Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 13, Problem 8CQ
Summary Introduction
To determine: Techniques to develop a rough estimate of cost of capital.
Introduction: The cost of capital is the WACC (Weighted Average Cost of Capital) is the total
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A firm is about to double its assets to serve its rapidly growing market. It must choose between a highly automated production process and a less automated one. It also must choose a capital structure for financing the expansion. Should the asset investment and financing decisions be jointly determined, or should each decision be made separately? How would these decisions affect one another? How could the leverage concept be used to help management analyze the situation?
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…
If two mutually exclusive projects were being compared, would a high cost of capital favor the longer-term or the shorter-term project? Why? If the cost of capital declined, would that lead firms to invest more in longer-term projects or shorter-term projects? Would a decline (or an increase) in the WACC cause changes in the IRR ranking of mutually exclusive projects?Note: DONOT GIVE BREIF ANSWER USE SHORT CONCEPTUAL ANSWER
Chapter 13 Solutions
Corporate Finance
Ch. 13 - Project Risk If you can borrow all the money you...Ch. 13 - WACC and Taxes Why do we use an aftertax figure...Ch. 13 - SML Cost or Equity Estimation If you use the stock...Ch. 13 - SML Cost or Equity Estimation What are the...Ch. 13 - Prob. 5CQCh. 13 - Cost of Capital Suppose Tom OBedlam, president of...Ch. 13 - Company Risk versus Project Risk Both Dow Chemical...Ch. 13 - Prob. 8CQCh. 13 - Leverage Consider a levered firms projects that...Ch. 13 - Beta What factors determine the beta of a stock?...
Ch. 13 - Prob. 1QAPCh. 13 - Prob. 2QAPCh. 13 - Prob. 3QAPCh. 13 - Prob. 4QAPCh. 13 - Prob. 5QAPCh. 13 - Prob. 6QAPCh. 13 - Prob. 7QAPCh. 13 - Prob. 8QAPCh. 13 - Prob. 9QAPCh. 13 - Prob. 10QAPCh. 13 - Prob. 11QAPCh. 13 - Prob. 12QAPCh. 13 - Prob. 13QAPCh. 13 - Prob. 14QAPCh. 13 - Prob. 15QAPCh. 13 - Prob. 16QAPCh. 13 - Prob. 17QAPCh. 13 - Prob. 18QAPCh. 13 - Prob. 19QAPCh. 13 - Prob. 20QAPCh. 13 - Prob. 21QAPCh. 13 - Prob. 22QAPCh. 13 - Prob. 23QAPCh. 13 - Prob. 24QAPCh. 13 - Prob. 1MCCh. 13 - Prob. 2MCCh. 13 - Go to www.reuters.com and find the list of...Ch. 13 - You now need to calculate the cost of debt for...Ch. 13 - You now have all the necessary information to...Ch. 13 - You used Tesla as a representative company to...
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- What procedures can be used to estimate the risk-adjusted cost of capital for a particular division? What approaches are used to measure a division’s beta?arrow_forwardHow does using the return on investment facilitate comparability between divisions of decentralized companies?arrow_forwardWhat is the major shortcoming of using operating income as a performance measure for investment centers?arrow_forward
- Internal Rate of Return is used: a) To determine the interest rate at which benefits of a project are equivalent to its costs. b) To determine which investment to choose when one of two alternatives must be chosen. c) To determine the interest rate for an investment that yields no income. d) To choose an investment that necessary to preserve the operation of the business. e) To justify a “lost-leader” project of a strategic nature.arrow_forwardWhat are three types of project risk? How caneach type of risk be considered when thinkingabout the new division’s cost of capital?arrow_forward. Qualitative considerations that may influence capital investment analysis include the investment proposal's impact on all of the following except ________. product quality manufacturing flexibility employee morale income taxes The process by which management allocates funds among competing capital investment proposals is called ________. competitive analysis fund analysis capital rationing None of these choices are correct. With capital rationing, alternative proposals are initially screened by establishing minimum standards and applying which of the following methods? Cash payback and net present value methods Net present value and internal rate of return methods Cash payback and average rate of return methods Net present value and average rate of return methodsarrow_forward
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