Which of the following statements is not true about the weighted average cost of capital (WACC) method? O a. WACC adjusts for the tax deductibility of interest costs O b. Average company WACC should not be used for evaluating projects in a multi-segment conglomerate O c. If WACC is greater than the IRR of a project and the cash flows are conventional, then, the NPV of the project will always be less than zero O d. WACC cannot be used to evaluate projects in which the capital structure is significantly different from the firm's overall structure Oe. If WACC is less than IRR of a strip mine project, then, the NPV of the project will always be greater

Which of the following statements is not true about the weighted average cost of capital (WACC) method? O a. WACC adjusts for the tax deductibility of interest costs O b. Average company WACC should not be used for evaluating projects in a multi-segment conglomerate O c. If WACC is greater than the IRR of a project and the cash flows are conventional, then, the NPV of the project will always be less than zero O d. WACC cannot be used to evaluate projects in which the capital structure is significantly different from the firm's overall structure Oe. If WACC is less than IRR of a strip mine project, then, the NPV of the project will always be greater

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

Which of the following statements is (are) FALSE? Select one or more alternatives: When sales of a new product displace sales of an existing product, the situation is often referred to as cannibalisation. If the IRR of a project is equal to the cost of capital, the NPV will be zero. It is reasonable to assume that a business has a terminal growth rate higher than the long-term growth rate of the economy. The terminal growth rate is the growth rate used to estimate the terminal value of a business. Interest expenses from borrowing should be subtracted from EBIT to estimate free cash flow to firm.
In capital budgeting decisions, are there reasons a company might choose to take a project that was NPV negative? Explain.
Which of the following statements is CORRECT? * A company can use its retained earnings without incurring a flotation cost. As a O result, while the cost of retained earnings is not zero, it is usually less expensive than the after-tax cost of debt. The capital structure that minimizes a company's weighted average cost of capital often maximizes its stock price. The capital structure that minimizes the firm's weighted average cost of capital often maximizes its earnings per share. If everything else is stable, and corporate tax rates drops, the Modigliani-Miller tax- adjusted tradeoff principle implies that companies should expand their use of debt. When a corporation learns that the cost of debt is less than the cost of equity, rising the debt ratio would lower the WACC.
If the present value of a firm's marginal financial distress costs are equal to the present value of its marginal tax shieid, the companySelect one:a.has too much debt in its capital structureb.should increase the amount of debt in ts capital structurec. has an optimal capital structured.shouid reduce the amount of equity in its capital structuree:none of the abovt
Which of the following statements is most correct? Group of answer choices The optimal capital structure maximizes the WACC. None of these. Increasing the amount of debt in a firm's capital structure is likely to increase the cost of both debt and equity financing. If the after-tax cost of equity financing exceeds the after-tax cost of debt financing, firms are always able to reduce their WACC by increasing the amount of debt in their capital structure.
The optimal capital structure for firms in stable industries can reasonably contain ________________ than firms in volatile industries. Select one: A. more debt B. less debt C. an equal amount of debt D. There is no relationship between the cyclical nature of an industry and optimal capital structure
Which of the followings proposes that there is a tradeoff between level of borrowing and benefit of tax shields up a point after which financial distress costs start kicking in? CAPM Static capital structure theory M&M Proposition I M&M Proposition II Pecking order theory Floation cost includes Gross spread Direct expenses Indirect expenses Abnormal returns All of above Which one of the followings states that the value of a firm is unrelated to the firm's capital structure? Capital Asset Pricing Model M&M Proposition I M&M Proposition II Law of One Price Efficient Markets Hypothesis
Which of the following statements is false? The equivalent annual value of a project is equal to the net present value of a project held in perpetuity, divided by the required rate of return. None of the given options is false. Management may select a project with a lower net present value because qualitative factors may render the other project less attractive. The rejection of positive net present value projects by management is inconsistent with the objective of maximising shareholder wealth.
Solve this one
A firm’s weighted average cost of capital should not do which one of the following? Group of answer choices measure the cost of short-term sources of funds measure cost on a marginal basis measure the cost of long-term sources of funds measure cost on an after-tax basis
What is the connection between capital budgeting decisions and the enterprise’s cost of capital? Would an enterprise ever decide to embark on a project whose rate of return would be less than its cost of capital? Why or why not?
7. Which TWO of the following statements are correct for a potential project with an investment followed by a series of positive operating cashflows? A The graph of NPV against discount rate has a negative slope B if the NPV at 10% is positive, the IRR will be below 10% C The IRR can be calculated exactly using linear interpolation D An estimate of the IRR requires the calculation of the NPV at 2 different rates

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