1A) Which of the following would not be considered a cost of Internal Equity? Im
ID: 394184 • Letter: 1
Question
1A) Which of the following would not be considered a cost of Internal Equity?
Implied cost using the Dividend Discount Model (DDM)
Zero cost
Opportunity cost of alternative investments to the company
Implied cost using CAPM
1B) Oldguy Inc. is considering two independent investments with the following cash flow streams:
initial
Year 1
Year 2
Year 3
Year 4
Year 5
Proj A
-50,000
+20,000
+20,000
+10,000
+5,000
+5,000
Proj B
-50,000
+10,000
+10,000
+5,000
+5,000
+50,000
Oldguy uses a combination of NPV and Payback period to evaluate alternatives, with a requirement of a positive NPV using a 10% discount rate and a maximum payback of 3 years. Which project(s) should Oldguy select?
A and B
neither A nor B
B only
A only
a.Implied cost using the Dividend Discount Model (DDM)
b.Zero cost
c.Opportunity cost of alternative investments to the company
d.Implied cost using CAPM
Explanation / Answer
1A b. Zero cost. Correct option
1B Project A NPV = 20000/1.10 + 20000/1.102 + 10000/1.103 + 5000/1.104 + 5000/1.105 – 50000
Project A = -1256.43 $
Project B payback is greater than 3 years as only 25000 cash flow comes to the organization in first three years.
b. Neither A nor B. Correct option
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.