Multiple choice
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Which of the following statements is most correct?
a. The rate of depreciation will often affect operating cash flows, even though depreciation is not a cash expense.
b. Corporations should fully account for sunk costs when making investment decisions.
c. Corporations should fully account for opportunity costs when making investment decisions.
d. All of the answers above are correct.
e. Answers a and c are correct.
Suppose the firm's WACC is stated in nominal terms, but the project's expected cash flows are expressed in real dollars. In this situation, other things held constant, the calculated NPV would
a. Be correct.
b. Be biased downward.
c. Be biased upward.
d. Possibly have a bias, but it could be upward or downward.
e. More information is needed; otherwise, we can make no reasonable statement.
Using the corporate valuation model, the value of a company's operations is $400 million. The company's balance sheet shows $20 million in short-term investments that are unrelated to operations. The balance sheet also shows $50 million in accounts payable, $90 million in notes payable, $30 million in long-term debt, $40 million in preferred stock, and $100 million in total common equity. If the company has 10 million shares of stock, what is your best estimate for the stock price per share?
a. $10
b. $21
c. $24
d. $26
e. $42
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Solution Summary
The solution explains some multiple choice questions relating to WACC, Corporate Valuation Model, NPV
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2. e. Answers a and c are correct.
Depreciation affects cash flows through the tax savings. Opportunity costs should be accounted for and sunk costs are to be ignored
3. b. Be biased downward.
If cash ...
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