Using Market Values Rather Than Book Values for Cost of Capital

question 55

Multiple Choice

Using market values rather than book values for cost of capital computations insures that the firm:

• A) does not ignore the value of retained earnings.
• B) gets the full value of the debt tax shield.
• C) uses expected rates of return.
• D) will not invest in negative NPV projects.

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Definitions:

Break-even Point

The financial point at which total revenue equals total costs, resulting in zero net profit or loss.

Break-even Analysis

A financial calculation to determine the point at which revenue received equals the costs associated with receiving the revenue.

Cost-volume-profit Analysis

A financial analysis tool that helps in determining the effect of changes in costs and volume on a company's profit.

PERT

An acronym for Program Evaluation and Review Technique, a statistical tool used in project management, designed to analyze and represent the tasks involved in completing a given project.