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Click on each question to check your answer.
1. What are the major sources of capital?
They are profits derived from the firm’s operation, borrowed money, and funds from selling stocks. (p. 275)
2. What are the two independent aspects of investing?
One is the source and amount of money available for capital investment projects; the other is the firm’s investment opportunities. (p. 277)
3. Should the selected projects be better than the best project rejected? Explain briefly.
Yes, they should. It is because the rate of return of selected projects should be higher than the best opportunity forgone. (p. 279)
4. How do you choose a minimum attractive rate of return?
The minimum attractive rate of return should be equal to the highest of the cost of borrowed money, the cost of capital, and the opportunity cost. (p. 280)
5. What is the common criterion used by firms to rank independent projects?
Rank independent projects, using an appropriate minimum attractive rate of return, according to their value of net present worth. (p. 283)