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Sample finance questions: internal rate of return, preferred stock, retained earnings break point and more...

# 1. An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year for 20 years. Find the internal rate of return to the nearest whole percentage point.

The answer is 11%. my calculations did not get this can you please explain how to solve the problem step by step.

# 2. The before stock is riskier than debt.- tax cost of preferred stock may be lower than the before-tax cost of debt, even though preferred.

The answer was "TRUE". Can you please explain why?

# 3. Which of the following will increase a company's retained earnings break point?

The choices were:
A. An increase in its net income.
B. An increase in its dividend payout.
C. An increase in the amount of equity in its capital structure.
D. An increase in its capital budget.
E. All of the statements above are correct.

The Answer is "A". Can you please explain why that is the correct choice and why the others are incorrect.

# 4. Which of the following statements is incorrect?

The answer choices were:
A. Assuming a project has normal cash flows, the NPV will be positive if the IRR is less than the cost of capital.
B. If the multiple IRR problem does not exist, any independent project acceptable by the NPV method will also be acceptable by the IRR method.
C. If IRR = k (the cost of capital), then NPV = 0.
D. NPV can be negative if the IRR is positive.
E. The NPV method is not affected by the multiple IRR problem.

The correct answer is "A". Can you please explain why that one is correct and why the other choices are incorrect.

# 5

Higher flotation costs reduce investor returns, and therefore reduce a company's WACC.

The answer was "FALSE". Can you please explain why?

THANK YOU SO MUCH!!

Solution Preview

# 1. An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year for 20 years. Find the internal rate of return to the nearest whole percentage point.

The answer is 11%. my calculations did not get this can you please explain how to solve the problem step by step.

The Future Value of an annuity of $100 is equal to $3310, solve to get the value of r.
The formula for future value of an annuity is =C/r*((1+r)^n-1)
n=20, C=100, we need to calculate r
3310 = 100/r*((1+r)^20-1)
You can find out the value of r either by using Excel formula or by hit and trial method. Say Plug in 7% to start with
We get the FV as 4099.55, since this value is greater than 3310, we need to decrease the discount rate. So decrease it to 5%. the value we get is 3307 which is very close to 3310. hence the answer should be 5%. The answer provided by your instructor is ...

Solution Summary

You will find the answer to this puzzling assignment inside...

$2.19