Which of the following statements about the internal rate of return (IRR) capital budgeting technique is correct?

It is the discount rate that equates the present value of a project's expec

A firm's weighted average cost of capital (WACC) is _____.

determined by participants in the financial markets, because investors set

Beige Inc. is evaluating three capital budgeting projects whose internal rates of return (IRRs) are greater than the fir

all of the projects whose internal rates of return (IRRs) are greater than

Which of the following is a correct statement about the discounted payback period (DPB) technique that is used to evalua

The DPB method considers the time value of money.

Which of the following statements is correct?

The net present value (NPV) technique provides an indication of the dollar

Explain the concept of the "hurdle rate"

The hurdle rate is a threshold that expected return must exceed to be accep

When determining a project's true profitability, it is normally better to compute the project's modified internal rate o

assumes that the project's cash flows are reinvested at the firm's requi

Which of the following capital budgeting evaluation techniques is based on the concept that it is better to recover the

Traditional payback period (PB)

To determine the actual cost of using debt, a firm must adjust its bonds' average yield to maturity for the fact that __

interest payments on debt represent a tax deductible expense to the firm

Which of the following statements is true about capital budgeting analysis?

a. A project should be purchased if its net present value (NPV) is posi

Suppose a capital budgeting project generates its largest cash flows in the early years of its life (i.e., up front) ra

The net present value of the project is not as sensitive to changes in the

Which of the following statements is correct?

To compute the NPV for a project, the firm's required rate of return must b

The weighted average cost of capital of a firm represents the _____.

minimum rate of return a firm must earn on average-risk investments to ma

The value of any asset—real or financial—is based on the _____ and the _____.

cash flow expected to be generated by the asset; rate of return required by

Suppose a firm evaluates four independent investments using only capital budgeting techniques that consider the time val

All of the capital budgeting techniques the company uses should provide the

Everything else equal, a project that has a long traditional payback period (PB) _____.

has greater implied risk than a project that has a shorter PB

A graph of the capital budgeting projects a firm is evaluating ranked in the order of their internal rates of return is

investment opportunity schedule (IOS)

How does WACC serve as a hurdle rate for companies evaluating potential projects.

WACC reflects the required returns of all stakeholders (creditors, preferre

In capital budgeting analyses, the primary difference between the traditional payback period (PB) technique and the disc

