If all projects are assigned the same discount rate for purposes of evaluation, which of the following could occur? A) Low-risk projects could be rejected when in fact they are good investment choices. B) High-risk projects could be accepted when in fact they are poor investment choices. C) High-risk projects could be accepted when in […]
Takelmer Industries has a different WACC for each of three types of projects. Low-risk projects have a WACC of 8.00%, average-risk projects a WACC of 10.00%, and high-risk projects a WACC of 12%. Which of the following projects do you recommend the firm accept? Project Level of Risk IRR A Low 9.50% B Average 8.50% […]
It is necessary to assign the appropriate cost of capital for each individual project that reflects that project’s ________ when doing capital budgeting. A) life B) cash flows C) riskiness D) managers ANSWER Answer: C
The conflict resulting from a manager’s desire to increase a firm’s risk without increasing current borrowing costs and lenders’ desire to limit lending is one effect of the ________ problem. A) agency B) leverage C) capital D) variable cost ANSWER A
At the end of year 1 firm XYZ has TA=$325 bn., and it is financed with debt with a book value of $125 mn. and equity with a book value of $200 mn. The firm must pay 10% interest annually on its debt. In year 2, the firm had a net income of $55 mn. […]
The cash conversion cycle of a firm is the difference between the number of days resources are tied up in the operating cycle and the average number of days the firm can delay making payment on the production inputs purchased on credit. Indicate whether the statement is true or false ANSWER TRUE
A corporation has $10,000,000 of 10 percent preferred stock outstanding and a 40 percent tax rate. The amount of earnings before interest and taxes (EBIT) required to pay the preferred dividends is ________. A) $1,000,000 B) $400,000 C) $600,000 D) $1,666,667 ANSWER D
Johnson’s Diner has an adjusted WACC of 10.08%. The company has a capital structure consisting of 70% equity and 30% debt, a cost of equity of 12.00%, a before-tax cost of debt of 8.00%, and a tax rate of 30%. Johnson is considering expanding by building a new diner in a distant city and considers […]
A firm’s provides valuable services in terms of ensuring that: (i) all parties involved in a project are working on coordinated and timely bases; (ii) original plans and specifications are followed, or alternatively that necessary changes are approved by senior management; (iii) effective product quality and cost controls are instituted at every stage of the […]
The adjusted WACC is the correct discount rate to use when evaluating a firm’s average-risk projects. Indicate whether the statement is true or false. ANSWER Answer: TRUE
