PRIN.OF CORPORATE FINANCE >BI<
PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Chapter 17, Problem 25PS

Investor choice Suppose that new security designs could be patented.14 The patent holder could restrict use of the new design or charge other firms royalties for using it. What effect would such patents have on MM's capital-structure irrelevance theory?

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If two mutually exclusive projects were being compared, would a high cost of capital favor the longer-term or the shorter-term project? Why? If the cost of capital declined, would that lead firms to invest more in longer-term projects or shorter-term projects? Would a decline (or an increase) in the WACC cause changes in the IRR ranking of mutually exclusive projects?Note: DONOT GIVE BREIF ANSWER USE SHORT CONCEPTUAL ANSWER
If two mutually exclusive projects were being compared, would a high cost of capital favorthe longer-term or the shorter-term project? Why? If the cost of capital declined, would thatlead firms to invest more in longer-term projects or shorter-term projects? Would a decline(or an increase) in the WACC cause changes in the IRR ranking of mutually exclusive projects?Explain.
What type of security can be used to minimize both price risk and reinvestment riskfor an investor with a fixed investment horizon? Does this security protect the realpayoff? Explain.
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