WACC Question |
The relevant WACC can change depending on the amount of funds a firm raises during a given year. Moreover, the WACC at each level of funds raised is a weighted average of the marginal costs of each capital component, with the weights based on the firm’s target capital structure. |
If a project has normal cash flows… |
A project’s NVP increases as the WACC declines. |
What can only occur if a cash flow has Multiple IRRs? |
If the signs of the cash flows change more than once. |
If two projects are equally risky and mutually exclusive, if one has IRR 15% and the other has 12%, what is possible with their NVPs? |
If the WACC is 10%, both projects will have positive NVPs. |
True of False, if an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land? |
True. |
Operating Question. |
Changes in Net Operating working capital should be reflected in a capital budgeting cash flow analysis. |
What should be considered when a company estimates the cash flows used to analyze a proposed project? |
The new project is expected to reduce sales of one of the company’s existing products by 5%. |
What would make a company less likely to invest in another market? |
The investment would preclude the company from being able to make a profitable investment in China. |
If the average risk projects have a WACC of 10%, it’s below average risk project is 8%, it’s above average risk projects have a WACC of 12%. Which should the company invest in? |
The 8% project since it’s below average risk but has a return of 8.5% |
What is a Terminal Cash Flow? |
The cash flow at the end of the life of the project. |
What is the Risk Analysis Technique that measures changes in the internal rate of return and net present value? |
Sensitivity Analysis |
What is the risk of a project without factoring in the impact of Diversification? |
Stand-Alone Risk |
What is an example of externality that can have a negative effect on a firm? |
Cannibalization |
What creates value for a company because it gives the company the right, but not obligation to take future action to increase its cash flows? |
Real Option Marketing Studies are Sunk Costs! |
If a company does not risk-adjust its discount rate for projects properly, what is likely to occur over time? |
The firm’s overall risk level will increase. The firm could potentially reject projects that provide a higher rate of the company than it should require. |