In Order to Maximize Firm Value, Management Should Invest in New

question 55

Multiple Choice

In order to maximize firm value, management should invest in new assets when cash flows from the assets are discounted at the firm's [blank] and result in a positive NPV.

• A)cost of capital
• B)cost of debt used to finance the project
• C)rate of return on equity
• D)internal rate of return

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Definitions:

Assumed Mortgage

When a property buyer takes over the seller's existing mortgage, it is referred to as an assumed mortgage.

Recognized Gain

The portion of a gain that is subject to tax, as realized from the sale or exchange of a capital asset beyond the original purchase price.

Section 1245

A section of the U.S. Internal Revenue Code that deals with the tax treatment of depreciable property and requires the recapture of depreciation upon sale of the property as ordinary income.

Section 1231

A tax provision related to the treatment of gains and losses on property used in a trade or business or held for the production of income.