating leverage, yet have different degrees of risk as measured by the variability of EPS
T or F: If expected ROIC is greater than the after-tax cost of debt, higher financial leverage always increased financial risk and decreases expected ROE
T or F: Employees receiving stock options as part of their compensations typically sell the options before the expiration date instead of exercising the options
T or F: In addition to the tax, signaling, bankruptcy, and managerial constraint effects, the firms optimal capital structure is related to its set of investment opportunities
Explanation / Answer
a.
The equivalent annual annuities (EAA) method is preferred to the replacement chains method because
(1) It is easier to explain the EAA method to those who are responsible for approving capital budgets
Given Statement is true
(2) It is easier to build inflation and other modifications into a spreadsheet and go on to do the calculations
Given Statement is False
b.
A projects economic life is the lift that maximizes the projects IRR
Given Statement is true
c.
Is it possible that two firms could have identical financial and operating leverage, yet have different degrees of risk as measured by the variability of EPS?
Yes it is possible. So Given Statement is true
d.
If expected ROIC is greater than the after-tax cost of debt, higher financial leverage always increased financial risk and decreases expected ROE
Yes, Given Statement is true
e.
Employees receiving stock options as part of their compensations typically sell the options before the expiration date instead of exercising the options
Given Statement is true
f.
In addition to the tax, signaling, bankruptcy, and managerial constraint effects, the firm’s optimal capital structure is related to its set of investment opportunities
Yes, Given Statement is true
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