1 A Statement I is correct.

Prices of bonds with lower coupons are more sensitive to interest rate changes than prices of bon
Statement II is wrong. Zero coupon bonds have no current yield.
Statement III is wrong. Zero coupon bonds will have the same YTM as a coupon bond of the same maturity and risk.

2E Years 1 - 4
Cost savings $200,000
Incremental Dep $100,000
Incremental EBIT $100,000
Tax $32,000
Incremental NI $68,000

OCF for project: $168,000

0 1 2 3 4
OCF $168,000 $168,000 $168,000 $168,000
Initial Investment -$400,000
Investment in NOWC -$21,000 $21,000
NSV of equipment $40,800
Net Cash Flow -$421,000 $168,000 $168,000 $168,000 $229,800

NPV: $62,806.14

3A 15% 0 1 2 3
-$125,000 $90,000 $90,000 $90,000
NPV = $80,490

-$150,000 $X $X
PV of cost = -$130,435
PV0 of 2 year annuity of $X = $210,925
PV1 of 2 year annuity of $X = $242,564
Find $X using calculator:
N= 2
I/Y = 15%
PV = $242,564
cpt PMT = $149,204.94

4 C Statement I is wrong. Projects might have non-conventional cashflows thus making IRR method unreliable.
Statement II is wrong. A Payback Period can exist since the payback period is calculated using nominal cashflows and n
Statement III is wrong. The discounted payback period method requires an arbitrarily set limit. Hence, this could result in
Statement IV is correct. The crossover rate is the point where the two NPV profiles intersect, meaning that the NPVs of t

𝑃_0=𝐷_1/(𝑟−𝑔)
5E

D0 = $3.50
D1 = $3.68
P0 = $73.50
6 C Find the YTM of the current bond.

Calc input:
N: 6
PMT: 40
FV: 1000
PV: -1112.03
cpt I/Y: 2.00%
YTM: 4.00%

The coupon rate of the new bond issued at par will be the same as the YTM of the current bond.

7C Calc input:
N: 12
PMT: 50
FV: 1000
PV: -1199.08
cpt I/Y: 3.00%
YTM: 6.00%

8 E Re of Green Inc's stock = 13.51%

g = 5%
0 1 2 3 …
$D

(𝐷×(1.05))/(13.51%−5%)
TV3 =

= 12.3384 D

Total CF3 = (12.3384 + 1) D

= 13.3384 D

$20.12
discounted by 3 periods

20.12=13.3384𝐷/ 〖 1.1351 〗 ^3
Therefore,

➔ D = $2.21

Sustainable Growth Rate=(ROE×RR)/(1−ROE×RR)

9A

ROE = 18.75%
RR = 70.00%
SGR = 15.11%
10 E Choice A is wrong because decision should be made based on comparison between IRR and required return and not the
Choice B is wrong because since there is a crossover point, it means that at lower discount rates, Project Spirit has the h
Choice C is wrong because these are mutually exclusive projects hence you cannot choose both.
Choice D is wrong because you are not told the required returns of both projects.
Choice E is correct because you would need the required return (and the NPV) in order to make the decision.

11 D Amt that Madison gets = $112,500.00

Interest paid = $6,250.00
Effective rate = 5.56%
Effective Annual Rate = 5.56%

12 B 14%
0 1 2 3 4
-$200,000 $100,000 $100,000 $100,000 $100,000
NPV = $91,371.23

14%
0 1 2 3 4
$X $100,000 $100,000
PV of $100,000 Cashflows = $126,705.18

To be indifferent,
$91,371.23=$126,703.18−$𝑋/ 〖 1.14 〗 ^2

$X = $45,920.00

13 D Year Project A Project B B-A

0 $ (64,000) $ (100,000) $ (36,000)
1 $ 18,000 $ 30,000 $ 12,000
2 $ 36,000 $ 48,000 $ 12,000
3 $ 48,000 $ 60,000 $ 12,000
Sum = $ 38,000 $ 38,000
IRR = 23.20% 15.99% 0.00%

Sum of cashflows for Project A = Sum of cashflows for Project B.

