16. When comparing two mutually exclusive projects of equal life, the capital bu
ID: 2764990 • Letter: 1
Question
16.
When comparing two mutually exclusive projects of equal life, the capital budgeting evaluation technique that ALWAYS identifies the BEST project is:
Question 16 options:
NPV
IRR
Profitability Index
All three of the techniques listed above will always give the same answer, therefore no one technique is better than any of the others for mutually exclusive projects.
None of the answers listed above is correct.
15.
Which of the following statements is most correct?
Question 15 options:
The constant growth model takes into consideration the capital gains earned on a stock.
It is appropriate to use the constant growth model to estimate stock value even if the growth rate never becomes constant.
Two firms with the same dividend and growth rate must also have the same stock price.
Statements a and c are correct.
All of the statements above are correct.
NPV
IRR
Profitability Index
All three of the techniques listed above will always give the same answer, therefore no one technique is better than any of the others for mutually exclusive projects.
None of the answers listed above is correct.
15.
Which of the following statements is most correct?
Question 15 options:
The constant growth model takes into consideration the capital gains earned on a stock.
It is appropriate to use the constant growth model to estimate stock value even if the growth rate never becomes constant.
Two firms with the same dividend and growth rate must also have the same stock price.
Statements a and c are correct.
All of the statements above are correct.
Explanation / Answer
Answer for question 16
Capital Budgeting evaluation for mutually exclusive project best technique to use is NPV method. If NPV of project is more than 0 that is a positive value, then project is accepted and when NPV of project is less than 0 that is negative value then project is rejected.
Hence, Option (a) is correct answer.
Answer for question 15.
If two firm has same discount rate and growth does not necessary that stock price of both firm will be same. Cost of equity of two firm might be different. When dividend growth rate is not constant then analyst should use multi stage growth model instead of constant growth rate model.
The constant growth model takes into consideration the capital gains earned on a stock.
Hence, Option (a) is correct answer.
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