PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Chapter 9, Problem 9PS
True/false* True or false?
- a. The company cost of capital is the correct discount rate for all projects because the high risks of some projects are offset by the low risk of other projects.
- b. Distant cash flows are riskier than near-term cash flows. Therefore, long-term projects require higher risk-adjusted discount rates.
- c. Adding fudge factors to discount rates undervalues long-lived projects compared with quick-payoff projects.
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Students have asked these similar questions
Which of the following is true about the WACC?
It’s the appropriate discount rate for all new projects with the same risk level as the existing assets of the firm
The optimal capital structure is the one that minimizes the WACC
The value of the firm will be maximized when the WACC is minimized
Since discount rates and values move in the same direction, minimizing the WACC will minimize the value of the firms cash flows
A, B, and C are true
Which of the following statements is false? (You may select more than one answer.)a. The payback period increases as the cost of capital decreases.b. The simple rate of return will be the same for two alternatives that have identicalcash flow patterns even if the pattern of accounting net operating income differsbetween the alternatives.c. The internal rate of return will be higher than the cost of capital for projects thathave positive net present values.d. If two alternatives have the same present value of cash inflows, the alternative thatrequires the higher investment will have the higher project profitability index.
6.
Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.
Group of answer choices
True
False
Chapter 9 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 9 - (VAR.P and STDEV.P) Choose two well-known stocks...Ch. 9 - (AVERAGE, VAR.P and STDEV.P) Now calculate the...Ch. 9 - (SLOPE) Download the Standard Poors index for the...Ch. 9 - Company cost of capital Suppose a firm uses its...Ch. 9 - Prob. 2PSCh. 9 - Definitions Define the following terms: a. Cost of...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 6PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Asset betas Which of these projects is likely to...
Ch. 9 - True/false True or false? a. The company cost of...Ch. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Company cost of capital The total market value of...Ch. 9 - Company cost of capital Nero Violins has the...Ch. 9 - Measuring risk The following table shows estimates...Ch. 9 - Company cost of capital You are given the...Ch. 9 - Measuring risk Look again at Table 9.1. This time...Ch. 9 - Prob. 16PSCh. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 18PSCh. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 22PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- When using the NPV method for a particular investment decision, if the present value of all cash Inflows Is greater than the present value of all cash outflows, then _______ . A. the discount rate used was too high B. the investment provides an actual rate of return greater than the discount rate C. the investment provides an actual rate of return equal to the discount rate D. the discount rate is too lowarrow_forwardSuppose 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 projectsarrow_forwardIf you could only have one piece of information to help you understand the discount rate for evaluating a project at hand, which of the following would you prefer? The project has different systematic risk than the firm overall. Group of answer choices How the project's expected cash flows are effected by the overall economy The firm's credit rating The firm's cost of equity The firm's WACCarrow_forward
- Select all that are true with respect to discount rates: Group of answer choices The cost of equity rises as you add leverage to the capital structure because the risk to equity rises as you add leverage. In a CAPM world, the Beta of equity rises as you add leverage to the capital structure. The appropriate discount rate for a project should reflect the systematic risk of the expected cash flows of that project. If the firm has positive debt, then the cost of debt is less than the WACC and the WACC is less than the cost of equity. The appropriate discount rate for a project that has the same risk as the overall firm is the firm’s WACC. The appropriate discount rate for a project that has the same risk as the firm’s equity is the firm’s cost of equity.arrow_forwardSuppose a firm uses a constant WACC in determining the value of capital budgeting projects rather than using a project beta. The firm will tend to A. accept profitable, low risk projects and reject unprofitable, high risk projects B. accept profitable, low risk projects and accept unprofitable, high risk projects C. reject profitable, low risk projects and accept unprofitable, high risk projects D. reject profitable , low risk projects and reject unprofitable, high risk projectsarrow_forwardWhen evaluating projects using internal rate of return,? A. projects having lower early-year cash flows tend to be preferred at higher discount rates. B. projects having higher early-year cash flows tend to be preferred at higher discount rates. C. projects having higher early-year cash flows tend to be preferred at lower discount rates. D. the discount rate and magnitude of cash flows do not affect internal rate of return.arrow_forward
- Is this statement true or false? Please explain in detail Companies should always finance projects with the highest projected ROI, to ensure that cash flows are not impacted due to a high WACC.arrow_forwardTrue or False: In solving a capital budgeting problem involving investment opportunities that are divisible (i.e., you can invest in portions of the opportunities instead of “all or nothing”), you rank the opportunities on thebasis of internal rate of return and add to the portfolio opportunities andfractions of opportunities, beginning with the largest internal rate of return,until “the investment bucket is filled.”arrow_forward3. I need help with multiple choice finance home work question Which of the following statements is incorrect? If a firm's target average accounting return is less than that calculated for a given project then the project should be accepted. If the NPV of a project is positive, it should be accepted. If a project has a payback which is faster than the company requires the project should be accepted. If the cost of capital is greater than the IRR, the project should be accepted. If a project has a profitability index greater than one the project should be accepted.arrow_forward
- 6 An advantage of the net present value method over the internal rate of return model in discounted cash flow analysis is that the net present value method Group of answer choices Uses discounted cash flows whereas the internal rate of return model does not Computes a desired rate of return for capital projects Can be used when there is no constant rate of return required for each year of the project Uses a discount rate that equates the discounted cash inflows with the outflowsarrow_forwardFor a typical project evaluation with initial investment at time=0 and positive cash flows afterwards, each statement in the following shows possible answers in parenthesis. Choose the answer that shows correct answers for all statements. Statement 1: When NPV = 0, investors earn (negative/zero/positive) return. Statement 2: Accept the project when valuation is (higher/the same/lower) than the cost. Statement 3: When IRR> cost of capital, NPV is (negative/zero/positive). Statement 4: Cost of capital is determined by the (company/investors) considering the (business risk/systematic) risk) a. negative, higher, positive, investors and systematic b. positive, lower, positive, investors and business c. positive, higher, zero, company and systematic d. positive, higher, positive, investors and systematicarrow_forwardWhen the present value of the cash inflows exceeds the initial cost of a project, then the project should be : A. rejected because NPV is negative. B. accepted because NPV is greater than 1. C. accepted because the profitability index is negative. D. rejected because the internal rate of return is negative.arrow_forward
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