This means the y-intercept for the NPV profiles will be the same.
The IRR of Project A is higher than IRR of Project B.
Therefore, the NPV profiles will not cross and Project A will always be preferred for any positive (>0) discount rate.

14 A Choice A is correct because an increase in systematic risk means the discount rate will increase, resulting in a l
Choice B is wrong because the NPV decreases.
Choice C is wrong because IRR does not change.
Choice D is wrong because IRR does not change.
Choice E is wrong because the NPV decreases.
15 A Statement I is wrong because an increase in A/R means an investment in NOWC, which will result in a cash OUTflow.
Statement II is wrong because interest tax shield is a financial item while we only consider operating items.
Statement III is correct because increase in NOWC is a cash outflow.
Statement IV is wrong because changes in NOWC will result in cash flows and the timing of these flows will impact the N
Statement V is wrong because an increase in depreciation expense will result in an incremental depreciation tax shield,

16 B Statement I is wrong because a PI of 1.5 means that the project has a positive NPV, which means that the discount rate
Statement II is correct because for a postive discount rate, the discounted payback period will be higher than the paybac
Statement III is wrong because given PI of 1.5, the intrinsic value of the project = $2.2m x 1.5 = $3.3m and the NPV = $3

17 E All the choices are correct (refer to slide 25-27 & 41 of Lecture 7).

18 C Choice A is wrong because a reduction in dividend payout ratio means more funds are retained by the company resultin
Choice B is wrong because if PM increases, then more funds will be available for the company.
Choice C is correct because a reduction in reliance on A/P means the company would need more external funds
Choice D is wrong because the company still has slack to absorb incremental sales without the need for external funds.

19 A Change in Sales = $85,000

A* = $40,400
L* = $3,300
M= 5.20%
Addition to RE = $780
RR = 10.00%

EFN = $19,801.33

20 E Choice A is wrong because if market interest rate declines, the YTM will decline and price of the bond will increase (from
Choice B is wrong because each coupon will be 12% x $1,000/2 = $60 only.
Choice C is wrong because the final payment will be $1,060.
Choice D is wrong because if the market interest rate was 12.5%, this is higher than the YTM of 12%, meaning that the b
Choice E is correct because the bond sells at par. This means YTM = coupon rate.

21 E YTM of outstanding bond = 7.80%

Choice A is wrong because the final payment of the outstanding bond is $1,020.
Choice B is wrong because the YTM will be the same since they are of the same risk and the same term.
Choice C is wrong because the coupon rate of the new bond will be 7.8% since the new bond sells at par.
Choice D is wrong because the prices of bonds will change over time since the term reduces.
Choice E is correct

22 B Since market is at equilibrium, expected return = required return.

Dividend yield for Stock X = 9% - 7% = 2%
Dividend yield for Stock Y = 15% - 13% = 2%

Choice A is wrong because stock price will grow based on dividend growth rate.
Choice B is correct.
 Choice C is wrong because Stock Y will have the higher systemtic risk since it has the higher required return.
Choice D is wrong because you are not told the risk-free rate to compare. Alternatively, since Stock Y has a significantly

23 A Discount = 1%
Period rate = 1.0101%
Discount period = 15 days
Credit Period = 45 days
Credit - Discount Period = 30 days
Number of periods = 12.1667
EAR of discount = 13.007%

24 C inputs for calculator:

N= 4
I/Y = 2.5
PMT = 15
FV = 1000

cpt PV = $962.38

25 D g = 5%
0 1 2 3 4
CFFA 20 -15 30 31.5
TV3 = 1050
Total Cashflows: 20 -15 1080

Market Value of Firm = $863.00

Debt = $20.00
Common Equity = $843.00
Intrinsic Value per share = $210.75
rate changes than prices of bonds with high coupons.

f the same maturity and risk.

