The Two Cardinal Rules That Financial Analysts Should Follow to Avoid

question 18

True/False

The two cardinal rules that financial analysts should follow to avoid capital budgeting errors are: (1) in the NPV equation, the numerator should use income calculated in accordance with generally accepted accounting principles, and (2) all incremental cash flows should be considered when making accept/reject decisions.

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Definitions:

Acquiring Firm

A firm that acquires or gains control over another business by means of a merger, acquisition, or takeover.

Parent

The controlling company in a group of companies, which owns a controlling interest in one or more subsidiaries.

Vertical Merger

A business strategy where a company merges with another company that operates in the same industry but at a different stage of the production process.

Supplier-Customer Relationships

The interactions and transactions between a provider of goods or services and the entity that purchases them.