Question

1-what is the advantage of financing with debt compared to equity?

2-why is preferred stock less risky for the investor than common stock?

3-which project do you chose A or B if you only have enough money to do one? A NPV is $30,000 NPV is $35,000

4-explain why using the payback method to decide how to invest millions of dollars is not a good idea.   

Answer 1

1)advantages of debt than equity is interest on debt is tax deductible so cost of debt will be lower compared to cost of equity

2) preferred stock is less risky because we get fixed dividends and in case of liquidation preferred stocks are paid first then equity is paid

3) according to npv rule project which has more Npv shall be accepted.project B has highest Npv so it should be accepted

4)payback period time in which investment is recovered. But it could not tell about value addition to the investment like Npv or cutoff rate like IRR. So payback shall not be used when investing billions