FIN

Which of the following is NOT a capital component when calculating the weighted average cost of capital for use in capital budgeting?

Accounts payable

The relative risk of a proposed project is best accounted for by which of the following procedures?

Adjusting the discount rate upward if the project is judged to have above-average risk

Which of the following statements is CORRECT?

An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital.

Which of the following statements is CORRECT?

An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to increase.

Duval Inc uses only equity capital, and it has two equally sized divisions. Division A's cost of capital is 10%. Division B's cost is 14% and the corporate (composite) WACC is 12%. All of Division A's projects are equally risky, as are all of Division B. Which of the following projects should the firm accept?

Division A project with an 11% return

Which of the following statements is CORRECT?

If a project has "normal" cash flows, then it can have only one real IRR

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

If a project's NPV is less than zero, then its IRR must be less than the WACC.

A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?

Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk

Which of the following statements is CORRECT?

Multiple IRRs can only occur if the signs of the cash flows change more than once.

Which of the following statements is CORRECT?

One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

Projects C and D are mutually exclusive and have normal cash flows. Project C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%. Which of the following statements is CORRECT?

Project D probably has a higher IRR.

Which of the following statements is CORRECT?

The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR

Which of the following factors should be included in the cash flows used to estimate a project's NPV?

The end-of-project recovery of any additional net operating working capital required to operate the project