method unreliable.
d using nominal cashflows and not discounted cashflows.
limit. Hence, this could result in a differrent decision with the NPV method.
sect, meaning that the NPVs of the two projects are the same.
R and required return and not the crossover rate.
unt rates, Project Spirit has the higher NPV than Project Valor. Hence we should use NPV decision rule to decide.

order to make the decision.

ny positive (>0) discount rate.

e will increase, resulting in a lower NPV. IRR will not change since it is only dependent on the cashflows and not the required retu
 will result in a cash OUTflow.
er operating items.

g of these flows will impact the NPV of the project.

emental depreciation tax shield, which will increase OCF.

ch means that the discount rate used must be less than the IRR of 18 percent.
od will be higher than the payback period.
x 1.5 = $3.3m and the NPV = $3.3m - $2.2m = $1.1m.

etained by the company resulting in less need for EFN.

ould need more external funds to support sales.

out the need for external funds.

e of the bond will increase (from current $1,000).

YTM of 12%, meaning that the bond will be a discount bond (price < $1,000).

d the same term.

bond sells at par.
 gher required return.
since Stock Y has a significantly higher return, even if Stock X is near risk-free, Stock Y will not be.
ows and not the required return.
1 C Statement I is correct since the part-time job is an alternative use of his time that would have resulted in income.
Statement II is wrong because he will only forfeit half of the tuition and not the whole amount, i.e. he still has a chance of
Statement III is correct because the amount spent on the textbook cannot be recovered from the decision to drop the co

2 B Choice A is true because a lower discount rate will make the PV of the coupons higher.
Choice B is false because prices of bonds with lower coupon payments will be more sensitive to interest rate ch
Choice C is true because bond prices and yields are inversely related.
Choice D is true because prices of bonds with longer maturities are more senstive to changes in interest rates.
Choice E is true because riskier bonds will have a higher YTM, which translates to a lower price.

3 B Choice A is wrong because a restrictive financing policy means a low amount of marketable securities (slide 22 of Lectur
Choice B is correct because cash and marketable securities will earn very little interest for the shareholders.
Choice C is wrong because having cash and marketable securities means the firm has liquid assets to pay liabilities hen
Choice D is wrong because it faces a high level of opportunity costs since it could have earned higher interest rates if it h
Choice E is wrong because holding high amounts of liquid assets means a low level of shortage costs.

Internal Growth Rate=(ROA×RR)/(1−ROA×RR)

4A

ROA = 21.82%
RR = 80%
IGR = 21.15%

5C Capacity Sales = $1,714.29

The firm has enough fixed assets to support up to $1,714.29 million of sales.
Since the target sales for 2022 is $1,500 million, it will not require any new fixed assets.
As such, the A* in the EFN equation should only be Current Assets.

EFN = -$180.00

6B inputs for calculator:

N= 8
I/Y = 4.5
PMT = 30
FV = 1000

cpt PV = $901.06

7D D1 = 0.212
Intrinsic Value = $10.60

8 E Statement I is wrong because the real rate of interest does not affect the slope of the term structure. It will only cause it t
Statement II is wrong because there is no credit risk premium in the term structure. The term structure is constructed usi
Statement III is wrong because inflation premium reflects the health of the economy in that if the economy is doing well,
 9E Stock P D0 = $2
Stock Q D0 = $4
Stock P g = 5%
Stock Q g = 3%
Stock P required return = 12%
Stock Q required return = 10%
Stock P dividend yield = 7%
Stock Q dividend yield = 7%

Choice A is wrong because both stocks have the same dividend yield.
Choice B is wrong because Stock P has the higher growth rate, g, which is the same as the capital gains yield.
Choice C is wrong because Stock P has the higher required return, which means it has the higher beta with market equi

10 C Stock P price = $30.00

Stock Q price = $58.86

11 C
0 1 2 3
dividends $2
required return = 10.0% TV3 = $34.67
$36.67

Intrinsic Value = $27.55

discount 3 years

12 D
0 1 2 3
dividends $2.50 $2.00 $1.60 $1.75
TV2 = $11.67
$13.27

Intrinsic Value = $11.77

13 A Input for calculator:

I/Y = 4
PMT = 25
PV = -921.37
FV = 1000
cpt N = 6.00

This means 6 semi-annual periods. Hence the bond will mature in 3 years.

