The return an investor in a security (a bond or a share of stock) receives is the cost of that security to the company that issued it.

True

False

Due to the fact that a firms capital comes from different sources, a firms cost of capital is a:

Geometric Average

Weighted Average

Arithmetic average

The weighted average cost of capital is interpreted as the required rate of return on:

The firms debt

The firms equity

The firm overall

The weighted average cost of capital is used to:

Discount future cash flows from investment projects

Determine the dividend paid on common stock

Determine the dividend paid on preferred stock

Following is the formula for the weighted average cost of capital:

WACC = r _LTD (1-tax rate) w _LTD + r _PS w _PS + r _CS w _CS

Where:

LTD is long term debt

PS is preferred stock

CS is common stock

In the formula for the weighted average cost of capital, the weights are determined by the firms:

Capital structure

Chief Financial Officer

Projected sources of capital for a particular project

In the formula for the weighted average cost of capital, the cost of debt is adjusted for:

Interest

Taxes

Flotation costs

If a firms capital is distributed in equal proportions, meaning 25% long term debt, 25% short term debt, 25% preferred stock and 25% common stock, the WACC is equal to the:

Arithmetic average of the required return on each of the components

Geometric average of the required return on each of the components

The standard deviation of the required return on each of the components

The WACC accounts for the fact the each of the components of a firms capital structure has a different:

Cost

Interest rate

Tax rate

The required return or cost of long term debt is equal to the after-tax cost of outstanding:

Common Stock

Preferred Stock

Bonds

The Discounted Payback Period method to evaluate investments is more accurate than simple Payback Period because it considers:

Risk and return

The time value of money

The Fisher Effect

The most widely used methods to evaluate investment projects are:

NPV and IRR

MIRR and Discounted Payback Period

IRR and Discounted Payback Period

The Net Present Value of an investment project is determined by using which of the following to discount future cash flows from the project:

The market rate of interest

The coupon rate on the firms bonds

The weighted average cost of capital

If a firm accepts a new investment project, it may be required to issue, or float, new bonds and stocks at some cost which are called:

Interest costs

Investment costs

Flotation costs

A firm should undertake an investment project if the NPV is:

Positive

Negative

Zero

The Internal rate of return (IRR) is the discount rate that results in a:

Positive NPV

Negative NPV

Zero NPV

The IRR is the discount rate at which the investment in the project is equal to the:

The discounted cash flows from the project

The salvage value of the project

The flotation costs of the project

Based on the IRR Rule, an investment is acceptable if the IRR exceeds the:

Weighted Average Cost of Capital

Market Interest Rates

The Risk -Free Rate of Return

The IRR and NPV investment criteria always result in the same accept or reject decision for an investment project.

True

False

If two projects are not independent, they are said to be:

Risk free

Mutually exclusive

Dependent

When is a conflict in the NPV and the IRR a problem:

When the projects are mutually exclusive

When the projects are independent

When the payback on the projects is less than three years

Unconventional cash flow from an investment project means:

A project produces positive and negative cash flows over the life of the project

The salvage value of the project is greater than the book value

The project produces only negative cash flows over the life of the project

If the investment project produces unconventional cash flows or is mutually exclusive, then the accept or reject decision to do the project is based on the:

Risk Free Rate of Return

IRR

NPV

If investment projects are mutually exclusive, always accept the project with:

The higher NPV

The higher IRR

The higher profitability index