Mark the statements below as true or false: -A corporation\'s cost of common equ
ID: 2749742 • Letter: M
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.