14 C Change in NOWC = -$10,000

0 1 2 3
OCF $120,000 $120,000 $120,000
 Initial Investment -$325,000
Investment in NOWC $10,000
NSV
tax rate @ 34%

Net Cash Flow -$315,000 $120,000 $120,000 $120,000

NPV = $7,807.42

Things to note:
1. The Change in NOWC is negative. This means that it will be an inflow at year 0 when shown in the Cashflow Table. C
2. There is no need to calculate depreciation at all since OCF is already given in the question.
3. The NSV is already given as "after-tax" so there is no need to do any further calculation.

15 D IRR = 19.27%

16 B 12% 0 1 2 3
-$50,000 $80,000 $80,000 $80,000
NPV = $142,147

-$75,000 $X $X
PV of cost = -$66,964
PV0 of 3 year annuity of $X = $209,111
PV1 of 3 year annuity of $X = $234,204
Find $X using calculator:
N= 3
I/Y = 12%
PV = $234,204
cpt PMT = $97,510.63

17 D Project S Project L
0 -$8,000 -$11,500
1 $5,000 $4,000
2 $5,000 - $8,000 = -$3,000 $4,000
3 $5,000 $4,000
4 $5,000 $4,000

discount rate = 10%

NPV = $1,237.76 $1,179.46

Things to note:
1. We need to repeat Project S at the end of Year 2 so as to fulfill the full 4 year contract.
2. The shirts will not be produced after 4 years, so we should not assume these projects can be repeated infinitely and h

18 B Statement I is wrong because the MIRR is affected by the required return rate that is used to compound or discount cash
Statement II is correct. We can observe from the NPV profile of projects with conventional cashflow patterns (refer to slid
Statement III is wrong because the Payback Period used nominal cash flows. A high discount rate could cause the proje
Statement IV is correct. This is seen in the example found on Slides 37 of Lecture 9.
19 C Choice A is not the best answer because the ease of understanding the NPV method does not mean it benefits the shar
Choice B is not the best answer because it describes the situation when NPV = 0.
Choice C is correct.
Choice D is not the best answer because the ease of calculating the NPV method does not mean it benefits the shareho

20 B Choice A is wrong because the incremental cash flows should be considered and not the whole $500,000 cash flow.
Choice B is correct.
Choice C is wrong because the incremental cash flows should be considered and not the current $350,000 cash flow.
Choice D is wrong.

21 C Choice A is wrong because a change in current assets will result in a change to NOWC, which is a relevant cash flow.
Choice B is wrong because a change in acounts payable will result in a change to NOWC, which is a relevant cash flow.
Choice C is correct because regular meeting fees are not incremental and are seen as a sunk cost/ irrelevant in
Choice D is wrong because changes to net working capital are relevant cash flows.

22 B Since market is at equilibrium, expected return = required return.

Dividend yield for Stock G = 11% - 6% = 5%
Dividend yield for Stock V = 8% - 3% = 5%

Choice A is wrong because stock price will grow based on dividend growth rate.
Choice B is correct.
Choice C is wrong because Stock G will have the higher systemtic risk since it has the higher required return.
Choice D is wrong because there is insufficient information to conclude if Stocks G and V belong in the same industry.

