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Chapter 4: Q7DQ (page 405)

If a corporation has projects that will earn more than the cost of capital, should it ration capital? (LO12-5)

Short Answer

Expert verified

Answer

The business entity must not ration its capital.

Step by step solution

01

Definition of Internal Rate of Return

A rate of return that defines the profitability of the initial investment made by the business entity is known as the internal rate of return. It is calculated using the same formula as NPV is calculated.

02

Project earnings more than the cost of capital

From the financial point of view, the project must not be accepted, and the business must not ration capital. The business entity will be able to increase its profitability and wealth at the point where the marginal cost of investment equals the marginal return

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Most popular questions from this chapter

Question: Beverly Hills started a paper route on January 1. Every three months, she deposits $550 in her bank account, which earns 8 percent annually but is compounded quarterly. Four years later, she used the entire balance in her bank account to invest in an investment at 7 percent annually. How much will she have after three more years?


Question:Ecology Labs Inc. will pay a dividend of \(6.40 per share in the next 12 months (D1). The required rate of return (Ke) is 14 percent and the constant growth rate is 5 percent.

a. Compute P0. (For parts b, c, and d in this problem, all variables remain the same except the one specifically changed. Each question is independent of the others.)

b. Assume Ke, the required rate of return, goes up to 18 percent. What will be the new value of P0?

c. Assume the growth rate (g) goes up to 9 percent. What will be the new value of P0? Ke goes back to its original value of 14 percent.

d. Assume D1 is \)7.00. What will be the new value of P0? Assume Ke is at its original value of 14 percent and g goes back to its original value of 5 percent.

Explain how the collections and purchases schedules are related to the borrowing needs of the corporation

b. Would the present value of the funds in part a be enough to buy a $2,900 concert ticket?

Rapid corporate growth in sales and profits can cause financing problems. Elaborate on this statement
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