1. Which of the following statements is true of the modified internal rate of re
ID: 2803914 • Letter: 1
Question
1. Which of the following statements is true of the modified internal rate of return?
a. The discount rate that forces the present value of the terminal value to equal the sum of undiscounted cash inflows is the modified internal rate of return (MIRR).
b. The discount rate that forces the present value of the terminal value to equal the future value of the costs is the modified internal rate of return (MIRR).
c. The discount rate that forces the present value of the terminal value to equal the present value of the costs is the modified internal rate of return (MIRR).
d. The discount rate that forces the future value of the terminal value to equal the future value of the costs is the modified internal rate of return (MIRR).
e. The required rate of return that forces the future value of the terminal value to equal the present value of the costs is the modified internal rate of return (MIRR).
2. Which of the following is included in the call provision of a preferred stock?
a. Preferred stock can be redeemed by incorporating a maturity option to a preferred stock issue.
b. Preferred stockholders have the right to receive preferred dividends previously not paid, to be disbursed before any common stock dividends can be paid.
c. Preferred stock can participate with the common stock in sharing the firm's earnings.
d. Preferred stockholders can elect the members of the board of directors and also vote on corporate issues.
e. Preferred stockholders have priority over common stockholders with regard to assets of the firm.
3. Government securities that can be easily converted to cash in the market will have a:
a. low liquidity premium.
b. high real risk premium.
c. high maturity risk premium.
d. high inflation premium.
e. low budget risk premium.
Explanation / Answer
1.) The option is C ie., the MIRR is the discount rate at which the present value of a project cost is equal to the present value of its terminal value. this is the definition of MIRR and here the terminal value means sum of the future cashflows multiplied or compunded by cost of capital.
2.) The option is A ie., The preferred stock can be redeemed by incorporating a maturity option to a preferred stock issue.
Reason: The call provision of a preferred stock of the issuing company gives an right to call the preferred stock for redemption including a call provision. The firms adds the maturity option to the preferred stock issue.
3.) The option is A ie., low liquidity premium
reason: generally government securities are easily convertible to cash in the market the liquidity premium means that doesnt convert into cash immediately hence for a government securities they will be low liquidity premium so that the securities can easily be converted.
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