1) ESOPs were originally designed to help improve worker productivity, but today they
are also used to help prevent hostile takeovers.
2) When evaluating mutually exclusive projects, the modified IRR (MIRR) always
leads to the same capital budgeting decisions as the NPV method, regardless of the
relative lives or sizes of the projects being evaluated.
3) The preemptive right gives current stockholders the right to purchase, on a pro rata
basis, any new shares issued by the firm. This right helps protect current stockholders
against both dilution of control and dilution of value.
4) Estimating project cash flows is generally the most important, but also the most
difficult, step in the capital budgeting process. Methodology, such as the use of NPV
versus IRR, is important, but less so than obtaining a reasonably accurate estimate of
projects’ cash flows.
5) Suppose a firm’s CFO thinks that an externality is present in a project, but that it
cannot be quantified with any precisionestimates of its effect would really just be
guesses. In this case, the externality should be ignoredi.e., not considered at allbecause
if it were considered it would make the analysis appear more precise than it really is.
6) The change in net working capital associated with new projects is always positive,
because new projects mean that more working capital will be required. This situation is
especially true for replacement projects.
7) As a general rule, a company’s debentures have higher required interest rates than its
mortgage bonds because mortgage bonds are backed by specific assets while debentures
are unsecured.
8) Not taking cash discounts is costly, and as a result, firms that do not take them are
usually those that are performing poorly and have inadequate cash balances.
9) Exchange rate risk is the risk that the cash flows from a foreign project, when
converted to the parent company’s currency, will be worth less than was originally
projected because of exchange rate changes.