Problem 1: Based upon NPV rule, "An investment should be accepted if the NPV is positive and rejected if it is negative". What does a NPV of zero mean? If you were a decision maker faced with a project with a zero NPV (or very close to zero) what should you do? Why?
Problem 2: List an briefly discuss the advantages and disadvantages of the IRR rule.
Problem 3: Why are some risks diversifiable and some are non-diversifiable? Give an example of each.
Problem 4: According to the CAPM, the expected return on risky assets depends on three components. Describe each component and explain its role in determining expected return.
Problem 5: What role does the cost of capital play in the overall financial decision making of the firm's top managers?
Problem 6: Should the firm's cost of capital be used for the entire firm's project and investment decision? Why or why not?
Problem 7: Can a firm's cost of capital (WACC) be negative? If so, how could this happen? How would this impact your capital budgeting-making?