1) A firm should never undertake an investment if accepting it would increase the firm’s cost of capital.
A) True
B) False
2) If a investment under consideration has beta of zero, its purchase will not affect the firm’s market risk.
A) True
B) False
3) A particular project might have highly volatile forecasted cash flows, yet not have high market risk.
A) True
B) False
4) If a firm is considering purchasing an asset (with normal cash flows) whose beta is greater than the current beta of the firm, it should evaluate it using a discount rate greater than the firm’s current cost of capital.
A) True
B) False
5) If a company uses the same discount rate to evaluate all projects,
A) it will become riskier over time, and its value will decline.
B) it will become riskier over time, and its value will rise.
C) it will become less risky over time, and its value will rise.
D) it will become less risky over time, and its value will decline.
E) there is no reason to expect its risk position or value to change.
6) Tropicali’s overall average cost of capital is 10%. Its frozen foods division is riskier than the firm as a whole, its fresh produce division has risk similar to the firm’s, and its institutional foods division has less risk. Tropicali adjusts for both divisional and project risk by adding/subtracting 2 percentage points to/from its corporate cost of capital. The hurdle rate for a low-risk project in the frozen foods division is:
a. 6%.
b. 8%.
c. 10%.
d. 12%.
e. 14%.