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:

Dominant Firm

A company with a large market share that has the power to influence the price and terms in its industry or market.

Innovations

The process of creating new methods, ideas, or products that bring about significant improvements or advancements.

Pure Monopoly

A market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable control over product price, and in which nonprice competition may or may not be found.

R&D

Research and Development, which refers to the activities companies undertake to innovate and introduce new products or services.