1. Using the payback period to measure the desirability of a project ignores the
ID: 2790540 • Letter: 1
Question
1. Using the payback period to measure the desirability of a project ignores the:
Select one:
a. timing of a cash flow.
b. time value of money.
c. arbitrary cutoff point.
d. project's cost.
e. initial cash flow of a project.
2. The optimal capital structure for a company the uses some debt to fund its operations:
Select one:
a. is the mixture of debt and equity financing that minimizes the weighted average cost of capital.
b. consists of equal amounts of debt and equity financing.
c. is 100 percent equity financing.
d. is 100 percent debt financing.
e. is the mixture of debt and equity financing that minimizes the firm's aftertax cost of debt.
Explanation / Answer
1. B. Time Value of money.
Explanation: While calculating payback period we do not discount the cash flow from required return. Hence time value of money is ignored.
2. a. is the mixture of debt and equity financing that minimizes the weighted average cost of capital.
Explanation: Optimal capital strucuture should be which increases the value of firm. If the WACC is less then it will leads to increase in valuation of firm. Hence this should be optimal capital structure.
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