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Q: Why does WACC increase and IRR decrease as the capital budget increases? Are there any steps…
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Q: 1 Why does WACC increase and IRR decrease as the capital budget increases? Are there any steps…
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Q: Why are interest charges not deducted when a project’s cash flows for use in a capital budgeting…
A: “Since you have asked multiple question, we will solve the first question for you. If you want any…
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Q: 1. Why is the WACC used in capital budgeting?
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- Why are interest charges not deducted when a project’s cash flows for use in a capital budgeting analysis are calculated? Most firms generate cash inflows every day, not just once at the end of the year. In capital budgeting, should we recognize this fact by estimating daily project cash flows and then using them in the analysis? If we do not, are our results biased? If so, would the NPV be biased up or down? Explain.Most firms generate cash inflows every day, not just once at the end of theyear. In capital budgeting, should we recognize this fact by estimating dailyproject cash flows and then using them in the analysis? If we do not, will thisbias our results? If it does, would the NPV be biased up or down? Explain.Most firms generate cash flows every day, not just once at the end of the year. In capital budgeting, should we recognize this fact by estimating daily project cash flows and then using them in the analysis? If we do not, will this bias our results? If it does, would the NPV be biased up of down? Explain.
- Explain the following: The WACC is a weighted average of the costs of debt, preferred stock, and common equity.Would the WACC be different if the equity for the coming year came solely in the formof retained earnings versus some equity from the sale of new common stock? Would thecalculated WACC depend in any way on the size of the capital budget? How mightdividend policy affect the WACC? Assume that the risk-free rate increases. What impact would this have on the cost of debt?What impact would it have on the cost of equity? Note: Explain Shortly And To the Point AnswerWhat is the major short coming of using the payback period as the only criterion in making capital budgeting decisions?Would a failure to recognize growth options tend to cause a firm’s actual capital budget tobe above or below the optimal level? Would your answer be the same for abandonment,timing, and flexibility options? Explain.
- Which of the following statement about the payback period method for capital budgeting decisions is not correct? The paybackperiod method ignores the time valueof money. A shorter payback period does not always mean that one investment is more desirable than another. When the annual net cash inflow isthe same each year, the payback period = Investment required/Annual netcash inflow. When the net cash flows change from year to year, the payback period = Investment required/Average netcash inflow per year.Explain how inflation impacts capital budgeting analysis. Why do we care? How is NPV impacted if you neglect to adjust for inflation in the cash flows when you use a discount rate based upon market (nominal) rates. Does it make the project look better or worse? Explain fully.With everything else held constant, which of the following events should increase the internal rate of return of a capital budgeting project? A. An increase in the cost of the asset. B. A decrease in the firm’s cost of capital. C. A decrease in the cost of operating the asset. D. A decrease in tax benefits.
- Which of the following is a problem associated with capital budgeting? Select all that apply. Long-term strategic planning for resource allocation Unsustainable budget infrastructure that will have an impact on future generations Miscalculating or poor estimation of projected costs Fluctuating economics and financial marketsIn our capital budgeting examples, we assumed that a firm would recover all of the working capital it invested in a project. Is this a reasonable assumption? When might it not be valid?Explain what a discounted cash flow method of making capital budgeting decisions is. Why are discounted cash flow methods superior to other methods? What are the risks related to using discounted cash flow methods? What a project profitability index? What does it measure? Why is it used? What is the primary criticism of the payback and simple rate of return methods of making capital budget decisions? What are the benefits in using these methods? Should companies continue to use these methods? Why or why not? What role, if any, should qualitative factors play in capital budgeting decisions? Explain your reasoning for your answer Discuss some of the major benefits to be gained from budgeting.