Question

True or False and why:

1- Most ratio comparisons are made over time and with companies like the target company.

2- Flotation costs are generally reflected in a project's after tax cash flows.

3- Financing costs must be included in a project's after-tax cash flows.

4- A liquidity premium is paid to bond issuers with a high current ratio and TIE ratio.

5- As market rate rise the price of an existing bond is likely to rise as well.  

Answer 1

1- Cost of debt and cost of preferred stock are the only WACC members that are adjusted for taxes.

False

Preferred stock dividend is not deductible, hence, not adjusted for taxes.

2- Flotation costs are generally reflected in a project's after tax cash flows.

False

They are part of WACC.

3- Financing costs must be included in a project's after-tax cash flows.

False

They are part of WACC/ discount rate.

4- Timing of projects does not impact the project's net present value.

False

Present value of cash flows changes based on the timing of cash flows.