What is the conceptual foundation of the flow-to-equity approach to capital budgeting?
What will be an ideal response?
In the flow-to-equity approach to capital budgeting, the after-tax cash flows that are available to be paid to equity holders are discounted at the levered equity required rate of return. Hence, the interest costs of debt are subtracted from the earnings of the firm in considering the amount of tax the firm will owe, and the interest payments that the firm must make are taken out of the residual free cash flow. The discount rate for these levered equity flows therefore must reflect the fact that equity is a residual claimant on the cash flows of the firm.
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Which of the following statements is true?
a. If a company reports net income on its income statement, it should report an increase in cash on its statement of cash flows. b. If a company reports a net loss on its income statement, it should report a decrease in cash on its statement of cash flows. c. If a company uses the accrual basis of accounting, it will improve its cash position if it reports net income for the same period. d. If a company uses the accrual basis of accounting, its cash balance can increase even if it reports a net loss.
A form of strict liability applies to all except which of the following situations?
a. A lawnmower sold in a defective condition that injures its owner. b. A fireworks factory that blows up and injures townspeople and their property. c. Abnormally risky medical procedures. d. A herd of goats that walk onto a neighbor's property and trample and eat the neighbor's roses.
The Kyoto Protocol is an international treaty to reduce greenhouse admissions, signed by over 200 countries including the United States. I. True II. False
Which of the following is NOT a network flow model?
A) Transportation model B) Assignment model C) Product mix model D) Shortest-path model E) Minimal-spanning tree model