and of outstanding debt. c. The opportunity cost principle implies that if the firm cannot invest retained earnings and earn at least rs‚ it should pay these funds to its stockholders and let them invest directly in other assets that do provide this return. d. The cost of common stock‚ rs‚ is usually less than the cost of preferred stock. 4. Assume a project has normal cash flows (i.e.‚ the initial cash flow is negative‚ and all other cash flows are positive). Which of the following statements is most
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Question 1 Not yet answered Marked out of 1.00 Flag question Question text A project has initial costs of $3‚000 and subsequent cash inflows in years 1 ? 4 of $1350‚ 275‚ 875‚ and 1525. The company’s cost of capital is 10%. Calculate the payback period for this project. Select one: A. 3.33 years B. 3.67 years C. 4.00 years D. 4.25 years Question 2 Not yet answered Marked out of 1.00 Flag question Question text A project has initial costs of $3‚000 and subsequent cash inflows in years
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projects are positive‚ a positive NPV contributes favorable to the share price or share value. The Internal Rate of Return of these entire projects are below the prototype store IRR which is a benchmark project. The IRR is an alternative to NPV however if the NPV is positive and the IRR is not what is desired‚ the NPV may supersede in making an investment decision. The IRR is what is expected based on internal factors. Projects with a low IRR may be funded through debt
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Corporate Finance Capital Budgeting Course Outline CAPITAL BUDGETING Course outline Key Principles in Capital Budgeting: Criteria for Investment Projects Net Pesent Value Internal Rate of Return Payback Profitability Index Finding Cash Flows Maria Ruiz 1 Financial Management Financial management is largely concerned with financing‚ dividend and investment decisions of the firm with some overall goal in mind. Corporate finance theory has developed around the goal of shareholder
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for either investment alternative. The task for the students is to build a valuation model for the two capital investment alternatives‚ whereby they can evaluate the attractiveness of the investment based on net present value (NPV) and the internal rate of return (IRR) of the discounted cash flows (DCF). Further‚ the student will have the opportunity to interpret those results and to test those measures’ sensitivity to variability in the base case. This case was prepared with the following objectives
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1. What is diversifiable risk? It is a part that can be eliminated by diversification . 2.What is preferred stock? Stock with dividend priority over common stock‚ normally with a fixed dividend rate‚sometime without voting rights. 3.What is risk premium? The excess return required from an investment in a risky asset over that required from an risk-free investment. 4.What is principle of diversification? Spreading an investment across a number of asset will eliminate some‚ but not all‚of the
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maximum return for a given level of risk or a minimum risk for every level of return. Answer: TRUE Diff: 2 Section: 3.2 Approaches to Project Screening and Selection Skill: Factual AACSB Tag: Analytic Skills 6) The present value of money is lower the further out in the future I expect to spend it. Answer: FALSE Diff: 2 Section: 3.3 Financial Models Skill: Analytical AACSB Tag: Analytic Skills 7) The reciprocal of the payback period is used to calculate the average rate of return
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quantitative method. On the other hand‚ if the time horizon and payback period matter‚ the company should use Internal Rate of Return Calculation. 1. Looking at the cash flows doesn’t really say much. The assumption is that the firm is in the business to make profit. Profit is equal return on investment cost of borrowing. If the WACC is 10% or higher‚ firm should make more than 10% as return on investment. Looking at the cash flows only gives an idea of how much excess of cash flow over initial
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School of Management Blekinge Institute of Technology THE IMPORTANCE OF THE PAYBACK METHOD IN CAPITAL BUDGETING DECISION. By Alaba Femi‚ AWOMEWE & Oludele Olawale‚ OGUNDELE Supervisor: Anders Hederstierna Thesis for the Master’s degree in Business Administration Fall/Spring 2008 THE IMPORTANCE OF THE PAYBACK METHOD IN CAPITAL BUDGETING DECISION. By Alaba Femi‚ AWOMEWE & Oludele Olawale‚ OGUNDELE A thesis submitted in partial fulfillment of the requirements for the degree
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=PV(rate‚ nper‚ pmt‚ fv‚ type) returns the present value of a series of cash flows. =FV(rate‚ nper‚ pmt‚ pv‚ type) returns the future value of a series of cash flows. =PMT(rate‚ nper‚ pv‚ fv‚ type) calculates the periodic payment for a loan based on constant payments and a constant interest rate. =NPER(rate‚ pmt‚ pv‚ fv‚ type) returns the number of periods for an investment based on periodic‚ constant payments and a constant interest rate. =NPV(rate‚ range) returns the
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