A Financial Manager Must Choose Between Three Alternative Investments

question 63

Multiple Choice

A financial manager must choose between three alternative investments.Each asset is expected to provide earnings over a three-year period as described below.Based on the wealth maximization goal,the financial manager would ________.

• A) choose Asset 1
• B) choose Asset 2
• C) choose Asset 3
• D) be indifferent between Asset 1 and Asset 2

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Definitions:

Interest Tax Shield

The reduction in income taxes that results from taking the allowable interest expense deductions from taxable income.

Financial Distress Costs

Expenses incurred by a firm facing financial difficulties, including legal, administrative, and potentially bankruptcy-related costs.

Reorganization

Financial restructuring of a failing firm to attempt to continue operations as a going concern.

Going Concern

An assumption that a company will continue to operate in the foreseeable future, without the intention or necessity of liquidation.