23 C Years 1 - 3
Cost savings $150,000
Incremental Dep $120,000
Incremental EBIT $30,000
Tax (32%) $9,600
Incremental NI $20,400

OCF for project: $140,400

0 1 2 3
OCF $140,400 $140,400 $140,400
Initial Investment -$360,000
Investment in NOWC -$16,000 $16,000
NSV of equipment $16,320
Net Cash Flow -$376,000 $140,400 $140,400 $172,720

NPV: -$18,959.89

24 C Find the YTM of the Balloon Company bond.

Calc input:
N: 16
 PMT: 25
FV: 1000
PV: -937.19
cpt I/Y: 3.00%
YTM: 6.00%

Clown Company bond will have the same YTM of the Balloon Company bond since they have the same term and same

Calc input:
N: 16
PMT: 35
FV: 1000
I/Y: 3.00%
cpt PV $1,062.80

25 C Net Amount Kenny needs = $100,000

Amt that Kenny borrows = $103,092.78
Interest paid = $6,701.03
Effective Rate = 6.70%
 have resulted in income.
mount, i.e. he still has a chance of getting back half of the tuition amount.
d from the decision to drop the course.

ore sensitive to interest rate changes.

hanges in interest rates.

able securities (slide 22 of Lecture 11).

nterest for the shareholders.
liquid assets to pay liabilities hence it is unlikely to face financial distress.
earned higher interest rates if it had invested in other long term assets.
shortage costs.

rm structure. It will only cause it to translate up or down.

term structure is constructed using risk-free government securities.
hat if the economy is doing well, investors will expect inflation to rise.
s the capital gains yield.
the higher beta with market equilibrium.

g = 4%
4
$2.08

4
$120,000
 -$10,000
$10,000

$120,000

n shown in the Cashflow Table. Consequently, there is a negative cashflow at the end of the project.

$X

s can be repeated infinitely and hence we cannot use the EAA methodology.

sed to compound or discount cashflows first.

nal cashflow patterns (refer to slide 37 of Lecture 8). If IRR > required return, then NPV > 0 at the required return.
scount rate could cause the project to have a negative NPV. However, on a nominal basis, the project could still have a payback period.
 oes not mean it benefits the shareholders.

not mean it benefits the shareholders.

he whole $500,000 cash flow.

he current $350,000 cash flow.

, which is a relevant cash flow.

WC, which is a relevant cash flow.
en as a sunk cost/ irrelevant in capital budgeting.

higher required return.

V belong in the same industry.
y have the same term and same level of risk.
still have a payback period.
1 A Benefits of the project = PV of cost savings = $1,428,571.43
Cost of investment is $1 million.
NPV = $428,571.43

2 B Year Cashflow Cumulative CF

0 -$20,000 -$20,000
1 $5,000 -$15,000
2 $5,000 -$10,000
3 $5,500 -$4,500
4 $5,500 $1,000
5 $1,000

Payback = 3 + (4500/5500) = 3.82 years

3 B Since the question says that this is a one-time acquisition, we cannot use the EAA methodology.
Instead, we have to simply compare the two NPVs.

Machine A pro-forma income statement

Years 1 - 5
Costs $160
Depreciation $60
EBIT -$220
OCF = -$160 (assume no tax)

Timeline for Machine A:

0 1 2 3 4
-$300 -$160 -$160 -$160 -$160
NPV = -$836.34

Machine B pro-forma income statement

Years 1 - 7
Costs $120
Depreciation $71
EBIT -$191
OCF = -$120 (assume no tax)

Timeline for Machine B:

0 1 2 3 4
-$500 -$120 -$120 -$120 -$120
NPV = -$999.25

Difference = $162.91 with Machine A have the lower PV of cost

4 A Choice A is correct. The required return is the discount rate to calculate NPV. IRR relies only on the cashflows
Choice B is wrong because it's the exact opposite of Choice A!
Choice C is wrong because the Payback Period uses cumulative nominal cashflows.
Choice D is wrong because you can end up with multiple or no IRR for projects with non-conventional cashflows.
Choice E is wrong because AAR is derived by taking Average Net Income divided by Average Book Value of Assets.
5 D Choice A is true because the MIRR method will produce one negative cash flow at time period 0 and one positive cash
Choice B is true because the discount rate is used to compound positive cashflows to the terminal year and also used
Choice C is wrong because it does require the discount rate.
Choice D is therefore correct since A and B are both true.
Choice is wrong because C is not true.

