1. Which of the following statements is CORRECT?
A. A firm’s business risk is determined solely by the financial characteristics of its industry.
B. The factors that affect a firm’s business risk include industry characteristics and economic conditions, both of which are generally beyond the firm's control.
C. One of the benefits to a firm of being at or near its target capital structure is that this generally minimizes the risk of bankruptcy.
D. A firm’s financial risk can be minimized by diversification.
E. The amount of debt in its capital structure can under no circumstances affect a company’s EBIT and business risk.
2. A firm needs to decide between two mutually exclusive projects. Project Alpha requires an initial investment of $37,000 today and is expected to generate cash flows of $31,000 for the next 4 years. Project Beta requires an initial investment of $92,000 and is expected to generate cash flows of $36,400 for the next 8 years. The cost of capital is 10%. The projects can be repeated with no change in cash flows. What is the NPV of the project that would be selected based on the replacement chain analysis?
A) Project Alpha; $103,111
B) Project Beta; $103,111
C) Project Alpha; $105,257
D) Project Beta; $102,191
E) Project Alpha; $112,391