Concept explainers
WACC True or false? Use of the WACC formula assumes
- a. A project supports a fixed amount of debt over the project’s economic life.
- b. The ratio of the debt supported by a project to project value is constant over the project’s economic life.
- c. The firm rebalances debt each period, keeping the debt-to-value ratio constant.
a)
To discuss: Whether the given statement is true or false.
Explanation of Solution
Given statement:
Project supports a fixed amount of debt over the economic life of a project.
Reason:
It is not true because only the ratio of debt is constant over the economic life of a project and the amount of debt is need not to fixed.
Hence, the given statement is false.
b)
To discuss: Whether the given statement is true or false.
Explanation of Solution
Given statement:
The ratio of debt supported by project to project value is fixed over the economic life of a project.
Reason:
It is true that the ratio of debt supported by project to project value is fixed over the economic life of a project.
Hence, the given statement is true.
c)
To discuss: Whether the given statement is true or false.
Explanation of Solution
Given statement:
The firm will keep the debt to value ratio constant and rebalances its debt each period.
Reasons:
It is true that the firm will keep the debt to value ratio constant and rebalances its debt each period.
Hence, the given statement is true.
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Chapter 19 Solutions
PRIN.OF CORPORATE FINANCE
- Which of the following statements is true about the internal rate of return? a. It is the interest rate that sets a project's net present value at zero. b. It is the minimal acceptable interest rate on an investment. c. It is the difference between the present value of the cash inflows and outflows associated with a project. d. It is the difference between the present value of a cash outflow and the depreciation associated with an asset.arrow_forwardThe net present value (NPV) of a project is positive when the discount rate used is: Group of answer choices equal to the project's internal rate of return (IRR). greater than the project's internal rate of return (IRR). equal to the yield to maturity of the bonds issued to finance the project. Less than the project's internal rate of return (IRR).arrow_forwardWhich of the following statements is most correct? If a project’s internal rate of return (IRR) exceeds the cost of capital, then the project’s net present value (NPV) must be positive. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital. Answers a and c are correct. None of the answers above are correct.arrow_forward
- Allied uses debt in its capital structure, so some money use to finance the project will be deb. Given this fact, should the projected cash flows be revised to show projected interest charges? Explainarrow_forwardWhat refers to the interest rate at which the present work of the cash flow on a project is zero of the interest earned by an investment? Select one: a. Return of investment b. Yield c. Rate of return d. Economic returnarrow_forwardConsider the following statement: In a capital rationing problem withdivisible investments, if all projects have positive present worths, all of theinvestment capital will be used. Solve, a. This statement is true b. This statement is false c. Not enough information is given; the numeric values of the present worths of the projects are required to know whether this statement is true or false d. Not enough information is given; the numeric values of the IRRs of the projects and the value of MARR are required to know whether this statement is true or falsearrow_forward
- In considering the payback period, ____. a. it considers the time value of money in determining the maximum allowable time period b. it is based on cash flows both during and after the payback period c. it gives some indication of a project’s desirability from a liquidity viewpoint d. the maximum period allowed by a firm is a specific time period based on objective criteriaarrow_forwardThe internal rate of return is defined as the: OOO rate of return a project will generate if the project is financed solely with internal funds. maximum rate of return a firm expects to earn on a project. discount rate that equates the net cash inflows of a project to zero. discount rate that causes the profitability index for a project to equal zero. discount rate which causes the net present value of a project to equal zero.arrow_forwardproject is accepted if, Net present value of the project is positive. IRR is lower than cost of capital. Modified internal rate of return is greater than cost of capital. Profitability index is greater than 1. I) II) III) IV) V) Payback period is lower than the acceptable payback period. Which of the above statements are correct? A. I, II and II. B. I and IV C. I, III, IV, and V D. All of the above.arrow_forward
- The duration of time within which the investment made for the project will be recovered by the net returns of the project is known as а. Accounting rate of return method b. Payback period С. Net present value method d. Period of return Capital budgeting is the process of evaluating and selecting short-term investments that are consistent with the firm's goal of maximizing owners' wealth. Select one: True Falsearrow_forwardExamine the following statements. (i) Payback period method measure the true profitability of a project. (ii) Capital Rationing and capital budgeting mean the same thing. (iii) Internal Rate of Return and Time Adjusted rate of Return are the same thing. (iv) Rate of Return takes into account the time value of money. A. (i), (ii) and (iii) are correct. B. (ii) and (iii) are correct. C. Only (iii) is correct. D. All (i), (ii), (iii) and (iv) are falsearrow_forwardA project should be accepted if its internal rate of return exceeds: O the rate of return on a government bond. the rate the company pays on borrowed funds. O zero. O the company's required rate of return.arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT