A firm’s capital structure can significantly affect the firm’s value by affecting its risk and return. Indicate whether the statement is true or false ANSWER TRUE
Date: September 19th, 2020
One problem with the decision criterion of IRR is that if cash flow is not standard, there is a possibility of multiple IRRs for a single project. Indicate whether the statement is true or false. ANSWER Answer: TRUE
Date: September 19th, 2020
The crossover rate is the discount rate where both projects have the same ________. A) IRR B) PI C) NPV D) length to completion ANSWER Answer: C
Date: September 19th, 2020
Pandora, Inc. is considering a five-year project that has an initial outlay or cost of $70,000. The cash inflows from its project for years 1, 2, 3, 4 and 5 are all the same at $14,000. The borrowing costs are 10%. What is the IRR? Should Pandora use the IRR method to evaluate this project? […]
Date: September 19th, 2020
Which of the following in NOT a potential problem suffered by the IRR method of capital budgeting? A) Multiple IRRs B) Disagreement with the NPV as to whether a project with ordinary cash flows is profitable or not C) Incorporates the IRR as the reinvestment rate for the future cash flows D) Comparing mutually exclusive […]
Date: September 19th, 2020
Spotify, Inc. is considering a five-year project that has an initial outlay or cost of $22,000. The future cash inflows from its project for years 1, 2, 3, 4 and 5 are $15,000, $15,000, $15,000, $15,000 and -$41,000, respectively. Compute both IRRs. Given these IRRs, compute the two NPVs. If Spotify’s true cost of borrowing […]
Date: September 19th, 2020
All items on the right-hand side of a firm’s balance sheet, excluding current liabilities are sources of capital. Indicate whether the statement is true or false ANSWER TRUE
Date: September 19th, 2020
One of the underlying assumptions of the IRR model is that all cash inflow can be reinvested at the individual project’s internal rate of return (IRR) over the remaining life of the project. Indicate whether the statement is true or false. ANSWER Answer: TRUE
Date: September 19th, 2020
The stated cost of a pledge of accounts receivable is normally ________ above the prime rate. A) 6 to 8 percent B) 2 to 5 percent C) 4 to 9 percent D) 6 to 10 percent ANSWER B
Date: September 19th, 2020
Using the Binomial Model, find the values of a firm’s levered equity (EL), and the expected return on the equity, rLE, given the following values: V=100, u=1.3, d=1/u, p=0.7, rf=5%, X=100, and T=3. EL rLE a. 32.34 6.92% b. 32.34 10.74% c. 18.96 6.92% d. 18.96 10.74% FORMULAS: ; EL = ; ; […]
Date: September 19th, 2020
