Answer Options:
a. True
b. False
Answer: True
Question: When considering two mutually exclusive projects, the firm should always select the project whose internal rate of return is the highest, provided the projects have the same initial cost. This statement is true regardless of whether the projects can be repeated or not.
Answer Options:
a. True
b. False
Answer: False
Question: For capital budgeting and cost of capital purposes, the firm should assume that each dollar of capital is obtained in accordance with its target capital structure, which for many firms means partly as debt, partly as preferred stock, and partly common equity.
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
a. If a company with a high beta merges with a low-beta company, the best estimate of the new merged company’s beta is 1.0.
b. Logically, it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks, especially if the projects are closely associated with research and development activities.
c. The beta of an “average stock,” which is also “the market beta,” can change over time, sometimes drastically.
d. If a newly issued stock does not have a past history that can be used for calculating beta, then we should always estimate that its beta will turn out to be 1.0. This is especially true if the company finances with more debt than the average firm.
e. During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects, the calculated historical beta may be drastically different from the beta that will exist in the future.
Answer: c. The beta of an “average stock,” which is also “the market beta,” can change over time, sometimes drastically.
Question: The phenomenon called “multiple internal rates of return” arises when two or more mutually exclusive projects that have different lives are being compared.
Answer Options:
a. True
b. False
Answer: False
Question: A conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects’ cost of capital is less than the rate at which the projects’ NPV profiles cross.
Answer Options:
a. True
b. False
Answer: True
Question: A patient with severe physical injuries is irritable, angry, and belittles the nurses. As a nurse changes a dressing, the patient screams, “Don’t touch me! You are so stupid. You will make it worse!” Which intervention uses a cognitive technique to help this patient?
Answer Options:
a. Discontinue the dressing change without comments and leave the room.
b. Stop the dressing change, saying, “Perhaps you would like to change your own dressing.”
c. Continue the dressing change, saying, “Do you know this dressing change is necessary?”
Answer: c. Continue the dressing change, saying, “Do you know this dressing change is necessary?”
Question: Small businesses make less use of DCF capital budgeting techniques than large businesses. This may reflect a lack of knowledge on the part of small firms’ managers, but it may also reflect a rational conclusion that the costs of using DCF analysis outweigh the benefits of these methods for very small firms.
Answer Options:
a. True
b. False
Answer: True
Question: One advantage of the payback method for evaluating potential investments is that it provides information about a project’s liquidity and risk.
Answer Options:
a. True
b. False
Answer: True
Question: In theory, capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital. The decision criterion should not be affected by managers’ tastes, choice of accounting method, or the profitability of other independent projects.
Answer Options:
a. True
b. False
Answer: True
Question: If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.
Answer Options:
a. True
b. False
Answer: False
Question: Both the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.
Answer Options:
a. True
b. False
Answer: False
Question: The reason why retained earnings have a cost equal to rs is because investors think they can (i.e., expect to) earn rs on investments with the same risk as the firm’s common stock, and if the firm does not think that it can earn rs on the earnings that it retains, it should pay those earnings out to its investors. Thus, the cost of retained earnings is based on the opportunity cost principle.
a. True
b. False
Answer: a. True
Question: The NPV and IRR methods, when used to evaluate two independent and equally risky projects, will lead to different accept/reject decisions and thus capital budgets if the projects’ IRRs are greater than their costs of capital.
Answer Options:
a. True
b. False
Answer: False
Question: Miller and Modigliani’s dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on either its cost of capital or its stock price.
a. True
b. False
Answer: True
Question: Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.
Answer Options:
a. True
b. False
Answer: a. True