Higher flotation costs reduce investor returns


Question 1. An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year for 20 years. Find the internal rate of return to the nearest whole percentage point.

Question 2. The before stock is riskier than debt.- tax cost of preferred stock may be lower than the before-tax cost of debt, even though preferred.

Question 3. Which of the following will increase a company's retained earnings break point?

The choices were:

A. An increase in its net income.
B. An increase in its dividend payout.
C. An increase in the amount of equity in its capital structure.
D. An increase in its capital budget.
E. All of the statements above are correct.

Question 4. Which of the following statements is incorrect?

The answer choices were:

A. Assuming a project has normal cash flows, the NPV will be positive if the IRR is less than the cost of capital.
B. If the multiple IRR problem does not exist, any independent project acceptable by the NPV method will also be acceptable by the IRR method.
C. If IRR = k (the cost of capital), then NPV = 0.
D. NPV can be negative if the IRR is positive.
E. The NPV method is not affected by the multiple IRR problem.

Question 5. Higher flotation costs reduce investor returns, and therefore reduce a company's WACC. True or False with explanation.

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Finance Basics: Higher flotation costs reduce investor returns
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