Question

Assume capital projects A and B both have a 5-year life. If the NPV profile for Project A is much steeper than the NPV profile for Project B, then Project A's future cash inflows tend to come in mostly towards the end of the project, while Project B's cash inflows tend to come in mostly towards the beginning of the project.

False

No answer text provided.

No answer text provided.

True

If a capital investment project has an NPV > $0, then its IRR is ______ the firm's required rate of return (cost of capital).

less than

No answer text provided.

equal to

greater than

If XYZ Corporation has NI=$1,000, and has 500 shares of stock outstanding, what is the estimated value of a share of XYZ stock if it has a PE ratio of 6x?

$16

$14

$12

none of the provided answers is correct

Based on the discounted dividend model, (Gordon model), if ABC stock is selling for $50/share, and just paid a $4/share dividend, what is the expected growth rate of dividends, assuming investors required rate of return in 16%?

6%

8%

4%

10%

A bond's market value will be less than its par value if:

the bond's coupon rate is greater than 0%

the bond's yield to maturity is greater than its coupon rate

the bond is convertible to common stock

the bond's coupon rate is less than its market value

Answer 1

1. TRUE.

Project A will have the steeper NPV profile. With the cash flows being greater at the end of the project's life, any shift in the discount factor will cause the PV to shift more than a project where cash flows are larger at the beginning.

2. greater than.

When NPV > 0, IRR > Cost of Capital. IRR is the rate at which NPV = 0. If NPV is negative IRR > cost of capital.

3. Incomplete question. PE ratio is not visible.

4. Cost of equity = (Annual dividend Current Share price) + Growth %

0.16 = [4 50] + g%

0.16 = 0.08 + g%

0.08 = g

Growth rate of dividends is 8%

5. the bond's yield to maturity is greater than its coupon rate.

A bond trades at premium if coupon rate > YTM.

A bond trades at discount if coupon rate < YTM.

A bond trades at par if coupon rate = YTM.