The risk of the debt capital is less than that of other long-term contributors of capital because ________. A) they have a lower priority of claim against any earnings or assets available for payment B) they have the stockholders’ personal assurance for all future interest payments C) there is no interest rate risk as the […]
Under which of the following circumstances is the pure play method of estimating a project’s beta particularly useful? A) The firm is looking to expand its current business operations, doing essentially the same work. B) The firm is looking to expand its current business operations into a brand new area unlike any of its internal […]
A positive cash conversion cycle means that a firm must obtain financing to support the cash conversion cycle. Indicate whether the statement is true or false ANSWER TRUE
Minimizing the weighted average cost of capital allows management to undertake a larger number of profitable projects, thereby further increasing the value of a firm. Indicate whether the statement is true or false ANSWER TRUE
Using the WACC to evaluate all projects may lead managers into accepting high-risk projects that do not compensate adequately for risk and into rejecting low-risk projects that compensate fully for the level of risk but may not have particularly high rates of return. Describe the situations when using a WACC is not appropriate and how […]
You have learned how to use NPV and IRR to evaluate projects as part of a capital budgeting decision-making process. How is WACC used in each of these capital-budgeting processes? What will be an ideal response? ANSWER Answer: When calculating the NPV of a project, the WACC is the appropriate required rate of […]
If the securities markets are efficient, the market’s reaction to new information about a firm’s value (such as an earnings announcement) should be: a. gradual, as investors rationally deliberate the effect of the information on the stock’s value. b. immediate and unbiased. c. slow or fast, depending on the amount of ‘surprise’ contained in the […]
Michigan Industries has three projects under consideration. Project L is a lower-than-average-risk project, project A is an average-risk project, and project H is a higher-than-average-risk project. You have gathered the following information to determine if one or more of these projects has an acceptable rate of return for the firm. • Sources of financing 50% […]
The cash conversion cycle is the sum of average age of the inventory and average collection period minus average payment period. Indicate whether the statement is true or false ANSWER TRUE
The appropriate capital budgeting decision rule is ________. A) to accept projects with an NPV greater than $0 B) to reject projects with an IRR greater than the required rate of return C) to reject projects with an NPV greater than $0 D) to reject projects with an IRR greater than the required payback period […]
