The process of planning expenditures that will influence the operation of a firm over a number of years is called Show
b. capital budgeting. c. net present valuation. d. dividend valuation. Which of the following is an example of a capital investment project?
b. Expansion of production facilities c. Development of employee training programs d. All of the above are examples of capital investment projects. A firm is considering three investment projects which we will refer to as A, B, and C. Each project has an initial cost of $10 million. Investment A offers an expected rate of return of 16%, B of 8%, and C of 12%. The firm's cost of capital is 6% if it borrows $10 million, 10% if it borrows $20 million, and 15% if it borrows $30 million. Which project(s) should the firm invest in?
b. All three should be undertaken, because the rate of return on B is above 6%, on C is above 10%, and on A is above 15%. c. Only A and C should be undertaken because both have rates of return that are greater than 10%. d. None of the above is correct. Which of the following is an appropriate way to measure cash flows?
b. Consider only incremental costs and revenues c. Consider only after-tax cash flows d. All of the above are appropriate ways to measure cash flows. The net present value of a project is equal to
b. the present value of all revenues minus the present value of all costs that result from the project. c. the present value of all future net cash flows that result from the project minus the initial investment required to start the project. d. All of the above are correct. The net present value method and the internal rate of return method will always yield the same decision when
b. mutually exclusive projects are evaluated. c. a limited number of projects must be selected from a large number of opportunities. d. All of the above are correct. Which of the following is a form of capital as the term is used in economics?
b. Factories owned by businesses c. Education d. Money In cases where capital must be rationed, a firm should rank projects according to their
b. internal rates of return. c. profitability indexes. d. external rates of return. Which of the following is an internal source of investment funding?
b. Sale of stocks c. Undistributed profits d. All of the above are internal sources. A firm can borrow at an interest rate of 10%. Its marginal tax rate is 40%. What is its cost of debt?
b. 14% c. 6% d. None of the above is correct. The method of raising funds for capital investment that involves the greatest risk to the firm is
b. relying on retained profits. c. issuing common stock. d. raising the dividend rate. Which of the following sources of funds for capital investment involves a tax adjustment to determine the cost of capital?
b. Issuing debt c. Issuing common stock d. All of the above involve a tax adjustment. Assume that the risk-free interest rate is 6% and that a firm can issue bonds at an interest rate of 9%. Assume further that the difference between the average yield on stocks and the average yield on corporate bonds is 4%. What is the risk premium associated with the firm's cost of equity capital? Assume that investors require a rate of return of 10% to invest in a firm that pays a dividend of $2 per year. The price of the firm's stock is currently based on the assumption that the firm's dividend will remain constant. By how much will the price of the firm's stock increase if the firm begins to grow at a rate of 2% per year and is expected to continue to do so indefinitely? The beta coefficient is associated with
b. the dividend valuation model. c. the risk-free rate plus premium model. d. the tax-adjusted cost of debt. Assume that the risk-free rate is 5% and that the rate of return on a balanced portfolio of common stocks is 9%. If a firm has a beta coefficient of 2, then its risk premium is A firm must raise $10 million dollars in funding for a capital investment project. $2 million will be raised by issuing debt with an interest rate of 10% while the remainder will be raised by issuing stocks that will yield a return of 12%. The firm's marginal tax rate is 30%. What is the firm's composite cost of capital? The debt to equity ratio that is selected by a firm depends
b. the cost of debt and the cost of equity capital. c. the nature of the firm's business. d. All of the above are correct. The review of projects after they have been implemented is called
b. a postaudit. c. blame spreading. d. context correlation. According to the Gitman and Forrester study published in 1977, the two most commonly used capital budgeting techniques are Which of the following can be a criterion for the acceptance of a project?Project success criteria (PSC)
Delivered within Time and Budget tolerances. Delivered to Specifications. Customer Satisfaction rating achieved. Health and Safety adherence.
Which of the following is the term that describes the amount of time taken for a capital budgeting project to recover its initial investment?Explanation: Payback period represents the time period that is taken by an investment to recover its initial or original cost using its expected annual cash flows. The method ignores the concept of the time value of money. There are two formulas used to determine the payback period depending on the cash flows.
What is the criteria of selection when choosing among mutually exclusive projects?In such cases, while choosing among mutually exclusive projects, one should always select the project giving the largest positive net present value using the appropriate cost of capital or predetermined cut-off rate.
Which of the following represent the amount of time that is take for a capital budgeting project to recover its initial cost?The payback period calculates the length of time required to recoup the original investment. For example, if a capital budgeting project requires an initial cash outlay of $1 million, the PB reveals how many years are required for the cash inflows to equate to the one million dollar outflow.
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