The Acceptance of a Capital Budgeting Project Is Usually Evaluated

question 52

Multiple Choice

The acceptance of a capital budgeting project is usually evaluated on its own merits. That is, capital budgeting decisions are treated separately from capital structure decisions. In reality, these decisions may be highly interwoven. This may result in:

• A) firms rejecting positive NPV, all equity projects because changing to a capital structure with debt will always create negative NPV.
• B) never considering capital budgeting projects on their own merits.
• C) corporate financial managers first checking with their investment bankers to determine the best type of capital to raise before valuing the project.
• D) firms accepting some negative NPV all equity projects because changing capital structure adds enough positive leverage tax shield value to create a positive NPV.
• E) firms never changing the capital structure because all capital budgeting decisions will be subsumed by capital structure decisions.

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Definitions:

Hourly Wage

The rate of pay per hour for employment, used to calculate total earnings based on the number of hours worked.

Rates of Inflation

The percentage rate at which the general level of prices for goods and services is rising.

Pace

The speed or rate at which something happens, often used to measure progress or activity levels.

Strip Bonds

Fixed-income securities that are derived from separating the principal and interest payments of a bond, which are then sold as individual zero-coupon bonds.