Question: Which of the following statements is correct?
Select an Answer: The NPV and IRR methods both assume that cash flows are reinvested at the cost of capital. However, the MIRR method assumes reinvestment at the MIRR itself. There can never be a conflict between NPV and IRR decisions if the decision is related to a normal, independent project, i.e., NPV will never indicate acceptance if IRR indicates rejection. A change in the cost of capital would normally change both a project's NPV and its IRR.
If you are choosing between two projects which have the same cost, and if their NPV profiles cross, then the project with the higher IRR probably has more of its cash flows coming in the later years. To find the MIRR, we first compound CFs at the regular IRR to find the TV, and then we discount the TV at the cost of capital to find the PV.
Rationale:
To see this, sketch out a NPV profile for a normal, independent project, which means that only one NPV profile will appear on the graph. If WACC < IRR, then IRR says accept. But in that case, NPV > 0, so NPV will also say accept.
2026-06-10
Question: Which of the following are fixed-income obligations that trade in the secondary market?
Select an Answer: corporate bonds real estate investment trust certificates of deposit common stock
Rationale:
Only corporate bonds are fixed-income obligations that trade in the secondary market, which means that one can buy and sell them to other individuals or institutions. Common stock and REITs are not fixed-income obligations, and CDs do not trade in the secondary market.
2026-06-09
Question: Business risk is concerned with the operations of the firm.
Which of the following is not associated with (or not a part of) business risk?
Select an Answer: the extent to which operating costs are fixed changes in required returns due to financing decisions the ability to change prices as costs change
demand variability sales price variability
Rationale:
Business risk is the combination of sales risk and operating risk. Product demand, sales price, and operating costs are all part of sales and operating risk.
Changes in required returns due to financing decisions would be part of financial risk.
2026-06-08
Question: Project A has an internal rate of return of 18 percent, while Project B has an internal rate of return of 16 percent. However, if the company's cost of capital (WACC) is 12 percent, Project B has a higher net present value.
Which of the following statements is most correct?
Select an Answer: All of these answers. Assuming the two projects have the same scale, Project A probably has a faster payback than Project B. The crossover rate for the two project is less than 12 percent. Assuming the timing of the two projects is the same, Project A is probably of larger scale than Project B.
Rationale:
Draw out the NPV profiles of these two projects. As B's NPV declines more rapidly with an increase in discount rates, this implies that more of the cash flows are coming later on. Therefore, Project A has a faster payback than Project B.
2026-06-07
Question: Normal projects C and D are mutually exclusive. Project C has a higher net present value if the WACC is less than 12 percent, whereas Project D has a higher net present value if the WACC exceeds 12 percent.
Which of the following statements is most correct?
Select an Answer: Project D has a higher internal rate of return. None of the statements are correct. Project C probably has a faster payback. Project D is probably larger in scale than Project C.
Rationale:
In this situation, D has a flatter NPV profile and a higher IRR. Project acceptance depends on what is the correct discount rate. If the discount rate is less than 12%, accept C. If it is greater than 12%, accept D. Projects that return their cash flows early (faster payback) and have lower initial investments tend to have higher IRRs.
