If corporate tax rates decreased, what would most likely happen to depreciation tax shields (DTS), operating free cash flows (FCF) and after-tax salvage values (ATSV)? Assume positive NPV projects and MACRS depreciation. A) DTS would increase, FCF would increase and ATSV would decrease B)DTS would increase, FCF would increase and ATSV would decrease. C) DTS would decrease, FCF would decrease and ATSV would increase. D) DTS would decrease, FCF would increase and ATSV would increase. E) DTS would increase, FCF would increase and ATSV would increase.

Which of the following statements is true? I. In the payback method, depreciation is added back to net operating income when computing the annual net cash flow. II. When a company is cash poor, a project with a short payback period but a low rate of return may be preferred to a project with a long payback period and a high rate of return. III. A shorter payback period does not necessarily mean that one investment is more desirable than another. Only statement III is true. O All of the statements are true. None of the statements are true. Only statement I is true.

According to the trade-off theory, the optimal capital structure is the level of debt that O minimizes the financial distress costs. equates the present values of the incremental interest tax shield and the incremental financial distress costs. maximizes the after-tax cash flows that are internally generated. maximizes the present value of the interest tax shield.

With everything else held constant, which of the following events should increase the internal rate of return of a capital budgeting project?   A. An increase in the cost of the asset.   B. A decrease in the firm’s cost of capital.   C. A decrease in the cost of operating the asset.   D. A decrease in tax benefits.