Answer Options:
a. True
b. False
Answer: b. False
Question: In general, firms should use their weighted average cost of capital (WACC) to evaluate capital budgeting projects because most projects are funded with general corporate funds, which come from a variety of sources. However, if the firm plans to use only debt or only equity to fund a particular project, it should use the after-tax cost of that specific type of capital to evaluate that project.
a. True
b. False
Answer: b. False
Question: Firms raise capital at the total corporate level by retaining earnings and by obtaining funds in the capital markets. They then provide funds to their different divisions for investment in capital projects. The divisions may vary in risk, and the projects within the divisions may also vary in risk. Therefore, it is conceptually correct to use different risk-adjusted costs of capital for different capital budgeting projects.
a. True
b. False
Answer: a. True
Question: Inflation, recession, and high interest rates are economic events that are best characterized as being
a. systematic risk factors that can be diversified away.
b. company-specific risk factors that can be diversified away.
c. among the factors that are responsible for market risk.
d. risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.
e. irrelevant except to governmental authorities like the Federal Reserve.
Answer: c. among the factors that are responsible for market risk.
Question: When evaluating mutually exclusive projects, the modified IRR (MIRR) always leads to the same capital budgeting decisions as the NPV method, regardless of the relative lives or sizes of the projects being evaluated.
Answer Options:
a. True
b. False
Answer: False
Question: The NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects’ NPV profiles cross is greater than the crossover rate.
Answer Options:
a. True
b. False
Answer: False
Question: Leasing is typically a financing and not a capital budgeting decision. The decision to acquire the asset is a “done deal” before the lease analysis begins. Therefore, in a lease analysis, we are concerned simply with whether to finance the asset with a lease or with a loan.
a. True
b. False
Answer: b. False
Question: The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don’t know which IRR is relevant.
Answer Options:
a. True
b. False
Answer: False
Question: An emergency department nurse realizes that the spouse of a patient is becoming increasingly irritable while waiting. Which intervention should the nurse use to prevent escalation of anger?
Answer Options:
a. Explain that the patient’s condition is not life threatening.
b. Periodically provide an update and progress report on the patient.
c. Explain that all patients are treated in order, based on their medical needs.
d. Suggest that the spouse return home until the patient’s treatment is completed.
Answer: b. Periodically provide an update and progress report on the patient.
Question: Other things held constant, an increase in the cost of capital will result in a decrease in a project’s IRR.
Answer Options:
a. True
b. False
Answer: False