FIN 515 Week 6 Problems Solutions

Topics: Investment, Weighted average cost of capital, Net present value Pages: 3 (677 words) Published: October 29, 2014

This archive file of FIN 515 Week 6 Problems Solutions contains:

Prob 16-1

Prob 16-2

Prob 16-3

Prob 16-4

Prob 16-5

Business - General Business
1. (TCO A) Which of the following does NOT always increase a company's market value? (Points : 5)

Increasing the expected growth rate of sales
Increasing the expected operating profitability (NOPAT/Sales) Decreasing the capital requirements (Capital/Sales)
Decreasing the weighted average cost of capital
Increasing the expected rate of return on invested capital

2. (TCO F) Which of the following statements is correct? (Points : 5)

The NPV, IRR, MIRR, and discounted payback (using a payback requirement of 3 years or less) methods always lead to the same accept/reject decisions for independent projects. For mutually exclusive projects with normal cash flows, the NPV and MIRR methods can never conflict, but their results could conflict with the discounted payback and the regular IRR methods. Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR. If a firm uses the discounted payback method with a required payback of 4 years, then it will accept more projects than if it used a regular payback of 4 years. The percentage difference between the MIRR and the IRR is equal to the project’s WACC.

3. (TCO D) Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company's last dividend, D 0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is ...

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