Two factors on which present value depends
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A. What are the two factors on which present value depends?
b. A firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects, even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all those projects that appear to have positive NPVs. Briefly explain why such a firm would tend to become riskier over time.
c. The required return on debt is 8%, the required return on equity is 14%, and the marginal tax rate is 40%. If the firm is financed 70% equity and 30% debt, what is the weighted average cost of capital?
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Response describes the two factors on which present value depends
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a. What are the two factors on which present value depends?
Present value is an important concept of the financial management. This is concept derived from the time value of money. The basic idea of time value of money is that a dollar today is worth more than a dollar tomorrow. (finance professor, 2009)
The investor has time preference of money because he can reinvest the funds, which are received early and can earn additional money Present value, is the future value being discounted by the rate of interest. This is because of reasons discussed before.
This concept is important because the major financial objective of the organization "Wealth maximization" is based on present value concept. Wealth maximization is preferable to profit maximization as it is based on cash flow which is unambiguous and considers time value of money and risk. Illustration of ...
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