Finance – Essay Questions (most of answers are given, so i need you to paraphrase the answers)

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Finance – Essay Questions (most of answers are given, so i need you to paraphrase the answers)

Essay Questions

From 1 to 7, the answers are given, so I need you to paraphrase these answers ( see attachment). 8 and 9 with out answer, so you should find the answer.

Note: avoid plagiarism.

  1. Based upon NPV rule, “An investment should be accepted if the NPV is positive and rejected if it is negative”. What does a NPV of zero mean? If you were a decisions-maker faced with a project with a zero NPV (or very close to zero) what should you do? Why?
  2. List an briefly discuss the advantages and disadvantages of the IRR rule.
  3. Why are some risks diversifiable and some are non-diversifiable? Give an example of each.
  4. According to the CAPM, the expected return on a risky asset depends on three components. Describe each component and explain its role in determining expected return.
  5. What role does the cost of capital play in the overall financial decision making of the firm’s top managers?
  6. Should the firm’s cost of capital be used for all the firm’s project and investment decisions? Why or why not?
  7. Can a firm’s cost of capital (WACC) be negative? If so, how could this happen? How would this impact your capital budgeting decision-making?
  8. For capital budgeting methods, why might a firm prefer payback periods over NPV or IRR?
  9. For capital budgeting decisions, you find that your new employer has been using the same WACC since 1995 (20 years), would this give you concern? Why or why not? What would you do to validate that the WACC being used in appropriate?
 

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