It has been said that few stockholders would think favorably of a project that promised its first cash flow in 100 years, no matter how large this return. Comment on this position.
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7. It has been said that few stockholders would think favorably of a project that promised its first cash flow in 100 years, no matter how large this return. Comment on this position.
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- Which of the following statements about payback periods is false? It measures the amount of time needed for a project to recover its initial investment. O It ignores post-payback cash-flows. O It ignores the timing/time-value of the cash-flows. O Any project with a payback period less than two years will increase shareholder wealth. O It is rather easy to calculate.3. Suppose your firm is going to finance a new investment project with only retained earnings. The manager claims that since the earnings are already being retained and that since no outside financing is required, the project should be evaluated at the risk-free rate of return. Is this appropriate? Are retained earnings risk-free? Why or why not? (3 marks)3. Inflation in project analysis Aa Aa It is often easy to overlook the impact of inflation on the net present value of the project. Not incorporating the impact of inflation in determining the value of the cash flows of the project can result in erroneous estimations. Consider the following scenario: Extensive Enterprise Inc. is considering opening a new division to make iGadgets that it expects to sell at a price of $12,450 each in the first year of the project. The company expects the cost of producing each iGadget to be $6,450 in the first year; however, it expects the selling price and cost per iGadget to increase by 1% each year. Based on this information, complete the following table: Selling price in year 4: Cost per unit in year 4: If a company does not take inflation into account when analyzing a project, the expected net present value (NPV) of the project will typically be than the true NPV of the project.
- 3. Suppose your firm is going to finance a new investment project with only retained earnings. The manager claims that since the earnings are already being retained and that since no outside financing is required, the project should be evaluated at the risk-free rate of return. Is this appropriate? Are retained earnings risk-free? Why or why not?33. Which of the following statements is false? a. The IRR is the discount rate that equates the present value of a project's expected cash inflows with its net present value. b. The IRR is the discount rate that makes the net present value of a project equal to zero. c. The IRR is the maximum discount rate that will give a non-negative net present value. d. Consider an investment opportunity that costs P10,000 and promises to pay a single lump sum of P13,000 three years from now. In this situation, invested capital will increase over the life of the investment.Why is the present value of an amount lesser than its value that is to be received (paid) in the future? a.Deflation causes investors to lose purchasing power when their pesos are invested for greater than one year. b.Investors have the opportunity to earn positive rates of return, so any amount invested today should grow to a larger amount in the future. c.Investments generally are not as good as those who sell them suggest, so investors usually are not willing to pay full face value for such investments, thus the price is discounted. d.Because investors are taxed on the income received from investments they never will buy an investment for the amount expected to be received in the future. e.None of the choices is a correct answer.
- The first question // one of the investors wants to establish a project that achieves net returns related to economic activity, as in the following table that shows the returns achieved in the market, noting that the risk-free rate of return is %8 The market is back The project is back Probability Economical Status %40 %20 %25 0.25 Stable %15 0.50 recovery %13 % 10- 0.25 Recession What is required // calculate the required rate of return with an opinion on acceptance or rejection of the project?The Salad Oil Storage Company (SOS) has financed a large part of its facilities with long-term debt. There is a significant risk of default, but the company is not on the ropes yet. a. explain why SOS stockholders could lose by investing in a positive-NPV project financed by an equity issue. b. explain why SOS stockholders could gain by investing in a highly risky, negative-NPV project.1. Basic NPV methods tell us that the value of a project today is NPV0. Time value of money issues also lead us to believe that if we choose not to do the project that it will be worth NPV1 one period from now, such that NPV0 > NPV1. Why then do we see some firms choosing to defer taking on a project. Be complete and thorough in your answer. 2. Briefly describe the agency relationship that exists between the shareholders and the managers of the firm and how it can result in what is referred to as the agency conflict?
- Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow -1,040 140 460 660 660 260 660 Use the NPV decision rule to evaluate this project; should it be accepted or rejected?1a. Consider the statement that an asset with higher risk must earn higher risk premium. Is it true or false? Please explain. b) A company with growth opportunities has dividend growth every year. Do you agree or not? Please explain. c) The Trump administration lowered corporate tax rate and this is a monetary policy. Is it true or false? If false, what type of policy is it.Consider a project with a HIGH beta. If you use the WACC as the discount rate for this project, you would be more likely to the NPV of the project. overestimate; overestimate O overestimate; underestimate O underestimate; underestimate O underestimate; overestimate Question 9 Assume taxes and bankruptcy costs exist, which of the following is TRUE? 1. The WACC depends on the capital structure. II. According to the pecking order, a firm should use equity financing first. OI and II O Neither I nor II Oll only OI only the risk and