test4

The weighted average cost of capital of a firm represents the _____

• minimum rate of return a firm must earn on average-risk investments to maintain its current value

• maximum rate of return a firm can expect to earn on its investments

• maximum interest rate a firm should pay on the debt it uses

• minimum dividend yield a firm must pay to its preferred stockholders

• required rate of return that should be used to evaluate capital budgeting projects that have above-average risk

A firm's weighted average cost of capital (WACC) is _____

• set by the board of directors of the firm, because it is the benchmark they use to evaluate members of the senior management team

• regulated by the Internal Revenue Service (IRS), because tax-deductible debt is included in the computation

• determined by participants in the financial markets, because investors set the minimum return they require (demand) to provide the funds the firm invests in capital budgeting projects

• the same as the average internal rate of return (IRR) the firm earns on its assets

• the combined net present value (NPV) of all the capital budgeting projects in which the firm invests

A graph of the capital budgeting projects a firm is evaluating ranked in the order of their internal rates of return is called a(n) _____

• marginal cost of capital graph

• investment opportunity schedule (IOS)

• modified internal rate of return (MIRR) graph

• internal project classification schedule

• optimal capital budget (OCB) schedule

Beige Inc. is evaluating three capital budgeting projects whose internal rates of return (IRRs) are greater than the firm's marginal cost of capital (MCC). Beige should choose _____

• the projects that minimize its marginal cost of capital

• all of the projects whose internal rates of return (IRRs) are greater than the firm's weighted average cost of capital WACC)

• the projects that maximize its dividend payout

• the projects that generate the greatest combination of cash inflows

• the one (single) project that has the highest net present value (NPV)

If a project's ____ exceeds the firm's weighted average cost of capital (WACC), its net present value (NPV) will be positive.

• marginal cost of capital

• incremental operating cash flows

• inflation premium

• internal rate of return (IRR)

• initial investment outlay

The component costs of capital are market-determined variables in as much as they are based on investors' required returns.

• True

• False

The net present value (NPV) method implicitly assumes that the rate at which cash flows can be reinvested is the required rate of return, whereas the internal rate of return (IRR) method implies that the firm has the opportunity to reinvest at the project's IRR.

• True

• False

Which of the following capital budgeting evaluation techniques is based on the concept that it is better to recover the cost of (investment in) a project sooner rather than later?

• Internal rate of return (IRR)

• Traditional payback period (PB)

• Modified internal rate of return (MIRR)

• Net present value (NPV)

• Present value (PV) of cash flows

The value of any asset—real or financial—is based on the ______ and the ______.

• weighted average cost of the investment; rate of return achieved by the firm

• cash flow expected to be generated by the asset; rate of return required by investors

• marginal return an investor expects to earn from the investment; additional cash flow generated by the asset

• rate of return achieved by the investment firm; investors’ weighted average cost of investing their money

• rate of return earned by the firm; cash flow expected to be generated by the asset

In capital budgeting analyses, the primary difference between the traditional payback period (PB) technique and the discounted payback period (DPB) technique is that the DPB _____

• considers cash flows that occur after the discounted payback period

• is always shorter than the traditional payback period

• considers the time value of money

• ensures a shorter payback period for a project, because projects with longer payback periods generally are accepted using the DPB technique

• ensures the amount of the original investment is recovered more quickly from the project's cash flows