Which of the Following Statements Regarding the Valuing of Costs

question 53

Multiple Choice

Which of the following statements regarding the valuing of costs and benefits is not correct?

• A) The first step in evaluating a project is to identify its costs and benefits.
• B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values.
• C) Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker.
• D) Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.

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Definitions:

M&M Proposition I

A theory stating that, in a perfect market, the value of a firm is unaffected by how it is financed, regardless of the debt-to-equity ratio.

Capital Structure

Refers to the way a corporation finances its assets through a combination of equity, debt, or hybrid securities.

M&M Proposition I

Modigliani and Miller's principle suggesting the irrelevance of financial leverage on a company's valuation in an ideal market.

Debt-Equity Ratio

A calculation of a firm's financial leverage determined by dividing its overall liabilities by the equity of its shareholders.