Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
i Explain how wrong calculation of the cost of capital of a project leads to
incorrect choice of a project.
ii Explain the superiority of the Security Market Line (SML) approach as
compared to the dividend valuation model.
iii A company is faced with the choice of one of two investment opportunities A
and B. The initial cost of each is Rs.200,000 and their estimated cash flows are
as follows.
Year Cash Flows (Rs.) – A Cash Flows (Rs.)
- B
1 200,000 40,000
2 240,000 60,000
Assuming a cost of capital of 7% calculate (year 1: .935; year 2: .873)
a.
b. The yield rate of each project
c. Say which project you would select
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