Finance Questions
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In capital budgeting analyses, it is possible that for a particular project, the NPV method and the IRR method both involve the reinvestment of the project's cash flows at the same rate.
Ace Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial cash outflow is $50,000 for each project. Project A results in cash inflows of $15,625 at the end of each of the next five years. Project B results in one cash inflow of $99,500 at the end of the fifth year. The required rate of return of Ace Inc. is 10 percent. Ace Inc. should invest in:
Which of the following results from a negative cash flow that occurs at the end of a project's life in addition to the initial investment in the project?
The reinvestment rate assumption that the cash flows from a project can be reinvested at the internal rate of return, is made in the _____.
There exists an IRR solution for each time the direction of cash flows associated with a project is interrupted, that is, each time outflows change to inflows.
The post-audit is a simple process in which actual results are compared with forecasted results and any discrepancy must have resulted from the changes in factors that are completely under management's control.
Project A has a pattern of high cash inflows in the early years, while Project B has majority of its cash inflows in the later years. At the current required rate of return, Projects A and B have identical NPVs. Assuming that interest rates are increasing, other things held constant, this change will cause B to become more preferable than A.
Using the discounted payback period method, a project should be accepted when the discounted payback period is greater than the project's expected life.
Any capital budgeting decision should depend solely on a project's forecasted cash flows and the firm's opportunity rate of return. Such a decision should not be affected by managers' tastes, the choice of accounting method, or the profitability of other independent projects.
The IRR of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the IRR of a project whose cash flows come in more slowly.
The rates of return, or costs, that a firm must pay to raise funds to invest in capital budgeting projects are determined by:
A firm should continue to invest in capital budgeting projects until its marginal cost of capital is:
The cost of debt to the firm is adjusted for _____.
A graph of a firm's acceptable capital projects ranked in the order of the projects' internal rates of return is called the firm's _____.
Allison Engines Corporation has established a target capital structure of 40 percent debt and 60 percent common equity. The firm expects to earn $150,000 in after-tax income during the coming year, and it will retain 40 percent of those earnings. What is the break point of retained earnings?
If a project's _____ exceeds the firm's cost of capital, its NPV will be positive.
The firm's cost of capital represents the maximum rate of return that a firm can earn from its capital budgeting projects to ensure that the value of the firm increases.
Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm's marginal tax rate is 40 percent. Which of the following is Rollins' component cost of debt? (Round off the answer to one decimal place.)
The before-tax cost of debt of a firm using funds from bond issue is equal to the _____ of the bond.
The correct discount rate for a firm to use in capital budgeting, assuming that new investments are as risky as the firm's existing assets, is its marginal cost of capital.