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Below is Table 7 from Meier and Tarhan's (2006) survey of corporate managers. What proportion of managers are evaluating projects correctly? Table 7: Consistency between

Below is Table 7 from Meier and Tarhan's (2006) survey of corporate managers.

What proportion of managers are evaluating projects correctly?

Table 7: Consistency between hurdle rate and the calculation of cash flows.

The rows of the cross-tabulation indicate what the self-reported hurdle rate represents and the columns denote five different ways to calculate cash flows, (i) to (v), plus the other category. Each cell then displays the absolute number and the fraction of all 113 respondents for a given combination of what the hurdle rate represents and how the firm calculates its cash flows when evaluating a project.

The definitions of the cash flow calculations (i)-(v) are as follows:

(i) Earnings before interest and after taxes (EBIAT) + depreciation

(ii) Earnings before interest and after taxes (EBIAT) + depreciation capital expenditures net change in working capital

(iii) Earnings

(iv) Earnings + depreciation

(v) Earnings + depreciation capital expenditures net change in working capital

Hurdle rate Cash flow calculation
(i) (ii) (iii) (iv) (v) Other Total
WACC 11.3% 34.8% 1.7% 3.5% 18.3% 1.7% 71.3%
Equity levered 0.0% 2.6% 0.9% 0.0% 0.9% 0.9% 6.1%
Equity unlevered 1.7% 1.7% 0.9% 0.9% 1.7% 0.9% 7.8%
Other 2.6% 5.2% 1.7% 0.9% 3.5% 0.9% 14.8%
Total 16.5% 44.4% 5.2% 5.2% 24.4% 4.4% 100.0%

What proportion of managers are evaluating projects correctly?

Select one:

a.

46.1%

b.

44.4%

c.

34.8%

d.

11.3%

e.

16.5%

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