Explain why the risk premium of a stock does not depend on its diversifiable risk.
Evaluate the following projects using the Net Present Value criteria. Assume a cost of capital of 10%.
Project A: Initial Cash Outflow: -RM250,000
Year 1 Cash Flow: RM25,000
Year 2 Cash Flow: RM125,000
Year 3 Cash Flow: RM175,000
Project B: Initial Cash Outflow: -RM250,000
Year 1 Cash Flow: RM150,000
Year 2 Cash Flow: RM100,000
Year 3 Cash Flow: RM75,000
(i) What are the NPVs for the projects and what do these numbers inform you?
(ii) If the projects are independent, which would you accept according to the NPV criterion?
(iii) If the projects are mutually exclusive, which would you accept according to the NPV criterion?
(iv) Both projects have in total RM325,000 of cash inflows and the same initial cash outflow. Explain why both porjects do not have the same NPV.
(v) If the cost of capital increased to 15%, what impact would this have on your decision?
Describe the process whereby the owners control the firm's management. What is the main reason that an agency relationship exists in the corporate form of organization? what kind of problems can arise?
source: Corporate Finance First Semester Examination Academic Session 2011/1012 , Master Business Administration, Universiti Sains Malaysia
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