Although the Three Capital Budgeting Methods Are Equivalent, They All

question 26

Multiple Choice

Although the three capital budgeting methods are equivalent, they all can have difficulties making computation impossible at times. The most useful methods or tools from a practical standpoint are:

• A) APV because debt levels are unknown in future years.
• B) WACC because projects have variable risk and target debt to value ratios.
• C) Flow-to-equity, because of variable risk and the knowledge that managers think in terms of suboptimal debt to equity ratios.
• D) both APV because debt levels are unknown in future years; and WACC because projects have constant risk and target debt to value ratios.
• E) both WACC because projects have constant risk and target debt to value ratios; and Flow-to-equity, because of constant risk and the knowledge that managers think in terms of optimal debt to equity ratios.

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Definitions:

Test Statistic

A figure derived from data in a sample for a hypothesis test, utilized to determine if the null hypothesis should be supported or refuted.

Stepwise Regression

A technique for creating regression models where the selection of predictor variables is done through an automated process.

Correlation Matrix

A table showing the correlation coefficients between sets of variables, indicating how changes in one variable are associated with changes in another.

Independent Variables

Factors in a study or simulation that are intentionally altered to observe their impact on outcome variables.