PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 11, Problem 15PS
Economic rents* True or false?
- a. A firm that earns the
opportunity cost of capital is earning economic rents. - b. A firm that invests in positive-
NPV ventures expects to earn economic rents. - c.
Financial managers should try to identify areas where their firms can earn economic rents, because it is there that positive-NPV projects are likely to be found. - d. Economic rent is the equivalent annual cost of operating capital equipment.
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3. I need help with multiple choice finance home work question
Which of the following statements is incorrect?
If a firm's target average accounting return is less than that calculated for a given project then the project should be accepted.
If the NPV of a project is positive, it should be accepted.
If a project has a payback which is faster than the company requires the project should be accepted.
If the cost of capital is greater than the IRR, the project should be accepted.
If a project has a profitability index greater than one the project should be accepted.
1. The Net Present Value decision technique may not be the only pertinent unit of measure if
the firm is facing
A. a labor union.
B. a major investment.
C. time or resource constraints.
D. the election of a new board of directors.
2. Which rate-based decision statistic measures the rate of return, including the cost of capital
for a project?
A. Profitability Index, PI
B. Net Present Value, NPV
C. Internal Rate of Return, IRR
D. Modified Internal Rate of Return, MIRR
3. When looking at these types of projects, one must consider any cash flows that arise from
installing the new equipment.
A. new
B. cost-cutting
C. incremental
D. replacement
E. all of the above.
4. Of the capital budgeting techniques discussed, which works equally well with normal and
non-normal cash flows and with independent and mutually exclusive project?
A. payback period
B. net present value
C. discounted payback period
D. modified internal rate of return
5. The approach to convert an infinite series of asset…
The cost of capital is:
the required rate of return for new projects that have risk that is similar to that of the overall firm.
the rate of return a firm earns on its investments to satisfy the required rate of return for the firm’s investors.
the opportunity cost of using funds on projects.
all of the above.
Chapter 11 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 11 - Capital budgeting process True or false? a. The...Ch. 11 - Capital budgeting process Explain how each of the...Ch. 11 - Capital budgeting process Draw up an outline or...Ch. 11 - Prob. 4PSCh. 11 - Biased forecasts Look back to the cash flows for...Ch. 11 - Prob. 6PSCh. 11 - Prob. 7PSCh. 11 - Prob. 8PSCh. 11 - Market prices Suppose the current price of gold is...Ch. 11 - Prob. 10PS
Ch. 11 - Prob. 11PSCh. 11 - Prob. 12PSCh. 11 - Prob. 13PSCh. 11 - Economic rents True or false? a. A firm that earns...Ch. 11 - Prob. 16PSCh. 11 - Economic rents Thanks to acquisition of a key...Ch. 11 - Prob. 18PSCh. 11 - Prob. 19PSCh. 11 - Prob. 20PSCh. 11 - Prob. 21PSCh. 11 - Prob. 22PSCh. 11 - Economic rents Taxes are a cost, and, therefore,...Ch. 11 - Prob. 1MCCh. 11 - Libby Flannery, the regional manager of Ecsy-Cola,...
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- WACC is an important concept because it represents a company's cost of capital; any project that it undertakes should have a return that exceeds its WACC. T/F?arrow_forwardfind the weighted average cost of capital for Jack in the Box Inc. (JACK). How is the WACC is calculated? Explain the WACC in the context of a hurdle rate, return on invested capital (ROIC), an optimal capital structure, and an optimal capital budget.arrow_forwardThese are true/false questions ____ 31. The normal selling price must be set high enough to cover all costs and expenses (fixed and variable) and provide a reasonable profit. ____ 32. Methods that ignore present value in capital investment analysis include the cash payback method. ____ 33. The rate of return on investment may be computed by multiplying investment turnover by the profit margin. ____ 34. The excess of divisional income from operations over a minimum amount of desired income from operations is termed the residual income. ____ 35. Responsibility accounting reports for profit centers are normally in the form of income statements.arrow_forward
- If the firms earns a higher rate of return on its investments than the required rate of return then it is called a_____ a. Normal firm b. Growth firm c. Decline firm d. Regular firmarrow_forwardWhich of the following is true regarding capital rationing decisions? a. Companies should always choose the investment with the highest NPV. b. Companies should always choose the investment with the highest ARR. c. Companies should always choose the investment with the shortest payback. d. None of the abovearrow_forwardIntroduction Net Present Value is a financial measure used to evaluate the profitability of an investment or project. If an NPV is positive, it suggests that the investment is profitable to the investor, while a negative NPV indicates potential losses. It helps in decision-making by considering the cost of capital and determining whether an investment adds value to the business.arrow_forward
- Weighted Average Cost of Capital (WACC) theory suggests there is an optimal capital structure. Discuss this statement to include an explanation of: What is meant by ‘capital structure’. How changes in capital structure effect WACC The relationship of WACC to the market value of a company The traditional view of the optimum gearing ratio. You may find graphical illustration(s) can support your discussion.arrow_forwardConsider the following statements: 1. Businesses that are capital intensive tend to have high operating gearing. 2. Businesses with relatively high total variable cost compared with their total fixed cost, at their normal level of activity, are said to have high operating gearing. Are the above statements true or false?arrow_forwardIf a company has over capitalization, rate of earning is: Select one: a. equal with the rate of earning if it has optimal level of capitalization b. lower than the rate of earning if it has optimal level of capitalization c. higher than the rate of earning if it has optimal level of capitalizationarrow_forward
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