Question 1

Assume that each of the following projects have the same costs (1,000). The discount rate is 3%. The payoffs from the projects are presented in the table below:
Based on this information, which project would you recommend?
$$\begin{array} {| l c c c | } 
\hline& { \text { Project } } \
\text { at the end of year 1 } & 500 & \text { B } & \text { C } \
\text { at the end of year 2 } & 500 & 250 & 500 \
\text { at the end of year 3 } & 500 & 250 & 1000 \
\hline
\end{array}$$

Accepted Answer

The answer of Assume that each of the following projects...

Question 2

Consider three stocks (A, B, and C) with three different beta coefficients. Beta A is 0.9, beta B is 0.7, and beta C is -0.5. If an investor holds shares of A and wishes to diversify their portfolio and limit the risk from a decline in the overall stock market, they should add to their portfolio

Accepted Answer

Stock C has a negative beta, indicating it moves in the opposite direction of the overall market. Adding shares of C would provide diversification and limit risk from a market decline.

Question 3

What is the firms cost of debt if the firm can borrow at 7 percent and its marginal tax rate is 25 percent?

Accepted Answer

The cost of debt is calculated as the interest rate (7 percent) multiplied by (1 - tax rate), which is (1 - 0.25) or 0.75. So, 7% * 0.75 = 5.25%.

Question 4

A firm that uses a discount rate of 10 percent calculated the internal rate of return of a project to be 11% so

Accepted Answer

The internal rate of return (IRR) is the discount rate at which the net present value (NPV) of all the cash flows (both positive and negative) from a project or investment equals zero. If the IRR is higher than the firm's discount rate (11% > 10%), it means the project is expected to generate a return higher than the firm's required rate of return, leading to a positive NPV.

Question 5

If the firm uses a discount rate of 10%, which of the following projects would increase the firm's value assuming the projects are not mutually exclusive?
$$\begin{array} { | l | l | l | l | l | } 
\hline \text { Project } & \text { A } & \text { B } & \text { C } & \text { D } \
\hline \text { IRR } & 5 \% & 14 \% & 7 \% & 11 \% \
\hline
\end{array}$$

Accepted Answer

Projects with an Internal Rate of Return (IRR) greater than the firm's discount rate (10%) increase the firm's value. Thus, projects B and D, with IRRs of 14% and 11% respectively, meet this criterion.

Question 6

The firm is considering a project which has an initial cost of $1,000,000 and will have a single return of 1,100,000 in one year. If the risk-adjusted discount rate is 9 percent, should the firm invest to this project?

Accepted Answer

The Net Present Value (NPV) is calculated as the present value of cash inflows minus the initial investment. Here, NPV = ($1,100,000 / (1 + 0.09)) - $1,000,000 = $1,009,174.31 - $1,000,000 = $9,174.31, which is positive. Therefore, the firm should invest in the project.

Question 7

The firm has computed the net present value of the two-period project to be negative. What does this mean about the internal rate of return?

Accepted Answer

When the net present value (NPV) of a project is negative, it means that the present value of the project's cash flows is less than the initial investment. This implies that the internal rate of return (IRR), which is the discount rate that makes the NPV equal to zero, is lower than the discount rate used in the NPV calculation.

Question 8

The firm is considering two investment projects, A and B. If the firm is able to compute only the net present value or the internal rate of return. Which of the two measures is more reliable?

Accepted Answer

Net present value (NPV) is generally considered more reliable than the internal rate of return (IRR) because it provides a direct estimate of the value added by the project, taking into account the time value of money and the firm's cost of capital. IRR can sometimes lead to misleading conclusions, especially in cases of non-conventional cash flows or when comparing projects of different sizes and durations.

Question 9

If the firm projects next year's sales to be $1,000,000, variable costs to be $250,000, fixed costs to be $250,000, depreciation to be $100,000 and income taxes to be $100,00, what is the firm's profit before taxes?

Accepted Answer

Profit before taxes is calculated as Sales - Variable Costs - Fixed Costs - Depreciation. So, $1,000,000 - $250,000 - $250,000 - $100,000 = $400,000. Income taxes are not subtracted to find profit before taxes.

Question 10

If the firm projects next year's sales to be $1,000,000, variable costs to be $250,000, fixed costs to be $250,000, depreciation to be $100,000 and income taxes to be $100,00, what is the firm's profit after taxes?

Accepted Answer

The firm's profit before taxes is calculated as sales minus variable costs, fixed costs, and depreciation: $1,000,000 - $250,000 - $250,000 - $100,000 = $400,000. After subtracting income taxes of $100,000, the profit after taxes is $300,000.

Question 11

If a firm projects next year's sales to be $1,000,000, variable costs to be $250,000, fixed costs to be $250,000, depreciation to be $100,000 and income taxes to be $100,00, what is the firm's net cash flow?

Accepted Answer

The answer of If a firm projects next year's sales...

Question 12

A firm estimates the two cash flows of the project in the next two years to be $100,00 and $200,000, consecutively. If the initial investment is $200,000 and the risk-adjusted discount rate is 10%, what is the approximate net present value of the project?

Accepted Answer

The net present value (NPV) of a project is the sum of the present values of all future cash flows, minus the initial investment. In this case, the initial investment is $200,000, and the future cash flows are $100,000 and $200,000. The risk-adjusted discount rate is 10%.The present value of the first cash flow is $100,000 / (1 + 0.10)^1 = $90,909.09. The present value of the second cash flow is $200,000 / (1 + 0.10)^2 = $163,636.36. The NPV of the project is $90,909.09 + $163,636.36 - $200,000 = $54,545.45.

