Question

Golden Corp. is a young start-up company and therefore is not paying any dividends on the stock over the next 6 years. However, the following year, the company will start paying a dividend of $23 per share (at the end of the year following year 6) and thereafter it will increase the dividends by 6% per year forever. If the required rate of return on this stock is 16%, what is the current (today’s) share price?

Do not use the $ sign. Use commas to separate thousands. Use to decimals. Round to the nearest cent. For example if you obtain $1,432.728 then enter 1,432.72; if you obtain $432 then enter 432.00

All projects (A to G) are 7-year projects. NPV = Net present value. IRR = internal rate of return. MIRR = modified internal rate of return. PI = profitability index.

Criteria:                Project_A                       Project_B                  Project_C         Project_D               Project_E                    Project_F                             Project_G

NPV=      $137,083               $31,290 $6,016   $7,647   ($584)    $12,521 $9,214

IRR=        31.80%   48.34%   12.03%   11.30%   9.94%     26.79%   37.87%

MIRR=    18.52%   23.52%   10.62%   10.59%   9.97%     23.53%   20.76%

PI=          1.69        2.25        1.040      1.038      0.999      2.25        1.92

The discounting rate (r) is 10%.

Which of the following 10 statements are false/incorrect (there are several, select all that apply). Consider each statement on its own separate from the others listed:

Question 8 options:

• If all projects are mutually exclusive, under the IRR rule projects A, B, C, D, F and G should be taken

• If projects A & B are mutually exclusive, projects C and D are also mutually exclusive (all others are independent), under the IRR rule projects B, C, and G should be undertaken

• If projects A & B are mutually exclusive, projects C and D are also mutually exclusive and projects F and G are also mutually exclusive (all others are independent), under the NPV rule projects A, D, and F should be undertaken

• If all projects are mutually exclusive, under the IRR rule only project B should be taken

• If all projects are mutually exclusive, under the PI rule only projects B and F should be taken

• If all projects are independent, under the NPV rule, projects A, B, C, D, F, and G should be taken

• If projects A & B are mutually exclusive, projects C and D are also mutually exclusive and projects F and G are also mutually exclusive (all others are independent), under the MIRR rule projects B, C, and F should be undertaken

• If projects A & B are mutually exclusive, projects C and D are also mutually exclusive and projects F and G are also mutually exclusive (all others are independent), under the PI rule projects A, D, and F should be undertaken

• If all projects are independent, under the PI rule, all projects should be taken

• If only projects E and F are mutually exclusive, under the NPV rule only project A should be taken

Answer 1

1.
=23/(16%-6%)*1/1.16^5
=109.50599

2.
If all projects are mutually exclusive, under the IRR rule projects A, B, C, D, F and G should be taken

If all projects are mutually exclusive, under the PI rule only projects B and F should be taken

If projects A & B are mutually exclusive, projects C and D are also mutually exclusive and projects F and G are also mutually exclusive (all others are independent), under the PI rule projects A, D, and F should be undertaken

If all projects are independent, under the PI rule, all projects should be taken

If only projects E and F are mutually exclusive, under the NPV rule only project A should be taken