True or False? 1) A company that sells common stock and uses the money to pay of

Question

True or False? 1) A company that sells common stock and uses the money to pay off a loan is increasing its use of financial leverage. 2) the initial outlay for a new project is an example of an opportunity cost. 3) the guiding rule in deciding if a free cash flow is incremental is to look at the company with, versus without, the new project. 4) if a firm imposes a capital constraint on investment projects, the appropriate decision criterion is to select the set of projects that jas the highest positive net present value subject to capital constraint. True or False? 1) A company that sells common stock and uses the money to pay off a loan is increasing its use of financial leverage. 2) the initial outlay for a new project is an example of an opportunity cost. 3) the guiding rule in deciding if a free cash flow is incremental is to look at the company with, versus without, the new project. 4) if a firm imposes a capital constraint on investment projects, the appropriate decision criterion is to select the set of projects that jas the highest positive net present value subject to capital constraint. 1) A company that sells common stock and uses the money to pay off a loan is increasing its use of financial leverage. 2) the initial outlay for a new project is an example of an opportunity cost. 3) the guiding rule in deciding if a free cash flow is incremental is to look at the company with, versus without, the new project. 4) if a firm imposes a capital constraint on investment projects, the appropriate decision criterion is to select the set of projects that jas the highest positive net present value subject to capital constraint.

Explanation / Answer

1) False - By replacing the debt with equity, it's actually decreaing its financial leverage.

2) True - This is an opportunity cost because this amount can be invested somewhere else to generate returns.

3) True

4) True

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