Question 13

A firm has an opportunity to invest in the project with only one positive future cash flow of $150,000. What is the internal rate of return of the project if the initial cost is $125,000?

Accepted Answer

The answer of A firm has an opportunity to invest...

Question 14

A firm has an opportunity to invest in the project with only one positive future cash flow of $150,000. What is the internal rate of return of the project if the initial cost is $150,000?

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of a project zero. If the initial cost and the future cash flow are equal, the IRR is 0 percent, as there is no gain or loss.

Question 15

A firm, which uses a discount rate of 10 percent, has an opportunity to invest in the project with only one positive future cash flow of $150,000. Approximately, what is the profitability index of the project if the initial cost is $125,000?

Accepted Answer

The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. Here, the future cash flow is $150,000, and the initial cost is $125,000. Using a discount rate of 10%, the present value (PV) of the future cash flow is $150,000 / (1 + 0.10) = $136,363.64. Thus, the PI = $136,363.64 / $125,000 = 1.09, which rounds to approximately 1.1.

Question 16

A firm, which uses a discount rate of 10 percent, has an opportunity to invest in the project with only one positive future cash flow of $150,000. Approximately, what is the profitability index of the project if the initial cost is $150,000?

Accepted Answer

The profitability index is calculated as the present value of future cash flows divided by the initial cost. In this case, the present value of future cash flows is $150,000 / (1 + 0.10) = $136,363.64. Therefore, the profitability index is $136,363.64 / $150,000 = 0.909.

Question 17

What should the price of a share of common stock be according to dividend valuation model if the dividends are expected to stay at $1 per share indefinitely and the investors' discount rate is 5 percent?

Accepted Answer

The answer of What should the price of a share...

Question 18

What should the price of a share of common stock be according to dividend valuation model if the dividends are expected to stay at $1 per share indefinitely and the investors' discount rate is 10 percent?

Accepted Answer

The price of the stock is calculated using the formula P = D / r, where P is the price, D is the dividend, and r is the discount rate. Here, P = $1 / 0.10 = $10.

Question 19

What should the price of a share of common stock be according to dividend valuation model if the dividends are expected to grow 2 percent per year, the next dividend is $2.00 and the investors' discount rate is 7 percent?

Accepted Answer

The answer of What should the price of a share...

Question 20

A dividend is growing 5 percent per year and the upcoming dividend is $5. If s share of stock is selling for $100, what is the investors' required rate of return?

Accepted Answer

The investor's required rate of return can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is given by the formula: Required Rate of Return = (Next Year's Dividend / Current Stock Price) + Growth Rate. Plugging in the given values: Required Rate of Return = ($5 / $100) + 5% = 0.05 + 0.05 = 10%.

Quiz 15: Long-Run Investment Decisions: Capital Budgeting

Consider three stocks (A, B, and C) with three different beta coefficients. Beta A is 0.9, beta B is 0.7, and beta C is -0.5. If an investor holds shares of A and wishes to diversify their portfolio and limit the risk from a decline in the overall stock market, they should add to their portfolio

What is the firms cost of debt if the firm can borrow at 7 percent and its marginal tax rate is 25 percent?

A firm that uses a discount rate of 10 percent calculated the internal rate of return of a project to be 11% so

The firm is considering a project which has an initial cost of $1,000,000 and will have a single return of 1,100,000 in one year. If the risk-adjusted discount rate is 9 percent, should the firm invest to this project?

The firm has computed the net present value of the two-period project to be negative. What does this mean about the internal rate of return?

The firm is considering two investment projects, A and B. If the firm is able to compute only the net present value or the internal rate of return. Which of the two measures is more reliable?

If the firm projects next year's sales to be $1,000,000, variable costs to be $250,000, fixed costs to be $250,000, depreciation to be $100,000 and income taxes to be $100,00, what is the firm's profit before taxes?

If the firm projects next year's sales to be $1,000,000, variable costs to be $250,000, fixed costs to be $250,000, depreciation to be $100,000 and income taxes to be $100,00, what is the firm's profit after taxes?

If a firm projects next year's sales to be $1,000,000, variable costs to be $250,000, fixed costs to be $250,000, depreciation to be $100,000 and income taxes to be $100,00, what is the firm's net cash flow?

A firm estimates the two cash flows of the project in the next two years to be $100,00 and $200,000, consecutively. If the initial investment is $200,000 and the risk-adjusted discount rate is 10%, what is the approximate net present value of the project?

A firm has an opportunity to invest in the project with only one positive future cash flow of $150,000. What is the internal rate of return of the project if the initial cost is $125,000?

A firm has an opportunity to invest in the project with only one positive future cash flow of $150,000. What is the internal rate of return of the project if the initial cost is $150,000?

A firm, which uses a discount rate of 10 percent, has an opportunity to invest in the project with only one positive future cash flow of $150,000. Approximately, what is the profitability index of the project if the initial cost is $125,000?

A firm, which uses a discount rate of 10 percent, has an opportunity to invest in the project with only one positive future cash flow of $150,000. Approximately, what is the profitability index of the project if the initial cost is $150,000?

What should the price of a share of common stock be according to dividend valuation model if the dividends are expected to stay at $1 per share indefinitely and the investors' discount rate is 5 percent?

What should the price of a share of common stock be according to dividend valuation model if the dividends are expected to stay at $1 per share indefinitely and the investors' discount rate is 10 percent?

What should the price of a share of common stock be according to dividend valuation model if the dividends are expected to grow 2 percent per year, the next dividend is $2.00 and the investors' discount rate is 7 percent?

A dividend is growing 5 percent per year and the upcoming dividend is $5. If s share of stock is selling for $100, what is the investors' required rate of return?