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internal rate of return (IRR) for an insurance firm

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1. Which of the following statements is most correct?

a. If a projects internal rate of return (IRR) exceeds the cost of capital, then the project?s net present value (NPV) must be positive.
b. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
c. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital.
d. Statements a and c are correct.
e. None of the statements above is correct.

2. 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.
a. 9%
b. 7%
c. 5%
d. 3%
e. 11%

3 When evaluating potential projects, which of the following factors should be incorporated as part of a project?s estimated cash flows?
a. Any sunk costs that were incurred in the past prior to considering the proposed project.
b. Any opportunity costs that are incurred if the project is undertaken.
c. Any externalities (both positive and negative) that are incurred if the project is undertaken.
d. Statements b and c are correct.
e. All of the statements above are correct

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Solution Preview

1)Which of the following statements is most correct?

a. If a projects internal rate of return (IRR) exceeds the cost of capital, then the

project?s net present value (NPV) must be positive.
b. If Project A has a higher IRR than Project B, then Project A must also have a higher
NPV.
c. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate
of return equal to the cost of capital.
d. Statements a and ...

Solution Summary

Problems associated with internal rate of return (IRR) are presented.

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Problem Set

# 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!!

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