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:

Correcting Entry

A journal entry made to rectify an error in the accounting records, ensuring the accuracy of financial statements.

Equipment

Tangible assets used in operations, not intended for sale, that have a useful life of more than one year.

Supplies

Consumable items or materials used in the day-to-day operations of a business.

Investments

Assets that are purchased with the expectation that they will generate income or appreciate in the future.