Question 1
When raising capital,companiesprefer issuing preferred stock to issuing common stock since preferred stock has no flotation cost and preferred dividends are tax deductible.
◦ true
◦ false
Question 2
A company is choosing between two projects. The larger project has an initial cost of $120,000, annual cash flows of $50,000 for 10 years, and an IRR of 15.68%. The smaller project has an initial cost of $60,000, annual cash flows of $25,000 for 10 years, and an IRR of 16.92%. The projects are equally risky. Which of the following statements is correct?
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Since the smaller project has the higher IRR, the two projects’ NPV profiles cannot cross, and the smaller project’s NPV will be higher at all positive values of WACC.
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Since the smaller project has the higher IRR, the two projects’ NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of WACC.
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Since the smaller project has the higher IRR and the larger NPV at a zero discount rate, the two projects’ NPV profiles will cross, and the larger project will look better if the WACC is greater than the crossover rate.
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Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects’ NPV profiles will cross, and the smaller project will have the lower NPV if the WACC is less than the crossover rate.
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