Any project deemed acceptable using the discounted payback period will also be acceptable if
using the traditional payback period.
Indicate whether the statement is true or false
Question 2
A small biotechnology research corporation has been experiencing losses for the first three years of
its existence, and thus has a negative balance in retained earnings. The corporation's stock price,
however, is 1 per share.
Which of the following statements is MOST correct?
A) The required return on the stock will be small because the company has very few assets.
B) Investors believe the stock is worth 1 per share because future earnings (and cash flows) are
expected to be positive.
C) The corporation's accountants must have made a mistake because retained earnings may not
be negative.
D) Investors are irrational to pay 1 per share when earnings per share have been negative for
three years.
