An Internal Rate of Return Greater Than the Cost of Capital

question 58

True/False

An internal rate of return greater than the cost of capital guarantees that the firm earns at least its required return. Investing in such an project would enhance the market value of the firm and therefore the wealth of its owners.

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Definitions:

U.S. Treasury

Refers to the federal government department responsible for managing government revenue and also to the securities (like bonds) it issues, considered low-risk investments.

Put Option

A financial contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a specified price within a specified time.

Underlying Asset

The financial asset upon which derivatives such as options and futures are based, determining their value.

Strike Price

The set price at which the holder of an options contract can buy (in a call option) or sell (in a put option) the underlying security or commodity.