T/F Questions from Exam Packets

NPV, IRR, and MIRR will always agree as to whether a project with normal cash flows is profitable or not

T

If a project has nonnormal cash flows, the IRR can be less than the cost of capital while the NPV is positive

T

As the cost of capital increased for a project with normal cash flows, and the IRR is less than the cost of capital, the MIRR will decrease if the project has positive interim cash flows

F

A project with normal cash flows never has multiple MIRRs

T

NPV should be used over IRR if the projects have unequal lives

F

For projects of different sizes, MITT, NPV, and IRR will all agree to decide which projects are profitable

F

Financial leverage is caused by the interest expense not staying proportional to sales

T

Signaling theory states that a mature firm using debt to fund a new project is a positive signal

T

Lower operating risk stems from having lower fixed cossts

T

Business risk refers to the fluctuation of the firms EPS

F

The more debt a firm has in its capital structure, the higher the firms financial leverage will be

T

The capital structure that maximizes the firm’s stock price is also the capital structure that minimizes the firms cost of capital

T

If the sum of the cash flows of a non normal project is negative and the cash flow at t=0 is negative, the project must have two MIRRs

F

IF two equal sized and equal length profitable normal projects are mutually exclusive, MIRR must agree with NPV as to which project to choose

T

As the cost of capital approaches infinity for a non normal project, the NPV of that project will approach its t=0 cash flow value, this holds true for a project with normal cash flows

T

IF a project has normal cash flows (whose sum exceeds zero) and has an MIRR less than the IRR, the project would have to have a negative NPV

F

The MIRR will always be lower than IRR because of the reinvestment rate assumption

F

An MIRR can be calculated for a project with no negative cash flows

F

If the sum of a normal project’s cash flows is zero, the IRR is zero

T

It is appropriate that NI and EBT and EPS have the same percent of increase

T

When the capital structure maximizes a company’s stock price, it will also minimize the firms WACC

T

The signaling theory states that a mature firm issuing stock to fund a project is a negative signal

T

The level of debt that maximizes a firms stock price is less debt than would maximize the firms EPS

T

Financial leverage is the extent that fixed income securities are used in the firms capital structure

T

As a firm’s D/A ratio increases, its beta will actually decrease since its using less equity

F

Sensitivity analysis is by far the most commonly used type of risk analysis. It starts with a base case NPV, and then asks a series of what-if questions

T

Operating leverage is caused by fixed costs not staying proportional to sales in the projected year

T

Monte Carlo simulation allows us to change more than one variable at a time when establishing a best case scenario, a worst case scenario, and a base case scenario

F

The most common type of negative externality is a project’s impact on the environment

T

The replacement chain approach to deciding between mutually exclusive projects that have different lengths of life will always choose the same project that the Equivalent Annual Annuity approach will choose

T

If the sum of the cash flows of a non normal project is negative and the last cash flow is negative, the project must have 2 IRRs

F

If to equal size and equal length profitable normal projects are mutually exclusive, MIRR must agree with NPV as to which project to choose

T

As the cost of capital approaches zero for a non normal or normal project, the NPV of that project will approach its t=0 cash flow value

T

If a project has normal cash flows (whose sum exceeds zero)and has an MIRR that is greater than the IRR, the project would have a negative NPV

T

The MIRR will always be to the left of IRR because of the reinvestment rate assumption

F

An NPV cannot be calculated for a project that does not have both negative and positive cash flows

F

If the NPV of a project with normal cash flows is positive, both IRR and MIRR will be less than k for the project

F

Financial leverage is caused by fixed costs not staying proportional to sales

F

The passage of the new Tax Cuts and Jobs Act reduces the value of the tax deduction associated with debt financing because the new tax rate for corporations is a flat 21%

T

A mature firm that issues a bond to finance an upcoming project is giving a positive signal regarding the prospects of the project

T

The text says that increasing a firms debt makes managers less frivolous because if the debt is not serviced as required, the firm will be forced into bankruptcy, in which case its managers would lose their jobs

T

Managers preferred pecking order for raising funds is first its accounts payable and accruals, then retained earnings from the current year, then issuing debt, and issuing new common stock as a last resort

T

When a company’s stock is overvalued (trading for more than its intrinsic value), its managers like to take this opportunity to repurchase the company’s stock

F

The MIRR method can have multiple MIRRs

F

As the cost of capital increases for a project with normal cash flows, and the IRR is less than the cost of capital, the MIRR will decrease if the project has positive interim cash flows

F

Projects with nonnormal cash flows can have multiple IRRs

T

IRR and NPV will agree whether a normal project is profitable

T

Signaling theory says that a firm with very favorable prospects would avoid selling stock and instead raise required new capital by using new debt

T

The pecking order hypothesis states that firms have a preferred sequence of raising needed capital; first accounts payable an accruals, then retained earnings, then other debt, and finally new common stock

T

The level of debt that maximizes a firms stock price is less debt than would max the EPS

T

If a firm’s interest expense stays constant from the historical year (just ended) to the projected year, than the firm’s degree of operating leverage will be greater than one

F

Firms often use less debt than their optimal debt level to ensure that they can obtain debt later if necessary

T

A project with normal cash flows that has an IRR that exceeds the cost of capital has to have a positive NPV

T

If a project is nonnormal, it might or might not have multiple IRRs

T

NPV, IRR, and MIRR will always agree as to whether a project with normal cash flows is profitable or not

T

As the cost of capital increases for a project with normal cash flows, and the IRR is less than the cost of capital, then MIRR will decrease if the project has positive interim cash flows

F

If a project with normal cash flows has positive interim cash flows and IRR equals k, MIRR and IRR must be equal and NPV must be $0

T

Lower operating leverage stems from having higher fixed costs

F

Business risk refers to the fluctuation of the firms operating income

T

The capital structure that maximizes the firms EPS is also the capital structure that minimizes the firms cost of capital

F

If a project with normal cash flows has a positive NPV, it will definitely have an MIRR less than the cost of capital

F

If a project with normal cash flows has an IRR that is greater than the cost of capital, then taking on the project would decrease the value of the firm

F

If a profitable project has normal cash flows, then the MIRR has to be greater than the IRR if the project has positive interim cash flows (think MIRR is IRR pulled to k)

F

If a project with normal cash flows does not have any interim cash flows, the projects IRR will be equal to the MIRR whether the project is profitable or not (think MIRR will have no change in reinvestment rate)

T

If the NPV for a project with normal cash flows is positive, then both MIRR and IRR will be greater than the cost of capital

T

The payback method does not consider the TVM

T

The MIRR method does not always choose the better of two mutually exclusive projects when the projects are of different sizes

T

The discounted payback method considers the TVM

T

The IRR of a project will increase if the firms cost of capital increases

F