A firm should never undertake an investment if acceptingthe project would cause an increase in the firm's cost ofcapital.

It is wrong to say so. The expected return on investment (ROI) of a project related to the cost of…

Answered: A firm should never undertake an…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 8QA

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If a company has an option to abandon a project, would this tend to make the company more or less likely to accept the project today?
If a company has an option to abandon a project, would this tend to makethe company more or less likely to accept the project today?
1) What is the company's WACC? 2) Should the company take the projects? Assume that the projects have the same risk as an average project for your firm. 3) If one project is depended on the other in a way that the company can only take both projects, should it take it?
Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,600,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project's NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company's WACC is 7%, and project Delta has the same risk as the firm's average project. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $500,000 Year 3 $450,000 Year 4 $475,000 Which of the following is the correct calculation of project Delta's IRR? 4.98% 4.27% 5.45% 4.74%
may force the firm to forgo positive NPV projects or to rely on costly external equity financing. A Moving to another question will save this response.
Suppose your firm could purchase another firm for only half of itsreplacement value. Would that be a sufficient justification for theacquisition? Why or why not?
What are the likely effects of a policy in which a company fails to adjust for difference in risk when estimating the cost of capital for their various projects?
If a firm fails to consider growth options, would this cause it to underestimate oroverestimate projects’ NPVs? Explain.
Which of the following contributes positively to the value of a real option to delay investment? First-mover competitive advantages It lowers idiosyncratic risk, and thus the firm's cost of capital Delaying project revenues, due to TVM The likely resolution of some uncertainty
8. Which of the following statements is FALSE? When a firm faces financial distress, it may choose not to finance new, positive-NPV projects. An under-investment problem occurs when shareholders choose to not invest in a positive-NPV project. Agency costs represent another cost of increasing the firm's leverage that will affect the firm's optimal capital structure choice. The agency costs of debt can arise only if there is no chance the firm will default and impose losses on its debt holders.
How can one distinguish between a relaxed butrational working capital policy and a situation inwhich a firm simply has excessive current assetsbecause it is inefficient? Does RR’s working capitalpolicy seem appropriate?
A company should accept for investment all positive NPV investment alternatives when which of the following conditions is true?a. The company has extremely limited resources for capital investment.b. The company has excess cash on its balance sheet.c. The company has virtually unlimited resources for capital investment.d. The company has limited resources for capital investment but is planning to issue new equity to finance additional capital investment.

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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.