Corporate Finance: Investment & Financing Decisions

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Questions and Answers

A company is considering a project that requires a significant upfront investment but promises substantial returns over a long period. Which of the following factors would most critically influence the decision to undertake this project, according to corporate finance principles?

The alignment of the project with the company's mission statement.

The preferences of the CEO regarding strategic growth initiatives.

The current market capitalization of the company.

A thorough analysis of the project's net present value and internal rate of return, considering the time value of money and associated risks. (correct)

A multinational corporation is evaluating two mutually exclusive investment opportunities: Project A, which is expected to generate consistent, moderate returns over 10 years, and Project B, which is expected to generate high returns in the short term but has higher uncertainty in later years. Which approach would provide the most robust framework for deciding between these projects, considering the complexities of international finance?

Calculate the risk-adjusted NPV for both projects, incorporating scenario analysis to address uncertainties and using appropriate discount rates for each project. (correct)

Opt for Project A due to its consistent returns and lower risk profile.

Choose the project that aligns best with the company's ethical guidelines.

Select Project B due to its potential for high returns in the short term.

A tech startup has developed a groundbreaking AI technology. The company is considering whether to finance its expansion through venture capital or a corporate bond offering. What key consideration should drive this financing decision, considering the unique characteristics of the startup?

The preferences of the board of directors.

The potential relinquishment of control and equity dilution associated with venture capital versus the fixed obligations and credit rating requirements of corporate bonds. (correct)

The current stock market conditions.

The prevailing interest rates in the bond market.

A manufacturing company is considering upgrading its production line with new, automated machinery. This investment is expected to reduce labor costs and increase production capacity. Which of the following factors should be least influential in making this investment decision?

The current market price of the company's stock. (D) Signup and view all the answers

A pharmaceutical company has developed a new drug and needs to raise capital to fund clinical trials and bring the drug to market. Which of the following financing options would be most appropriate, considering the high-risk, high-reward nature of the pharmaceutical industry?

Securing venture capital or private equity to share the risk and potentially gain industry expertise. (C) Signup and view all the answers

What is the MOST important consideration when deciding between investments?

The potential risk and return of the investment. (D) Signup and view all the answers

A company is considering two mutually exclusive projects. Project A has a higher expected return but also carries a higher risk. Project B has a lower expected return but is less risky. Which of the following approaches would be most appropriate for deciding which project to undertake?

Calculate the risk-adjusted return for both projects and select the one with the higher risk-adjusted return. (D) Signup and view all the answers

A company's decision to repurchase its own shares is an example of:

A financing decision, as it involves altering the company's capital structure. (A) Signup and view all the answers

Flashcards

Financial Decisions

Choices made by firms regarding investments and funding methods.

Investment Decisions

Choices to purchase assets for business operations, known as capital budgeting.