Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 22.4, Problem 1CC
Why can a firm with no ongoing projects, and investment opportunities that currently have negative NPVs, still be worth a positive amount?
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Students have asked these similar questions
Which of the following is an example of a way in which companies can create value by exploiting real options?
A.Exercising in-the-money real options immediately
B.Optimally delaying or abadoning projects
C.Abandoning good projects in favor of newer projects
D.Acting quickly to take on the new projects even if there is no cost to wait
Which of the following statements is true?
Group of answer choices
a. Undertaking a negative NPV project may increase the value of a firmʹs equity while decreasing overall firm value
b. In order to maximize firm value, management should commit to take on no projects that could decrease the value of the existing debt
c. In order to maximize firm value, management should undertake all projects that will maximize the value of its equity
d. Undertaking a positive NPV project will always increase the values of both the firmʹs debt and its equity
Many companies still go ahead to undertake capital projects even when these projects have a negative NPV. Why do you think this is so?
Chapter 22 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 22.1 - What is the difference between a real option and a...Ch. 22.1 - Why does a real option add value to an investment...Ch. 22.2 - Prob. 1CCCh. 22.2 - In what circumstances does the real option add...Ch. 22.2 - How do you use a decision tree to make the best...Ch. 22.3 - What is the economic trade-off between investing...Ch. 22.3 - Prob. 2CCCh. 22.3 - Does an option to invest have the same beta as the...Ch. 22.4 - Why can a firm with no ongoing projects, and...Ch. 22.4 - Why is it sometimes optimal to invest in stages?
Ch. 22.4 - How can an abandonment option add value to a...Ch. 22.5 - Prob. 1CCCh. 22.5 - Prob. 2CCCh. 22.6 - Why can staging investment decisions add value?Ch. 22.6 - How can you decide the order of investment in a...Ch. 22.7 - Prob. 1CCCh. 22.7 - Prob. 2CCCh. 22 - Your company is planning on opening an office in...Ch. 22 - You are trying to decide whether to make an...Ch. 22 - Prob. 4PCh. 22 - Prob. 5PCh. 22 - You are a financial analyst at Global Conglomerate...Ch. 22 - Prob. 7PCh. 22 - Prob. 8PCh. 22 - Consider again the electric car dealership in...Ch. 22 - Prob. 12PCh. 22 - Prob. 13PCh. 22 - You are an analyst working for Goldman Sachs, and...Ch. 22 - You own a small networking startup. You have just...Ch. 22 - An original silver dollar from the late eighteenth...Ch. 22 - What implicit assumption is made when managers use...Ch. 22 - Prob. 22PCh. 22 - Genenco is developing a new drug that will slow...Ch. 22 - Prob. 24PCh. 22 - Your firm is thinking of expanding. If you invest...Ch. 22 - Prob. 26PCh. 22 - Assume that the project in Example 22.5 pays an...
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- A firm should never undertake an investment if accepting the project would cause an increase in the firm's cost of capital.arrow_forwardYour company requires that all planned investment projects should have a positive net present value at the company cost of capital of 15%. Explain how this policy can lead to wrong investment decisions for the company.arrow_forwardA firm would accept a project with a net present value of zero because Select one: a. the return on the project would be zero. b. the return on the project would be positive. c. the project would enhance the wealth of the firm's owners. d. the project would maintain the wealth of the firm's owners.arrow_forward
- Why do most academics and financial executives regard the NPV as being the single best criterion and better than the IRR? Why do companies still calculate IRRs?arrow_forwardIf 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 ANSWERarrow_forwardWhy are the companies with low cash flow unable to bear the risk of a large project?arrow_forward
- Which of the following limits the market from becoming a fully efficient market? New information takes time to process. Obtaining new information is costly. The existence of closed end investment companies. Both a. and b. are correct. All of the above answers are correct. None of the above answers is correct.arrow_forwardI think question 3 is not answered clearly. If Project A is rejected due to negative NPV, then all positive NPVs projects should be accepted. The answer is not clear. Please correct me if I am missing something. Question 3) If the firm uses the discounted-payback rule, will it accept any negative NPV projects? Will it turn down any positive NPV projects? How do you know? Your answer is: No Due to Project A's negative NPV, it cannot cover the initial investment within its useful life. Will it turn down any positive NPV projects? It will reject projects with positive NPVs but not those with negative NPVs. If all potential cash flows are taken into account but the project still doesn't reach the designated cutoff point, the NPV can still be positive.arrow_forwardWhich of the following is a disadvantage of the internal rate of return criterion? Select one: a. It is not a true rate of return. b. It uses an arbitrary benchmark cutoff rate. c. It ignores time value of money, cash flows, and market values. d. It cannot be used to rank independent projects. e. It may lead to incorrect decisions when comparing mutually exclusive investments.arrow_forward
- If a firm is planning for an international project, the manager should understand that the project's NPV would be ______ by the size of the initial investment and the project's required rate of return. A. positively; negatively B. positively; positively C. negatively; negatively D. negatively; positivelyarrow_forwardAssume we are a world that is not frictionless. Indeed, the real world is such a place. In this world, a firm may have difficulty raising funds to fund a positive NPV project because too much of the project's payoff would go to investors other than the investors from whom you are trying to raise the new money. Group of answer choices True Falsearrow_forwardMany firms still use the internal rate of return rule instead of net present value. When used properly, the two rules lead to the same decision, but the internal rate of return rule has several pitfalls that can trap the unwary.Explain with reasons, THREE (3) pitfalls of using the internal rate of return rule in appraising capital investment.arrow_forward
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