Expected return= D_1/P_0 +g=Dividend Yield+Growth rate of

6 B dividends
At market equilibrium, expected return = required return.
Choice B is correct.

7 C P/E ratio is the Price per share divided by the Earnings per share for the firm.
The price of a stock is positively related to the growth of the firm.
The price of a stock is negatively related to the discount rate since a higher discount rate will mean a lower PV of the f
The discount rate is the required return, which in turn will be determined by the risk of the stock. The higher the risk, th
Hence, the higher the risk of the stock, the lower the price of the stock. This means the P/E ratio will be negatively rela
Choice C is correct.

8 B g = 20% g = 10% g = 5%
12% 0 1 2 3
Dividends $1.0000 $1.2000 $1.3200 $1.3860
1.3860/(12%−5%)
TV2 =

= $19.80
Total CF2 = $21.12

Price = $17.91

9 D Multiple IRRs can occur if the cashflow pattern for the project is non-conventional, i.e., there are multiple sign changes
Choice D is correct.

10 D Operating Cycle = Inventory Period + Receivables Period

Inventory Period= 365/(Inventory Turnover)=365/8=45.625 days

Receivables Period = DSO = 55 days

Operating Cycle = 100.625 days

11 E Choice A is wrong because entries that do not grow with sales and first projected at the same level. Also, RE changes
Choice B is true because the Percentage of Sales method first requires that we identify which entries on the balance s
Choice C is true because the Percentage of Sales method will allow us to create the pro-forma balance sheet, which w
Choice D is wrong because A is wrong.
Choice E is correct because both B and C are true.
12 D Since the price of the bond is above $1,000, this is a premium bond.
A premium bond will mean that the YTM is less than the Current Yield, which is less than the Coupon Rate (refer to Sl
Choice D is correct.

13 D Stock Price = $23.53

Required return = 12.75%
Price of Preferred Stock= D_1/r_e

➔ Dividend = $3.00

WACC=E/V r_e+D/V r_d (1−t_c )

14 E

The question gives us the debt-equity ratio as 0.7.

This means that D = 0.7 while E = 1.0 (this will give us a ratio of 0.7).
Hence, E/V=1/1.7 and D/V=0.7/1.7

➔ WACC = 9.5%

Note:
1. We do not need to multiple rd by (1 - tc) again because the 6% given is already after-tax.

15 A Price of bond = $156.26

Number of bonds = 39,678

16 D Amount to borrow = $60,416.67

Interest paid = $4,833.33
Effective rate = 8.33%

17 B Since both bonds are priced at par,

Price of Sami bond = $1,000
Price of Henchoz bond = $1,000
Current Yield of Sami bond = 7.00%
Current Yield of Henchoz bond = 7.00%

When market yield falls to 5%,

Price of Sami bond = $1,071.70
Price of Henchoz bond = $1,130.55
% change in Sami bond = 7.17%
% change in Henchoz bond = 13.06%

Current Yield of Sami bond = 6.53%

Current Yield of Henchoz bond = 6.19%
Change to Sami bond = -0.47%
Change to Henchoz bond = -0.81%
 Choice A is wrong because Henchoz bond has a higher percentage change in price (refer to cell D143)
Choice B is correct (compare cells D147 and D148).
Choice C is wrong (refer to cells D142 and D143).
Choice D is wrong because coupon rates are fixed and do not change with market yield changes.
Choice E is wrong because YTM > Current Yield > Coupon rate for discount bonds and both these bonds are premium

18 E Choice A is wrong because a surprise increase to market interest rates will cause required returns for stocks to increa
Choice B is wrong because when market participants become more risk-averse, the SML steepens. This means requi
Choice C is wrong because higher compliance costs would translate to slower growth for the company, hence lower fu
Choice D is wrong because increase to the risk-free rate will result in the SML translating upwards, increasing required
Choice E is correct because a higher-than-expected growth rate will mean future cashflows will increase at a f

19 C Choice A is wrong because the final payment for Didi bond is $1,025.
Choice B is wrong because since the bond is a par bond (priced at $1,000), if rates remain the same next year, the pr
Choice C is correct because the Current Yield is calculated as Annual coupon divided by current Market price
Choice D is wrong because Alonso Bond will be a premium bond whereas Didi Bond is a par bond.

