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Capital Budgeting

1) Thompson corp has proposed project with normal cash flows. In other words, there is an up-front cost followed over time by a series of positive cash flows. The projects internal rate of return is 12 percent and its WACC is 10 percent. Which of the following statements is most correct?

a. The projects NPV is positive.

b. The project?s MIRR is greater than 10 percent but less than 12 percent.

c. The projects payback period is greater than its discounted payback period.
d. Statements a and b are correct.

e. All of the statements above are correct

2) Stock C has a beta of 1.2, while Stock D has a beta of 1.6. Assume that the stock market is efficient. Which of the following statements is most correct?

a. The required rates of return of the two stocks should be the same.

b. The expected rates of return of the two stocks should be the same.

c. Each stock should have a required rate of return equal to zero.

d. The NPV of each stock should equal its expected return.

e. The NPV of each stock should equal zero.

Solution Preview

1) d. Statements a and b are correct.

Since IRR is greater than WACC, NPV has to be positive. So (a) is correct. Also, when IRR>WACC, we have MIRR to be less than IRR but greater than WACC. So ...

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