Question

true or false

(1) when an investment projecthas a positive net present value (NPV), it has an internal rate of return (IRR) that is higher than the discount used in the NPV calculations.

(2) most businesses undertake more than one investment project at a time. this reduces the risk to equity investors in the company. is this last statement true or false?

(3) When deutsche bank was told by the US government that it would need to pay $14 billions in fines, management decided to suspend dividend payments, but not interest payments. this case shows why the rate of return required by equity investors should be higher than the rate of return required by equity investors should be higher than the rate of return required by debt investors. is this last statement true or false?

(4) The WACC is a weighted-average of the cost of debt and the cost of equity in whichthe weights are the debt ratio and the equity ratio.

Answer 1

(1) when an investment project has a positive net present value (NPV), it has an internal rate of return (IRR) that is higher than the discount used in the NPV calculations.	TRUE	IRR is the rate of return on an investment which causes the NPV of all future cash flows to be zero.So when NPV is greater than 0 IRR is higher than discount rate.
(2) most businesses undertake more than one investment project at a time. this reduces the risk to equity investors in the company. is this last statement true or false?	TRUE	Many business use diversification strategy to tradeoff the risk factor.
(3) When deutsche bank was told by the US government that it would need to pay $14 billions in fines, management decided to suspend dividend payments, but not interest payments. this case shows why the rate of return required by equity investors should be higher than the rate of return required by equity investors should be higher than the rate of return required by debt investors. is this last statement true or false?	TRUE	The required rate of return should never be lower than the cost of capital and it could be substantially higher.The cost of capital represents the lowest rate of return at which a business should invest funds.
(4) The WACC is a weighted-average of the cost of debt and the cost of equity in which the weights are the debt ratio and the equity ratio.	TRUE	The WACC is the average cost of the costs of various source of financing and weights are the debt ratio and the equity ratio.