Suppose the debt ratio (Debt/ Total Asset) is 50%, the interest rate on new debt

Question

Suppose the debt ratio (Debt/ Total Asset) is 50%, the interest rate on new debt is 8%, the current cost of equity is 16%, and the tax rate is 40%. An increase in the debt ratio to 60% would have to decrease the weighted average cost of capital (WACC). 6. a. True b. False 7. Which of the following statements are CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a· The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. b. The higher the WACC used to calculate the NPV, the lower the calculated NPV will be. c. If a project's NPV is greater than zero, then its IRR must be less than the WACC d. If a project's NPV is greater than zero, then its IRR must be less than zero. e. Two of the above answers are correct. The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant. 8· a. True b. False Projects S and L both have an initial cost of $10,000. Project S's undiscounted net cash flows total $20,000, while L's total undiscounted flows are $30,000. At a WACC of 10%, the two projects have identical NPVs. Which project's NPV is more sensitive to changes in the WACC? 9. a. Project S b. Project L c. Both projects are equally sensitive to changes in the WACC since their NPVs are equal at all costs of capital. Neither project is sensitive to changes in the discount rate, since both have NPV profiles that are horizontal. The solution cannot be determined because the problem gives us no information that can be used to determine the projects' relative IRRs d. e. 10. Stern Associates is considering a project that has the following cash flow data. What is the project's payback? Year Cash flows 2 5310 3 $320 -$1,100 $300 5330 $340 a. 2.31 years b. 2.56 years c. 2.85 years d. 3.16 years e. 3.52 years 11. Changes in net operating working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets, not working capital. a. True b. False

Explanation / Answer

As per chegg policy maximum four sub parts of a question can be answered, if you want answer of more sub parts pl. ask it separately on Chegg website

6a.

Option a. True is correct, an increase in the debt ratio to 60% would have decrease the WACC but moderately because when Debt is higher the risk increase and accordingly rate on debt will increase and accordingly WACC will increase

7e

Option e is correct because option a and b both are correct

8b

Option b. False is correct

Because in mutually exclusive project company preferred to that project which have higher IRR

9b.

Option b Project L is correct

Because inflow in Project L is coming at later stage and in uncertain environment the inflow which is in very near future are most certain

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.