Question 71 

Which of the following is the most appropriate decision rule for mutually exclusive projects?

A) Accept both projects if their internal rates of return exceed the firm’s hurdle rate.

B) Accept the project with the highest net present value, subject to the condition that its net present value is greater than zero.

C) Accept the project with the highest payback period as long as it does not exceed the company's benchmark payback period.

D) If the net present value method and the internal rate of return method give conflicting signals, select the project with the highest internal rate of return.

Question 72 

Annette Crews, CFA, and Pearlitta Herman work in the capital planning department at Rollins Corporation. During their department’s weekly planning meeting, Crews and Herman exchange several comments. Which of the following comments is least accurate with regard to capital budgeting? 

A) “All capital budgeting decisions should be based on cash flows, not accounting income.”

B) “We have two acceptable projects, but because they are mutually exclusive, we cannot accept both of them.”

C) “I prefer expansion projects because they require the least amount of detailed analysis.”

D) “If our required return increases, many projects that are now acceptable may be unacceptable, regardless of whether the NPV or IRR criteria is applied.”

Question 73 

Which of the following statements related to corporate governance is least accurate? 

A) Board members should not have any material relationships with the firm’s advisers, auditors, and their families.

B) It is desirable for board members to have board experience with other boards.

C) It is desirable for the chairman of the board to be the firm’s current CEO or former CEO. 

D) It is a positive sign if a majority of a board is made up of independent members.

Question 74 

A North American investment society held a panel discussion on the topics of capital costs and capital budgeting. Which of the following comments made during this discussion is the least accurate? 

A) An increase in the after-tax cost of debt may occur at a break point.

B) A project’s internal rate of return decreases when a breakpoint is reached.

C) Any given project’s NPV will decline when a breakpoint is reached.

D) The optimal capital budget occurs at the amount of investment at which the firm’s investment opportunity schedule intersects its marginal cost of capital curve.

Question 75 

Company X and Company Y have identical capital structures and identical costs of debt, common equity, and preferred stock. If Company X is subject to a higher corporate income tax rate than Company Y: 

A) the weighted average cost of capital and the after-tax cost of debt will be lower for Company X.

B) Company X will have a lower weighted average cost of capital, but Company Y will have a lower after-tax cost of debt.

C) the after-tax cost of debt will be lower for Company X, but the two firms will have the same weighted average cost of capital.

D) the after-tax cost of all capital components in the weighted average cost of capital will be higher for Company X.

答案和详解如下：

Question 71 

The correct answer was B) 

The project that maximizes the firm's value is the one that has the highest positive NPV. 

This question tested from Session 11, Reading 44, LOS e, (Part 2)

Question 72 

The correct answer was C) “I prefer expansion projects because they require the least amount of detailed analysis.” 

Expansion projects are undertaken to grow the business. They require a very detailed analysis which includes explicit forecasts of future demand. 

This question tested from Session 11, Reading 44, LOS a

Question 73 

The correct answer was C) It is desirable for the chairman of the board to be the firm’s current CEO or former CEO. 

The willingness of independent board members to express opinions that are not aligned with managements’ may be impaired when the chairman is the firm’s current CEO or a former CEO. 

This question tested from Session 11, Reading 48, LOS c

Question 74 

The correct answer was B) 

The internal rate of return is independent of the firm’s cost of capital. It is a function of the amount and timing of a project’s cash flows. 

This question tested from Session 11, Reading 45, LOS j

Question 75 

The correct answer was A) the weighted average cost of capital and the after-tax cost of debt will be lower for Company X. 

The weighted average cost of capital (WACC) may be expressed as: WACC = [(w_d)(k_d)(1 − t)] + (w_ps)(k_ps) + (w_ce)(k_ce)

Assuming identical capital structures (percentages) and identical component costs of capital before taxes, both the after-tax cost of debt and the WACC for the firm with the higher tax rate will be lower.

This question tested from Session 11, Reading 45, LOS b

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