- 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.