Exam 15: Long-Run Investment Decisions: Capital Budgeting

If the firm projects next year's sales to be $1,000,000, variable costs to be $250,000, fixed costs to be $250,000, depreciation to be $100,000 and income taxes to be $100,00, what is the firm's profit before taxes?

A firm with a beta coefficient that is equal to zero has the same degree of risk as a broad-based portfolio of stocks.

A firm that must raise all of the funds required for a project by borrowing at an interest rate of 12 percent has a marginal tax rate of 50 percent. Which of the following independent projects should the firm undertake?

A firm plans to raise $4 million by issuing common stock. The firm's stock has a beta coefficient of 1.5, the risk-free interest rate is 8 percent, the average rate of return on stocks is 10 percent, and the marginal tax rate is 40 percent. What is the firm's cost of equity capital?

The firm is considering a project which has an initial cost of $1,000,000 and will have a single return of 1,100,000 in one year. If the risk-adjusted discount rate is 9 percent, should the firm invest to this project?

A firm that pays an interest rate of 9 percent on its bonds has a marginal income tax rate of 50 percent. The interest rate on government bonds is 6 percent, the average rate of return on all stocks traded on the market is 10 percent, the estimated beta coefficient for the firm's stock is 1.5, and the firm intends to raise 60 percent of its capital by borrowing. (i)What is the firm's cost of debt? (ii)What is the firm's cost of equity capital? (iii)What is the firm's composite cost of capital?

If the beta coefficient for a firm's stock is negative, then

In general, a firm should undertake any project that has an internal rate of return that is positive.

Which of the following could be expected to increase the calculated net present value (NPV) of a project that is being considered by a firm?

A firm is considering three investment projects, which we will refer to as A, B, and C. Each project has an initial cost of $10 million. Investment A offers an expected rate of return of 16 percent, B of 8 percent, and C of 12 percent. The firm's cost of capital is 6 percent if it borrows $10 million, 10 percent if it borrows $20 million, and 15 percent if it borrows $30 million. Which project(s) should the firm invest in?

During most of the 1980s, the cost of capital in the United States was below the cost of capital in Japan.

A firm, which uses a discount rate of 10 percent, has an opportunity to invest in the project with only one positive future cash flow of $150,000. Approximately, what is the profitability index of the project if the initial cost is $150,000?

Assume that the risk-free interest rate is 6 percent and that a firm can issue bonds at an interest rate of 9 percent. Assume further that the difference between the average yield on stocks and the average yield on corporate bonds is 4 percent. What is the risk premium associated with the firm's cost of equity capital?

In cases where capital must be rationed, a firm should rank projects according to their

Which of the following is an internal source of investment funding?

The firm intends to use 40 percent debt in raising the capital. If the after-tax cost of debt is 6 percent and the cost of equity is 10 percent, what is the weighted average cost of capital?

The method of raising funds for capital investment that involves the least amount of risk to the firm is

If the net present value method and the internal rate of return method yield contradictory results, the latter should be followed rather than the former.

The firm should engage in the project that has an IRR lower than the risk-adjusted discount rate.

In calculating net cash flows, depreciation is treated as a cost.