When a firm borrows funds to pay for an investment project, it invests in the project...

When a firm borrows funds to pay for an investment project, it invests in the project when __________. When a firm uses its own funds to pay for an investment project, it invests in the project when __________.

	a.	the real interest rate is less than the real profit rate, the real profit rate is less than the real interest rate
	b.	the real interest rate is less than the real profit rate, the real interest rate is less than the real profit rate
	c.	the real profit rate is less than the real interest rate, the real profit rate is less than the real interest rate
	d.	the real profit rate is less than the real interest rate, the real interest rate is less than the real profit rate

Solutions

Expert Solution

When a firm borrow funds to invest, it invest in the project when real profit rate is more than real interest rate such that they can earn some money after paying money back to the bank with interest.

When they use their own funds, they invest when real profit rate is less than real interest rate because they can lend the same money and earn higher rate of interest without investing it anywhere.

Option A is correct.

Rahul Sunny answered 2 years ago

Next > < Previous

Related Solutions

When a firm finances a new investment, it often borrows part of the funds required, so...

When a firm finances a new investment, it often borrows part of the funds required, so the interest and principal payments this creates are incremental to the project’s acceptance. Why are these expenditures not included in the project’s cash flow computation? How does a firm’s use of short-term debt as opposed to long-term debt subject the firm to a greater liquidity risk?

Nancy always invests in firms that pay dividends. She believes that when firms increase dividend, firm...

Nancy always invests in firms that pay dividends. She believes that when firms increase dividend, firm value will increase. Use two dividend theories to support and explain Nancy’s belief.

A firm is planning an investment in a project. The initial investment is 250,000. The project...

A firm is planning an investment in a project. The initial investment is 250,000. The project returns $100,000 cash at the end of one year. At the end of second year the project returns cash of amount $F. These are only cash flows from the project. If the IRR for the project is 10%, what is the amount $F?

Hampton Investment Co. is a U.S. firm that executes a carry trade in which it borrows...

Hampton Investment Co. is a U.S. firm that executes a carry trade in which it borrows euros (where interest rates are presently low) and invests in British pounds (where interest rates are presently high). Hampton uses $100,000 of its own funds and borrows an additional 600,000 euros and convert to British Pounds. It will pay 0.5% interest on euros borrowed for the next month and will earn 1.0 % on funds invested in British pounds. Assume that the euro’s spot...

Hampton Investment Co. is a U.S. firm that executes a carry trade in which it borrows...

A firm invests $100,000 in a project today. It receives $15,000 a year from now, $20,000...

A firm invests $100,000 in a project today. It receives $15,000 a year from now, $20,000 two years from now, and $95,000 three years from now and nothing more. What is the IRR of the project? Where aX:aY are cells aX to aY which have cash flows entered into them. The initial investment is a negative cash flow so it should have a negative sign. Z is a "guess" IRR, usually you can set to 0.1 (which is 10%).

A firm is considering a project that requires an initial investment of $55,000. The project is...

A firm is considering a project that requires an initial investment of $55,000. The project is expected to generate revenues of $80,000 per year for three years. Operating expenses will be 65% of revenues. The equipment will be depreciated on a straight-line basis to a zero net salvage value. The equipment will have a life of 3 years. The project feasibility study, which was just completed, cost $35,000. The project requires an initial investment in working capital of $5,000. Further...

A fund of funds invests across many hedge funds with an expected return of 7% before...

A fund of funds invests across many hedge funds with an expected return of 7% before fees in a particular year. Hedge funds charge 2% 20% for management and incentives fee, respectively. Fund of fund investors require an expected return of 3%. What type of fee structure (incentive fees and management fees) for the fund of fund delivers an expected return of 3%? Plot a graph (incentive fees as a function of management fees) that displays the plausible combinations.

Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the...

Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $1.7 million per year to beneficiaries. The yield to maturity on all bonds is 18.0%. a. If the duration of 5-year maturity bonds with coupon rates of 8.0% (paid annually) is four years and the duration of 20-year maturity bonds with coupon...

Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the...

Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $3.4 million per year to beneficiaries. The yield to maturity on all bonds is 18.5%. a. If the duration of 5-year maturity bonds with coupon rates of 14.6% (paid annually) is four years and the duration of 20-year maturity bonds with coupon...

Subjects