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Multiple Choice questions - finance

1. Assume a project has normal cash flows, that is, the initial cash flow is negative, and all other cash flows are positive. Which of the following statements is most correct? It can be more than one statement:
-All else equal, a project's IRR increases as the cost of capital declines
-All else equal, a project's NPV increases as the cost of capital declines
-All else equal, a project's MIRR is unaffected by changes in the cost of capital
Please explain how you came to this conclusion.

2. A project has an up-front cost of $100,000. The project's WACC is 12% and its NPV is $10,000. Which of the following statements is most correct? It can be all of the statements, one of the statements or none of the statements:
-The project should be rejected since its return is less than the WACC
-The project's IRR is greater than 12%
-The project's modified IRR is less than 12%
Please explain how you came to this conclusion.

3. Moynihan Motors has a cost of capital of 10.25%. The firm has two normal projects of equal risk. Project A has an IRR of 14%, while Project B haws an IRR of 12.25%. Which of the following statements is most correct? It can be more than one statement:
-Both projects have a positive NPV
-If the projects are mutually exclusive, the firm should always select Project A
-If the crossover rate (that is, the rate at which the Project's NPV profiles intersect) is 8%, Project A will have a higher NPV than Project B
Please explain how you came to this conclusion.

4. Ridgefield Enterprises has total assets of $300 million. The company currently has no debt in its capital structure. The company's basic earning power is 15%. The company is comtemplating a recapitalization where it will issue debt at 10% and use the proceeds to buy back shares of the company's common stock. If the company proceeds with the recapitalization its operating income, total assets, and tax rate will remain the same. Which of the following will occur as a result of the recapitalization? One, two or all the statements may be correct:
-The company's ROA will decline
-The company's ROE will increase
-The company's basic earning power will decline
Please explain how you came to this conclusion.

5. Which of the following factures is likely to encourage a corporation to increase the proportion of debt in its capital structure? Choose one:
-an increase in the corporate tax rate
an increase in the personal tax rate
-an increase in the company's degree of operating leverage
-the company's assets become less liquid
-an increase in expected bankruptcy costs

6. Suppose that 288 yen could be purchased in the foreign exchange market for two U.S. dollars today. If the yen is expected to depreciate by 8% tomorrow, how many yen could two U.S. dollars buy tomorrow?

Solution Preview

1. Assume a project has normal cash flows, that is, the initial cash flow is negative, and all other cash flows are positive. Which of the following statements is most correct? It can be more than one statement:
-All else equal, a project's IRR increases as the cost of capital declines

False - The NPV of the project is dependent on the cost of capital. The IRR is dependent on the cash flows and does not change with the change in cost of capital.

-All else equal, a project's NPV increases as the cost of capital declines

True - Since the discounting rate is the cost of capital, if we reduce the cost of capital the PV of the flows will increase and so the NPV will increase.

-All else equal, a project's MIRR is unaffected by changes in the cost of capital

False - In MIRR the intermediate cash flows are compouned to the terminal year using the cost of capital. The terminal year cash flow is dependent on the cost of capital. Changing the cost of capital will affect the MIRR.

Please explain how you came to this conclusion.

2. A project has an up-front cost of $100,000. The project's WACC is 12% and its NPV is $10,000. Which of the following statements is most correct? It can be all of the statements, one of the statements or none of the statements:
-The project should ...

Solution Summary

The solution has multiple choice questions in finance relating to capital budgeting, ROA, ROE and exchange rates.

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