Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Chapter 12.1, Problem 12.1RQ
Are most mutually exclusive capital budgeting projects equally risky? If you think about a firm as a portfolio of many different kinds of investments, how can the acceptance of a project change a firm’s overall risk?
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1) What is the company's WACC?
2) Should the company take the projects? Assume that the projects have the same risk as an average project for your firm.
3) If one project is depended on the other in a way that the company can only take both projects, should it take it?
Suppose a firm uses the WACC as the single hurdle rate in determining the value of capital budgeting projects rather than using risk adjusted hurdle rates. Choose the statement that actually completes the sentence describing the possible outcomes for the firm: the firm will tend to
Accept profitable, low risk projects and reject unprofitable, high risk projects
Accept profitable, low risk projects and accept unprofitable, high risk projects
Reject profitable, low risk projects and reject unprofitable high risk projects
Become less risky overtime
Reject profitable, low risk projects and accept unprofitable, high risk projects
What is the difference between systematic and unsystematic risk?ii. What is strategic business plan and why it is important for the success of a firm? Explain inyour own words.iii. Explain for which types of projects, a detailed capital budgeting analysis is required and why?
Chapter 12 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 12.1 - Are most mutually exclusive capital budgeting...Ch. 12.2 - Prob. 12.2RQCh. 12.2 - Describe how each of the following behavioral...Ch. 12.3 - Briefly explain how the following items affect the...Ch. 12.4 - Describe the basic procedures involved in using...Ch. 12.4 - Explain why a firm whose stock is actively traded...Ch. 12.4 - Prob. 12.8RQCh. 12.5 - Explain why a mere comparison of the NPVs of...Ch. 12.5 - What are real options? What are some major types...Ch. 12.5 - What is the difference between the strategic NPV...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Which of the following statements is inaccurate under perfect capital markets? A. The NPV of a project determines whether it is worth investing in it B. How much an investor should invest in a particular project does not depend on the investor’s risk preferences C. Whether an investor should invest in a project or not does not depend on the investor’s intertemporal preferences D. Whether a long term project should be undertaken does not depend on whether the investor is patient or impatientarrow_forwardWhich of the following is true about the WACC? It’s the appropriate discount rate for all new projects with the same risk level as the existing assets of the firm The optimal capital structure is the one that minimizes the WACC The value of the firm will be maximized when the WACC is minimized Since discount rates and values move in the same direction, minimizing the WACC will minimize the value of the firms cash flows A, B, and C are truearrow_forwardWhat risks are inherent in using the expected future cash flow method of evaluating projects? In what circumstances would you choose to use a dividend discount model rather than a free cash flow model to value a firm?arrow_forward
- If two mutually exclusive projects were being compared, would a high cost of capital favorthe longer-term or the shorter-term project? Why? If the cost of capital declined, would thatlead 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?Explain.arrow_forwardIf you could only have one piece of information to help you understand the discount rate for evaluating a project at hand, which of the following would you prefer? The project has different systematic risk than the firm overall. Group of answer choices How the project's expected cash flows are effected by the overall economy The firm's credit rating The firm's cost of equity The firm's WACCarrow_forwardFinancial advisors generally recommend that their clients allocate more to higher risk–return asset classes (like equities) if their investment horizons are long. Is this advice consistent with the basic M-V model? Does adding a shortfall constraint to the M-V model make a difference? If so, how? If not, why not? Assuming investment opportunities change over time, what type of asset return behavior would justify this advice within the M-V framework?arrow_forward
- Which of the following statements is correct? a. Since investors prefer more return and less risk, one will never hold a dominated asset in the risk-return sense. In other words, if asset A has a higher expected return and lower standard-deviation than asset B, then investors would only hold asset A in their optimal portfolio. b. The IRR method correctly ranks mutually exclusive projects. c. When an investment project is evaluated today, the spending that occurred in the last year has to be included in the NPV analysis. d. The payback period criterion properly considers the time value of money. e. When there are two mutually exclusive projects, the project with the highest NPV should be chosen.arrow_forwardIf a firm has only independent projects, a constant WACC, and projects with normal cash flows, the NPV and IRR methods always lead to identical capital budgeting decisions. What does this imply about the choice between IRR and NPV? If each of the assumptions were changed (one by one), how would your answer change?arrow_forwardWhich of the following statements is FALSE? a) The Capital Asset Pricing Model is the most important method for estimating the cost of capital that is used in practice. b) Because the risk that determines expected returns is unsystematic risk, which is measured by beta, the cost of capital for an investment is the expected return available on securities with the same beta. c) A common assumption is that a project has the same risk as the firm. d) To determine a project's cost of capital we need to estimate its beta.arrow_forward
- Does a risky investment always equal a big payoff and vice versa?arrow_forwardIf a firm uses its weighted average cost of capital (WACC) as the discount rate for all of the projects it undertakes then the firm will tend to: I. reject some positive net present value projects. II. accept some negative net present value projects. III. favor low risk projects over high risk projects. IV. increase its overall level of risk over time. Group of answer choices I and III only III and IV only I, II, and III only I, II, and IV only I, II, III, and IVarrow_forwardWhich of the following contributes positively to the value of a real option to delay investment? First-mover competitive advantages It lowers idiosyncratic risk, and thus the firm's cost of capital Delaying project revenues, due to TVM The likely resolution of some uncertaintyarrow_forward
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