Assume the Following: (1)A Firm Is Considering Two Projects,one with a 5-Year

question 53

True/False

Assume the following: (1)A firm is considering two projects,one with a 5-year life and the other with a 10-year life;(2)the cash flows of the two projects are equally risky by all definitions of the word "risky";(3)the company uses 40 percent debt and 60 percent equity to finance the projects;(4)the debt used to finance any given project has a maturity equal to the life of the project;and (5)the term structure of interest rates has a sharp upward slope.This would suggest,other things held constant,that a lower discount rate should be used to find the NPV for the 5-year project than for the 10-year project.

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Definitions:

Equity-Financed

Pertains to the method of raising capital by selling company shares rather than borrowing funds.

Earnings Per Share

A company's net profit divided by the number of its shares outstanding, indicating how much money each share of stock earns.

Merger

The combination of two or more companies into a single entity, typically to achieve synergistic benefits, expand market reach, or gain efficiencies.