Mark the statements below as true or false: -Because investors like dividends, t
ID: 2749743 • Letter: M
Question
Mark the statements below as true or false:
-Because investors like dividends, the higher the company's dividend growth rate, the lower the company's cost of common equity.
-Both the profitability index (PI) and net present value (NPV) are based on the present value of all future free cash flows, but the PI is a relative measure while the NPV is an absolute measure of a project's desirability.
-If a project is acceptable using the NPV criteria, it will also be acceptable when using the profitability index and IRR criteria.
-If a project's IRR is equal to its required return, then the project's NPV is equal to zero and its PI is equal to one.
-In order to create value a corporation must earn a rate of return on its invested capital that is higher than the market's required rate of return on that invested capital.
Explanation / Answer
i. True. If the dividend rate are higher the Cost of common equity is lower.
ii. True. PI is a relative measure i.e. it gives the figures as a ratio and NPV is an absolute measure i.e. it gives as the dollar figure for a project.
iii. True. However, an exception occurs when evaluating mutually exclusive projects.
iv. True, If IRR equals required rate of return, NPV equals zero and PI is one. This shows that at IRR equals required rate of return, NPV provides the minimum return.
v. True. The corporation must earn a higher rate of return of invested capital than the market's required rate of return on that invested capital to create value.