finance exam 3 conceptual

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 11% for each project.

"B" has a positive NPV when discounted at 15%

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12% for each project.

"D" has a zero NPV when discounted at 14%.

Which one of the following changes will increase the NPV of a project?

A decrease in the discount rate

A firm's cost of capital should be used as the discount rate for every new project the firm considers.

False

An increase in a firm's debt ratio will have no effect on the required rate of return for equity holders.

False

For mutually exclusive projects, the project with the higher IRR is the correct selection.

False

Projects with an NPV of zero decrease shareholders' wealth by the cost of the project.

False

The Internal Rate of Return (IRR) represents which of the following:

The discount rate that makes the net present value equal to zero.

As the opportunity cost of capital decreases, the net present value of a project increases.

True

The company cost of capital is the expected rate of return that investors demand from the company's assets and operations.

True

There are two costs of debt finance. The explicit cost of debt is the rate of interest that bondholders demand. But there is also an implicit cost, because higher levels of debt increase the required rate of return to equity.

True

What decision should be made on a project with above-average market risk?

Use a higher discount rate than the WACC to reflect the project's risk and accept if NPV is positive at this higher discount rate.

Capital structure decisions refer to the:

blend of equity and debt used by the firm

According to the NPV rule, all projects should be accepted if NPV is positive when discounted at the:

opportunity cost of capital

If the IRR for a project is 20%, then the project's NPV would be:

positive at a discount rate of 15%

If the IRR for a project is 15%, then the project's NPV would be:

negative at a discount rate of 20%.

A firm is considering expanding its current operations and has estimated the internal rate of return on that expansion to be 12.2%. The firm's WACC is 11.8%. Given this, you know that the:

expansion should be undertaken as it has a positive net present value.

A firm's WACC:

is a benchmark discount rate that may be adjusted for the riskiness of each project.

A project requires an initial outlay of $10 million. If the opportunity cost of capital exceeds the project IRR, then the project has a(n):

negative NPV

NPV is not the correct decision rule when:

there is capital rationing

Selecting the project(s) with the highest NPV(s) is not the correct decision rule when:

there is capital rationing.

To calculate the present value of a business, the firm's free cash flows should be discounted at the firm's:

weighted-average cost of capital