FINC 341 EXAM 3 THEORY QUESTIONS & ANSWERS
NPV, IRR, and MIRR will always agree as to whether a project with normal cash flows is
profitable or not. - Answers - True
If a project has nonnormal cash flows, the IRR can be less than the cost of capital while
the NPV is positive. - Answers - True
A nonnormal project's NPV will approach the value of the project's last cash flow at t=n
as the cost of capital approaches infinity. - Answers - False
A nonnormal project's NPV will approach the value of the project's last cash flow at t=0
as the cost of capital approaches infinity. - Answers - True
As the cost of capital increases for a project with normal cashflows, and the IRR is less
than the cost of capital, the MIRR will increase if the project has positive interim cash
flows. - Answers - True
The capital structure that maximizes the firm's earnings per share is also the capital
structure that minimizes WACC. - Answers - False
The capital structure that maximizes the firm's stock price is also the capital structure
that minimizes WACC. - Answers - True
Lower operating leverage stems from having lower fixed costs. - Answers - True
The higher a firm's tax rate, the more attractive debt capital will be to that firm. -
Answers - True
The more debt a firm has in its capital structure, the higher that firm's financial leverage
will be. - Answers - True
In general, as a firm begins to add debt to its capital structure, the firm's EPS will
improve, but the riskiness or EPS will increase as well. - Answers - True
Cannibalized sales from another product within the same firm should not count as cash
flow for the new product of that firm since the NPV is trying to measure the amount of
new value added to the firm. - Answers - True
Accelerated deprecation usually makes the sale of the equipment a gain rather than a
loss. - Answers - True
Accelerated depreciation increases Net Cash Flows in the earlier years of a project. -
Answers - True
NPV, IRR, and MIRR will always agree as to whether a project with normal cash flows is
profitable or not. - Answers - True
If a project has nonnormal cash flows, the IRR can be less than the cost of capital while
the NPV is positive. - Answers - True
A nonnormal project's NPV will approach the value of the project's last cash flow at t=n
as the cost of capital approaches infinity. - Answers - False
A nonnormal project's NPV will approach the value of the project's last cash flow at t=0
as the cost of capital approaches infinity. - Answers - True
As the cost of capital increases for a project with normal cashflows, and the IRR is less
than the cost of capital, the MIRR will increase if the project has positive interim cash
flows. - Answers - True
The capital structure that maximizes the firm's earnings per share is also the capital
structure that minimizes WACC. - Answers - False
The capital structure that maximizes the firm's stock price is also the capital structure
that minimizes WACC. - Answers - True
Lower operating leverage stems from having lower fixed costs. - Answers - True
The higher a firm's tax rate, the more attractive debt capital will be to that firm. -
Answers - True
The more debt a firm has in its capital structure, the higher that firm's financial leverage
will be. - Answers - True
In general, as a firm begins to add debt to its capital structure, the firm's EPS will
improve, but the riskiness or EPS will increase as well. - Answers - True
Cannibalized sales from another product within the same firm should not count as cash
flow for the new product of that firm since the NPV is trying to measure the amount of
new value added to the firm. - Answers - True
Accelerated deprecation usually makes the sale of the equipment a gain rather than a
loss. - Answers - True
Accelerated depreciation increases Net Cash Flows in the earlier years of a project. -
Answers - True
