Mark the statements below as true or false: -A corporation\'s cost of common equ

Question

Mark the statements below as true or false:

-A corporation's cost of common equity may be estimated using either a dividend valuation model or the capital asset pricing model.

-Advantages of the payback period include that it is easy to calculate, easy to understand, and that it is based on cash flows rather than on accounting profits.

-An acceptable project should have a net present value greater than or equal to zero and a profitability index greater than or equal to one.

-An increase in a corporation's marginal tax rate will cause the corporation's after tax cost of debt to increase, other things remaining the same.

Explanation / Answer

-A corporation's cost of common equity may be estimated using either a dividend valuation model or the capital asset pricing model. – TRUE

Because both are valuation models only.

-Advantages of the payback period include that it is easy to calculate, easy to understand, and that it is based on cash flows rather than on accounting profits. – TRUE

Payback is based on the cash flows not only accounting profits.

-An acceptable project should have a net present value greater than or equal to zero and profitability index greater than or equal to one. TRUE

Projects having positive NPV will automatically have PI more than 1.

-An increase in a corporation's marginal tax rate will cause the corporation's after tax cost of debt to increase, other things remaining the same. FALSE

If tax increases, cost of debt will decrease and vice-versa.

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