considers the time value of money

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FINA Test 4

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Questions 38

Answers

1
An investment firm is selling a new product that will pay $100 at the end of each of the next 20 years. If the new inves
7%
5%
3%
11%
9%
2
Coral Inc.'s preferred stock currently sells for $90 a share and pays a dividend of $10 per share. However, the firm wil
8.13%
12.50%
7.22%
11.76%
11.11%
3
Super Solutions Inc. just paid a dividend equal to $3.00 per share which are expected to grow at 6%. Its stock sells for
15.64%
9.09%
14.58%
15.09%
9.64%
4
Oval Inc. just paid a dividend equal to $1.50 per share on its common stock, and it expects this dividend to grow by 4 p
18.55%
10.60%
14.60%
13.38%
8.76%
5
In capital budgeting analyses, the net present value (NPV) method and the internal rate of return (IRR) method both assu
True
False
6
If a project's _____ exceeds the firm's weighted average cost of capital (WACC), its net present value (NPV) will be pos
marginal cost of capital
initial investment outlay
inflation premium
incremental operating cash flows
internal rate of return (IRR)
7
Which of the following statements about the internal rate of return (IRR) capital budgeting technique is correct?
It is the same as the firm's required rate of return.
It is the discount rate that equates the present value of a project's expec
It is the discount rate at which the net present value of a project is nega
It is the rate of return at which a project's payback period is shortest.
It is the discount rate that should be used to evaluate a project with mult
8
A firm's weighted average cost of capital (WACC) is _____.
set by the board of directors of the firm, because it is the benchmark th
the same as the average internal rate of return (IRR) the firm earns on i
the combined net present value (NPV) of all the capital budgeting project
determined by participants in the financial markets, because investors set
regulated by the Internal Revenue Service (IRS), because tax-deductible d
9
Beige Inc. is evaluating three capital budgeting projects whose internal rates of return (IRRs) are greater than the fir
all of the projects whose internal rates of return (IRRs) are greater than
the projects that maximize its dividend payout
the projects that generate the greatest combination of cash inflows
the one (single) project that has the highest net present value (NPV)
the projects that minimize its marginal cost of capital
10
Which of the following is a correct statement about the discounted payback period (DPB) technique that is used to evalua
The DPB does not provide information about the liquidity of a project.
The DPB method considers the time value of money.
According to DPB, a project should be accepted when its discounted payback
To compute a project's DPB, its internal rate of return (IRR) must be known
To compute a project's DPB, simply add up the unadjusted expected cash fl
11
Bouchard Company's stock sells for $20 per share, its last dividend (D0) was $1.00, its growth rate is a constant 6 perc
12.25%
11.56%
12.63%
11.00%
11.30%
12
Which of the following statements is correct?
A project's internal rate of return (IRR) depends on the firm's required
The net present value (NPV) technique contains information about a project'
The net present value (NPV) is the only capital budgeting technique that al
The net present value (NPV) technique provides an indication of the dollar
The internal rate of return (IRR) does not allow you to determine whether m
13
J. Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50
16.50%
14.54%
15.91%
15.50%
15.00%
14
Explain the concept of the "hurdle rate"
The hurdle rate is a threshold that expected return must exceed to be accep
Graph that relates firm's weighted average cost of each dollar of capital.
Cost of obtaining another dollar of new capita; the weighted average cost.
Graph of the firm's investment opportunities ranked in order.
15
Rollins Corporation is constructing its marginal cost of capital (MCC) schedule. Its target capital structure is 30 perc
3.6%
12.0%
4.8%
7.2%
8.4%
16
Diggin Tools plans to issue new preferred stock, which has a market value of $85 per share. Holders of the stock will re
10.38%
11.00%
17.00%
11.70%
11.66%
17
When determining a project's true profitability, it is normally better to compute the project's modified internal rate o
assumes that the project's cash flows are reinvested at the risk-free
considers only the cash flows after the project's payback period
assumes that the project's cash flows are reinvested at the firm's requi
assumes that the project's cash flows are discounted at its IRR
has a decision rule that is easier to apply than the IRR decision rule
18
Suppose a firm has evaluated four capital budgeting projects and, using one of the time value of money capital budgeting
traditional payback period (PB)
net present value (NPV)
modified internal rate of return (MIRR)
internal rate of return (IRR)
discounted payback period (DPB)
19
Seattle Inc. identified an investment opportunity that requires an initial cash outflow of $150,000. Seattle's required
6.12 years
4.86 years
4.35 years
4.51 years
5.23 years
20
Which of the following capital budgeting evaluation techniques is based on the concept that it is better to recover the
Modified internal rate of return (MIRR)
Traditional payback period (PB)
Internal rate of return (IRR)
Present value (PV) of cash flows
Net present value (NPV)
21
To determine the actual cost of using debt, a firm must adjust its bonds' average yield to maturity for the fact that __
the average yield to maturity on its debt is a positive return that the f
the average yield to maturity on the firm's debt determines the tax rate
the firm's bondholders do not have to pay taxes on the interest they receiv
interest payments on debt represent a tax deductible expense to the firm
interest payments on debt represent taxable income to the firm
22
The net present value (NPV) method implicitly assumes that the rate at which cash flows can be reinvested is the require
True
False
23
Which of the following statements is true about capital budgeting analysis?
The traditional payback period method should be used for capital budgeting
a. A project should be purchased if its net present value (NPV) is posi
The net present value (NPV) method should be used to evaluate independent
A project with only cash outflows and no cash inflows would have two inte
The payback period method should be used to evaluate capital budgeting proj
24
Suppose a capital budgeting project generates its largest cash flows in the early years of its life (i.e., up front) ra
The net present value of the project must be negative.
The project will have multiple internal rates of return.
The net present value of the project is not as sensitive to changes in the
The required rate of return of the project must be revised throughout its
The project's traditional payback period will be greater than the years e
25
There exists an internal rate of return (IRR) solution for each time the direction of cash flows associated with a proje
True
False
26
Which of the following statements is correct?
If a project's net present value (NPV) is equal to its internal rate of ret
Two firms could compute different internal rate of return (IRR) for a proje
a. A project's discounted payback period (DBP) is normally shorter than
To compute the NPV for a project, the firm's required rate of return must b
Everything else equal, firms with higher required rates of return generally
27
The weighted average cost of capital of a firm represents the _____.
minimum rate of return a firm must earn on average-risk investments to ma
required rate of return that should be used to evaluate capital budgeting p
maximum rate of return a firm can expect to earn on its investments
minimum dividend yield a firm must pay to its preferred stockholders
maximum interest rate a firm should pay on the debt it uses
28
The Jackson Company just paid a dividend equal to $3.00 per share on its common stock, and it expects this dividend to g
7%
23%
21%
16%
11%
29
With the improvement in the technology and understanding of discounting techniques, both the net present value (NPV) tec
maximize it required rate of return
minimize the number of multiple IRRs computed for every project
maximize its value
minimize its overall payback period
maximize the initial capital investment
30
The value of any asset—real or financial—is based on the _____ and the _____.
weighted average cost of the investment; rate of return achieved by t
rate of return earned by the firm; cash flow expected to be generated by th
cash flow expected to be generated by the asset; rate of return required by
rate of return achieved by the investment firm; investors’ weighted avera
marginal return an investor expects to earn from the investment; addition
31
Suppose a firm evaluates four independent investments using only capital budgeting techniques that consider the time val
The capital budgeting techniques used by the company will always agree on w
All of the capital budgeting techniques the company uses should provide the
The company should purchase the one project that has the highest internal
The company should purchase the project that has the shortest traditional p
The company should purchase the one project that has the highest net presen
32
Everything else equal, a project that has a long traditional payback period (PB) _____.
results in a terminal value that is greater than the present value of its c
must have a positive net present value (NPV)
has an expected rate of return that is greater its internal rate of retur
has greater implied risk than a project that has a shorter PB
generally ensures the firm has enough liquidity to survive for a fairly lon
33
Suppose a firm is evaluating a capital budgeting project using the internal rate of return (IRR) technique. If the firm'
False
True
34
A graph of the capital budgeting projects a firm is evaluating ranked in the order of their internal rates of return is
internal project classification schedule
modified internal rate of return (MIRR) graph
investment opportunity schedule (IOS)
optimal capital budget (OCB) schedule
marginal cost of capital graph
35
How does WACC serve as a hurdle rate for companies evaluating potential projects.
WACC reflects the required returns of all stakeholders (creditors, preferre
It calculates all investments of a firm
its the weighted average of capital
Cost of equity plus cost of debt
36
In capital budgeting analyses, the primary difference between the traditional payback period (PB) technique and the disc
ensures a shorter payback period for a project, because projects with longe
is always shorter than the traditional payback period
ensures the amount of the original investment is recovered more quickly fro
considers cash flows that occur after the discounted payback period
considers the time value of money
37
The main reason that the net present value (NPV) method is regarded as being conceptually superior to the internal rate
True
False
38
The component costs of capital are market-determined variables in as much as they are based on investors' required retur
True
False

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