FINC 341 - EXAM 3 THEORY (GUYTON) QUESTIONS &
ANSWERS
If a project with normal cash flows has a positive NPV, it will definitely have an MIRR
greater than the cost of capital? - Answers - True
If a project with normal cash flows has an IRR that is greater than the cost of capital,
then taking on the project would increase the value of the firm? - Answers - True
If a project has normal cash flows, then the IRR has to be between k and MIRR if the
project has positive interim cash flows (cash flows between t=0 and the end of the
project)? - Answers - False
A nonnormal project's NPV will approach the value of the project's t=0 cash flow as the
cost of capital approaches infinity? - Answers - True
Multiple IRRs can exist for a project if the project has nonnormal cash flows? - Answers
- True
How do you determine if a project is more sensitive to change in the cost of capital? -
Answers - The slope is steeper which means the NPV decreases faster as the k
increases
When projects are the same size, MIRR and NPV will chose the same project? -
Answers - True
What is the pecking order hypothesis? - Answers - A/P & Accruals -> Retained Earnings
-> Debt -> New Stock
Lower operating leverage stems from having lower interest expense? - Answers - False
The higher a firm's tax rate, the more expensive debt capital will be for that firm? -
Answers - False
The announcement of a stock offering is generally taken as a signal that the firm's
prospects as seen by its management are not bright? - Answers - True
As a firm adds more debt to its capital structure, the firm's EPS will improve? - Answers
- False; because the EPS will rise initially and then fall dramatically
Cannibalized sales are sales stolen from another firm, and should be counted as cash
flow? - Answers - False
ANSWERS
If a project with normal cash flows has a positive NPV, it will definitely have an MIRR
greater than the cost of capital? - Answers - True
If a project with normal cash flows has an IRR that is greater than the cost of capital,
then taking on the project would increase the value of the firm? - Answers - True
If a project has normal cash flows, then the IRR has to be between k and MIRR if the
project has positive interim cash flows (cash flows between t=0 and the end of the
project)? - Answers - False
A nonnormal project's NPV will approach the value of the project's t=0 cash flow as the
cost of capital approaches infinity? - Answers - True
Multiple IRRs can exist for a project if the project has nonnormal cash flows? - Answers
- True
How do you determine if a project is more sensitive to change in the cost of capital? -
Answers - The slope is steeper which means the NPV decreases faster as the k
increases
When projects are the same size, MIRR and NPV will chose the same project? -
Answers - True
What is the pecking order hypothesis? - Answers - A/P & Accruals -> Retained Earnings
-> Debt -> New Stock
Lower operating leverage stems from having lower interest expense? - Answers - False
The higher a firm's tax rate, the more expensive debt capital will be for that firm? -
Answers - False
The announcement of a stock offering is generally taken as a signal that the firm's
prospects as seen by its management are not bright? - Answers - True
As a firm adds more debt to its capital structure, the firm's EPS will improve? - Answers
- False; because the EPS will rise initially and then fall dramatically
Cannibalized sales are sales stolen from another firm, and should be counted as cash
flow? - Answers - False
