Which of the following best explains the limitations of using WACC as adiscount rate for evaluating projects?Od. WACC and beta must be in equilibriumO WACC is only true when using debt and equity for capitalIt is difficult to find the needed information to determine WACCO The firm itself is a portfolio of projects with varying degrees of systematic risk Which of the following disadvantages of the "payback period" is addressed byusing the "discounted payback period" method?O Bias against long-term projects such as research and developmentO Consideration of cash flows past the payback periodO Accounting for time value of moneyO Arbitrary cutoff point

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Which of the following best explains the limitations of usin discount rate for evaluating projects?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 8MC: You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand...

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Which of the following statements is FALSE? a) The Capital Asset Pricing Model is the most important method for estimating the cost of capital that is used in practice. b) Because the risk that determines expected returns is unsystematic risk, which is measured by beta, the cost of capital for an investment is the expected return available on securities with the same beta. c) A common assumption is that a project has the same risk as the firm. d) To determine a project's cost of capital we need to estimate its beta.
Which of the following statements is correct? a. Since investors prefer more return and less risk, one will never hold a dominated asset in the risk-return sense. In other words, if asset A has a higher expected return and lower standard-deviation than asset B, then investors would only hold asset A in their optimal portfolio. b. The IRR method correctly ranks mutually exclusive projects. c. When an investment project is evaluated today, the spending that occurred in the last year has to be included in the NPV analysis. d. The payback period criterion properly considers the time value of money. e. When there are two mutually exclusive projects, the project with the highest NPV should be chosen.
Which of the following statements is inaccurate under perfect capital markets? A. The NPV of a project determines whether it is worth investing in it B. How much an investor should invest in a particular project does not depend on the investor’s risk preferences C. Whether an investor should invest in a project or not does not depend on the investor’s intertemporal preferences D. Whether a long term project should be undertaken does not depend on whether the investor is patient or impatient
Suppose a firm uses the WACC as the single hurdle rate in determining the value of capital budgeting projects rather than using risk adjusted hurdle rates. Choose the statement that actually completes the sentence describing the possible outcomes for the firm: the firm will tend to Accept profitable, low risk projects and reject unprofitable, high risk projects Accept profitable, low risk projects and accept unprofitable, high risk projects Reject profitable, low risk projects and reject unprofitable high risk projects Become less risky overtime Reject profitable, low risk projects and accept unprofitable, high risk projects
When using internal rate of return for project evaluation, you can meet the following problems: A)No solution or more than one solution B)Internal rate of return can not be calculated for bonds. C)The same rule for all evaluated decisions: IRR>r D)IRR gives dijerent result than NPV
Consider the following statement: In a capital rationing problem withdivisible investments, if all projects have positive present worths, all of theinvestment capital will be used. Solve, a. This statement is true b. This statement is false c. Not enough information is given; the numeric values of the present worths of the projects are required to know whether this statement is true or false d. Not enough information is given; the numeric values of the IRRs of the projects and the value of MARR are required to know whether this statement is true or false
According to the M&M propositions, in a perfect market which of the following statements is true? a.The value of the firm will be equal to the net present value of its underlying projects b.The value of the firm is higher when financed with debt due to its lower cost c.The net present value of a firmʹs projects should exceed the present value of the firmʹs issued claims d.The net present value of a firmʹs projects will be higher if they are financed with debt since debt carries a lower cost
Determine whether each of the statements (a)–(c) is True or False. A) Underestimation of the market risk premium results in the underestimation of the cost of capital for a project and in turn increases the likelihood that a negative NPV project is falsely accepted. B) The CAPM beta of a security measures the variability of the return of the security in isolation. C) If an investor holds a well-diversified portfolio, the type of risk left in such a portfolio is primarily the idiosyncratic risk. Answer: a) b) c)
If a firm plans to issue new stock, flotation costs (investment bankers' fees) should not be ignored. There are two approaches to use to account for flotation costs. The first approach is to add the sum of flotation costs for the debt, preferred, and common stock and add them to the initial investment cost. Because the investment cost is increased, the project's expected rate of return is reduced so it may not meet the firm's hurdle rate for acceptance of the project. The second approach involves adjusting the cost of common equity as follows: The difference between the flotation-adjusted cost of equity and the cost of equity calculated without the flotation adjustment represents the flotation cost adjustment. Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $2.50 and it expects dividends to grow at a constant rate g = 4.3%. The firm's current common stock price, P0, is $20.00. If it needs to issue new common stock, the firm will encounter a 6%…
If a firm plans to issue new stock, flotation costs (investment bankers' fees) should not be ignored. There are two approaches to use to account for flotation costs. The first approach is to add the sum of flotation costs for the debt, preferred, and common stock and add them to the initial investment cost. Because the investment cost is increased, the project's expected rate of return is reduced so it may not meet the firm's hurdle rate for acceptance of the project. The second approach involves adjusting the cost of common equity as follows:The difference between the flotation-adjusted cost of equity and the cost of equity calculated without the flotation adjustment represents the flotation cost adjustment. Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $1.70 and it expects dividends to grow at a constant rate g = 4.7%. The firm's current common stock price, P0, is $23.60. If it needs to issue new common stock, the firm will encounter a 5.2%…
Which of the following statements are CORRECT? Check all that apply: The aftertax cost of debt decreases when the market price of a bond increases. A decrease in a firm's WACC will increase the attractiveness of the firm's investment options. Cost of capital is also known as the minimum expected or required return an investment must offer to be attractive.
If a firm fails to consider growth options, would this cause it to underestimate oroverestimate projects’ NPVs? Explain.