Bolla Inc. rations capital spending to $30,000 per year. They are evaluating the
ID: 2633832 • Letter: B
Question
Bolla Inc. rations capital spending to $30,000 per year. They are evaluating the following four projects. The initial Investment, present value of future cash flows and profitability index (PI) are shown for each project. Project Investment PV of Cash Inflows Profitability Index A $18,000 $21,600 1.20 B $15,000 $14,400 0.96 C $14,000 $17,360 1.24 0 $8,000 $10,400 1.30 If Bolla uses the profitability Index (PI) to prioritize investment in projects, which project(s) should Bolla fund? Project A, C and B Project D and A Project A, C and D Projects C and D Firms often limit (ration) the amount of projects they fund because they rely on internally generated cash and are reluctant to raise more capital by issuing new shares. Why are managers reluctant to issue new shares? (check all that apply): Investors interpret an announcement to raise new equity capital as an indication that management believes the firm's stock is overvalued. Issuing new shares increases the cash flows expected from most capital projects. Investors interpret an announcement to raise new equity capital as an indication that the firm's existing Investments are not generating enough cash flows. Raising new equity dilutes managers' current ownership stake in the firm. Issuing new shares changes the IRR of most projects.Explanation / Answer
1.D
2.A, C,D