Question

A company is considering a project that costs $150,000 and is expected to generate cash flows of $50,000, $52,000, $53,000 in the coming three years. Which of the following is correct?

A. The project must have a postive net present value.

B. The project must be accepted by the payback rule.

C. The project must be accepted by the discounted payback rule.

D The project must have an internal rate of return lower than 2%

E. None of the above.

2. A project has a payback period that is equal to the required payback period. The project must be acceptable under the discounted payback rule. Is it true or false or there is insufficient information to ansert the question

3. A project has a profitability index of 0.95. Which of the following are correct?

I. The project must be rejected

II The project creates an additional $0.95 in value to the firm.

III The project has greater market value than its cost.

IV The project must be have a negative net present value.

A. I and II only

B. I and IV only

C II and IV only

D I, II and IV only

E. I, II, III and IV

4. Which of the follolwing regarding capital budgeting decision in practoce is(are) correct?

A. One needs only to focus on the primary decision rule and can ignore secondary rule.

B. Net present value is the only primary decision rule.

C. When a project is rejected by the net present value rule, one should reject the project even if it is accepted by the payback period rule

D. both A and B of the above

E. both A and C of the above

5. Which one of the following statement is correct?

A. The capital gains yield is the annual rate of change in a stock's price.

B. Preferred stocks have constant growth dividends

C A stock that pays non-constant dividend can be valued using the dividend growth model.

D. The dividend growth model can be used to compute the current value of any stock

E An increase in the required return will decrease the capital gains yield

Thanks very much.

Answer 1

1.

A company is considering a project that costs $150,000 and is expected to generate cash flows of $50,000, $52,000, $53,000 in the coming three years. Which of the following is correct?

A. The project must have a postive net present value.

B. The project must be accepted by the payback rule.

C. The project must be accepted by the discounted payback rule.

D The project must have an internal rate of return lower than 2% : CORRECT

E. None of the above.

A IS INCORRECT : BECAUSE TO FIND NPV, WE NEED A DISCOUNT RATE, WHICH IS NOT GIVEN

B IS INCORRECT : BECAUSE TO COMPARE & DECIDE, WE NEED AN ACCEPTABLE PBP, WHICH IS NOT GIVEN

C IS INCORRECT : BECAUSE TO FIND DISCOUNTED PBP, WE NEED A DISCOUNT RATE, WHICH IS NOT GIVEN

D IS CORRECT : IRR IS LOWER THAN 2% (SEE EXCEL SHEET IMAGE)

2.

A project has a payback period that is equal to the required payback period. The project must be acceptable under the discounted payback rule. Is it true or false or there is insufficient information to answer the question

INFORMATION IS NOT SUFFICIENT.

Because it may be possible that PBP is just near required PBP & finding discounted PBP may be higher than required one. anything possible.

3.

A project has a profitability index of 0.95. Which of the following are correct?

I. The project must be rejected

II The project creates an additional $0.95 in value to the firm.

III The project has greater market value than its cost.

IV The project must be have a negative net present value.

A. I and II only

B. I and IV only : correct

C II and IV only

D I, II and IV only

E. I, II, III and IV

I and IV correct. PI less than 1 indicates that project has lower PV of CFAT compared to investment so project is to be rejected.

4.

Which of the follolwing regarding capital budgeting decision in practice is(are) correct?

A. One needs only to focus on the primary decision rule and can ignore secondary rule.

B. Net present value is the only primary decision rule.

C. When a project is rejected by the net present value rule, one should reject the project even if it is accepted by the payback period rule : correct

D. both A and B of the above

E. both A and C of the above

capital budgeting have many techniques and each technique is useful depending on situation but one thing is very clear that if NPV is negative, project can not be undertaken.

5. Which one of the following statement is correct?

A. The capital gains yield is the annual rate of change in a stock's price. : correct

B. Preferred stocks have constant growth dividends

C A stock that pays non-constant dividend can be valued using the dividend growth model.

D. The dividend growth model can be used to compute the current value of any stock

E An increase in the required return will decrease the capital gains yield

Preferred stock have constant dividend, no growth.

dividend growth model is useful for constant & multiple growth rate but not for non-constant

dividend growth model can be used for finding today's value and also future value of shares.

higher required rate indicates better profitability & expectations of shareholders, so price will increase

Go through it, Any doubts, please feel free to ask, Give positive feedback, Thank you