Which of the Following Statements Is Correct

question 42

Multiple Choice

Which of the following statements is correct?

• A)In a capital budgeting analysis where part of the funds used to finance the project are raised as debt, failure to include interest expense as a cost when determining the project's cash flows will lead to an upward bias in the NPV.
• B)The existence of any type of "externality" will reduce the calculated NPV versus the NPV that would exist without the externality.
• C)If one of the assets to be used by a potential project is already owned by the firm, and if that asset could be leased to another firm if the new project were not undertaken, then the net rent that could be obtained should be charged as a cost to the project under consideration.
• D)If one of the assets to be used by a potential project is already owned by the firm but is not being used, then any cost associated with that asset is a sunk cost and should be ignored.

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Definitions:

Target Debt/Equity Ratio

A firm's optimal mix of debt and equity financing aimed at minimizing its cost of capital and maximizing valuation.

High Flotation Costs

The expenses incurred by a company in issuing new securities, typically including underwriting, legal, and registration fees, which can be higher for smaller issues.

Positive NPV Projects

Investment opportunities where the net present value (NPV) is greater than zero, indicating that they are expected to generate a profit.

High Dividend Payout

The practice of distributing a large portion of a company's earnings to its shareholders in the form of dividends.