20 D To price Alonso Bond, we must first realize that the Didi Company bond has a YTM of 5%.
We can now use this yield to price Alonso Bond.
Price of Alonso Bond = $1,065.28

21 B A call provision means that the bond is callable.

A callable bond means the issuer has the right to redeem the bond before its maturity.
This increases risk to the investor since the redemption date is uncertain.
Hence, a callable bond will come with a higher YTM.
Therefore, a bond without this call provision will generally have a lower YTM.
Choice B is correct.

22 B Retention Ratio = 60%

ROE = 16.6667%
Sustainable Growth Rate = 11.1%

23 C Required return = 12.70%

0 1 2 3 4
Dividends $0 $0 $0 $3
3.18/(12.7%−6%)
TV4 =

= $47.46

Total CF4 = $50.46

Price = $31.28
24 C Pro-forma Income Statement
Years 1 - 3
Sales $150,000
Cost Savings $100,000
Depreciation Expense $120,000
EBIT $130,000
Taxes (34%) $44,200
Net Income $85,800
OCF = $205,800

Net Salvage Value (NSV) = $26,400

0 1 2 3
OCF $205,800 $205,800 $205,800
Initial Investment Outlay -$360,000
Investment in NOWC -$25,000 $25,000
NSV $26,400
Net Cash Flow -$385,000 $205,800 $205,800 $257,200

NPV @ 17% $101,825.23

25 D Year Project A CF Project B CF (B - A) CF

0 -$30,000 -$50,000 -$20,000
1 $9,000 $15,000 $6,000
2 $18,000 $24,000 $6,000
3 $24,000 $30,000 $6,000
NPV profile y-intercept $21,000 $19,000
IRR 27% 16% -5.09%

Since the crossover rate is negative, this means that for any positive required returns, one project is preferred over the
We can observe that Project A has the higher y-intercept for the NPV profile and it also has the greater IRR. This mea
Hence, Project A will always be preferred for any positive discount rate.
Choice D is correct.
 5
-$160

5 6 7
-$120 -$120 -$120

only on the cashflows and does not need the required return for its calculation.

entional cashflows.
Book Value of Assets.
 0 and one positive cashflow at the terminal year.
inal year and also used to discount negative cashflows to time period 0.

mean a lower PV of the future dividends or cashflows.

k. The higher the risk, the higher the stock beta, which means a higher discount rate.
io will be negatively related to the risk of the stock.

e multiple sign changes to the cashflows.

evel. Also, RE changes based on the addition to RE from the pro-forma income statement.
entries on the balance sheet varies with sales and which do not.
balance sheet, which will then show us if we have a shortfall of funds.
Coupon Rate (refer to Slide 43 of Lecture 7).
hese bonds are premium bonds.

urns for stocks to increase, which then results in lower PV for future cash flows, i.e. lower stock price.
pens. This means required returns increase, translating to lower PV of future cashflows, i.e. lower stock price.
ompany, hence lower future cashflows, therefore lower price.
ards, increasing required returns for all stocks and thereby reducing PV of future cashflows, i.e. lower stock price.
ows will increase at a faster rate, therefore the PV of these cashflows will increase, i.e. higher stock price.

same next year, the price will remain at $1,000.

y current Market price, which is $50/$1,000 = 5%.

g = 6%
5
$3.18
18/(12.7%−6%)
 ect is preferred over the other.
e greater IRR. This means that the NPV profile of Project A will always be above the NPV profile of Project B.