Please do it by type not pics. 1.P/E multiple contraction means: A. Revenues dec
ID: 1171120 • Letter: P
Question
Please do it by type not pics.
1.P/E multiple contraction means:
A. Revenues decrease per $1 in costs paid
B. The growth rate falls
C. A stock now costs less per $1 in earnings
D. Bond prices fall and YTM increases
2. As of today, MU’s WACC = 11.6% and SBUX’s WACC = 5.9%. Both MU (Micron) and SBUX (Starbucks) are publicly traded companies. This means:
A. MU’s cost of capital is higher than SBUX’s
B. The market views MU as riskier than SBUX.
C. Both A and B
D. None of the above
2. An NPV of $100K means:
A. The project has $100K in revenue.
B. The project’s Alpha > WACC
C. The project’s WACC < IRR
D. The project is expected to have $100K in revenue.
Explanation / Answer
1) PE multiple contraction means: The growth rate falls
PE multiple contraction means that the market will pay a lot less for the same earnings. This reflects the stage of inflation and market recession.Under this the stock price falls as well as the growth rate.
2) A. MU's cost of capital is heigher than SBUX
The WACC is actually the cost which a company has to bear against the capital generated by them. Foe eg, interest is the cost of debt and divident is the cost of shares. we can also say that it is the rate of return whch the investers or debt holders are expected from the company. Since the expectation of investors is heigher from MU than SBUX, hence we can saythat MU is not riskier than SBUX.
3) An NPV of $100k means: B: The project Alpha> WACC
NPV is the total discounted cash inflows minus the discounted initial cash out flow. it is calculate by minus the initial cash outflow by the future revenue. Positive NPv means revenues are greater than the cost.