Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 19, Problem 3PS
WACC True or false? Use of the WACC formula assumes
- a. A project supports a fixed amount of debt over the project’s economic life.
- b. The ratio of the debt supported by a project to project value is constant over the project’s economic life.
- c. The firm rebalances debt each period, keeping the debt-to-value ratio constant.
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Students have asked these similar questions
The net present value (NPV) of a project is positive when the discount rate used is:
Group of answer choices
equal to the project's internal rate of return (IRR).
greater than the project's internal rate of return (IRR).
equal to the yield to maturity of the bonds issued to finance the project.
Less than the project's internal rate of return (IRR).
Which of the following statements is true about the internal rate of return?
a.
It is the interest rate that sets a project's net present value at zero.
b.
It is the minimal acceptable interest rate on an investment.
c.
It is the difference between the present value of the cash inflows and outflows associated with a project.
d.
It is the difference between the present value of a cash outflow and the depreciation associated with an asset.
true or false?
if we choose to use company's WACC in the calculation of the NPV of a project, we are assuming that the project 1- has the same risk as the average-risk project of the company, and 2- will have constant target capital structure throughout its useful life
Chapter 19 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 19.A - The U.S. government has settled a dispute with...Ch. 19.A - Prob. 2QCh. 19 - Prob. 1PSCh. 19 - Prob. 2PSCh. 19 - WACC True or false? Use of the WACC formula...Ch. 19 - Flow-to-equity valuation What is meant by the...Ch. 19 - APV True or false? The APV method a. Starts with a...Ch. 19 - APV A project costs 1 million and has a base-case...Ch. 19 - Prob. 7PSCh. 19 - APV Consider a project lasting one year only. The...
Ch. 19 - WACC The WACC formula seems to imply that debt is...Ch. 19 - Prob. 10PSCh. 19 - Prob. 11PSCh. 19 - WACC Table 19.4 shows a simplified balance sheet...Ch. 19 - WACC How will Rensselaer Felts WACC and cost of...Ch. 19 - APV Digital Organics (DO) has the opportunity to...Ch. 19 - APV Consider another perpetual project like the...Ch. 19 - Prob. 18PSCh. 19 - Prob. 19PSCh. 19 - Prob. 22PSCh. 19 - Company valuation Chiara Companys management has...Ch. 19 - Prob. 25PSCh. 19 - Prob. 26PS
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- choose the coreect answer 1-Aconservative financing policy indicates that investment in fixed and current assets is funded by long-term sources of financing and this policy leads to a-Low risk of real and financial hardship – b-Low interest rates and apayment premium borne by the company 2- The payback period method in evaluating projects depends on extracting the time period required to cover the investment amount under this method a-we tuke only cashflows to cover the investment size b-we talk cash flows to cover with cash flows expected to be collected after the payback period 3- suppose you have a stock and this stock achieves a loss in half of the period of 20% and makes a profit in the other half of the period of 70% and therefore the expected rate of return per share will ER =25% ER=50% ER=65%arrow_forwardWith 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.arrow_forwardproject is accepted if, Net present value of the project is positive. IRR is lower than cost of capital. Modified internal rate of return is greater than cost of capital. Profitability index is greater than 1. I) II) III) IV) V) Payback period is lower than the acceptable payback period. Which of the above statements are correct? A. I, II and II. B. I and IV C. I, III, IV, and V D. All of the above.arrow_forward
- Which one of the following statements is correct? If the initial cost of a project is increased, the net present value of that project will also increase. The net present value is positive when the required return exceeds the internal rate of return. If the internal rate of return equals the required return, the net present value will equal zero. Net present value is equal to an investment's cash inflows discounted to today's dollars.arrow_forwardIn considering the payback period, ____. a. it considers the time value of money in determining the maximum allowable time period b. it is based on cash flows both during and after the payback period c. it gives some indication of a project’s desirability from a liquidity viewpoint d. the maximum period allowed by a firm is a specific time period based on objective criteriaarrow_forwardA project's internal rate of return (IRR) is the that forces the PV of its inflows to equal its cost. The IRR is an estimate of the project's rate of return, and it is comparable to the on a bond. The equation for calculating the IRR is: CFt is the expected cash flow in Period t and cash outflows are treated as negative cash flows. There must be a change in cash flow signs to calculate the IRR. The IRR equation is simply the NPV equation solved for the particular discount rate that causes NPV to equal . The IRR calculation assumes that cash flows are reinvested at the . If the IRR is than the project's risk-adjusted cost of capital, then the project should be accepted; however, if the IRR is less than the project's risk-adjusted cost of capital, then the project should be . Because of the IRR reinvestment rate assumption, when projects are evaluated the IRR approach can lead to conflicting results from the NPV method. Two basic conditions can lead to conflicts between NPV and…arrow_forward
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