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16. You are the Chief Financial Officer of a large electric utility company, and are about to suggest to your Board of Directors that an

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16. You are the Chief Financial Officer of a large electric utility company, and are about to suggest to your Board of Directors that an expensive new wind farm electric generating plant is approved for construction. The Board represents shareholders, as such, any decisions they make must be done in their best interest. What part of your assessment gives you confidence that this project will benefit the company's shareholders in future periods? a. The Net Present Value ("NPV) of the project was below zero. b. The project has expected future cash flows that are extremely difficult to forecast with any accuracy. The Internal Rate of Return ("IRR) of the project was greater than the targeted Thurdle' rate of return. d. The salvage value of the equipment required for the project at the end of its useful life is anticipated to be just 5% of its original cost. e. All of the above. 17. In class, we discussed and practiced the concept of a dividend discount model to determine the value of a common stock. But we discovered that the model has significant shortfalls. For example, if a company does not pay a dividend, the model gives a resulting value of 'zero' for the common stock and if estimated growth rate() is greater than our required rate of return (k). we end up with a negative value for the stock. What other valuation measures were discussed? b Price to Earnings ratio-Dividing market price of the stock by the earnings per share. Discounted free cash flow method - Estimating the free cash available to a shareholder several years into the future, and discounting these cash flows back at an appropriate rate of return Price to Book Value ratio-Dividing market price of the stock by the accounting book value for shareholders equity) on a company's balance sheet. "Sum of the Parts" valuation calculation, whereby the separate value attributed to a company's independent subsidiaries is worth more than the market price of the entire company te, the quoted market price in the secondary markets. All of the above d 18. Which of the following statements about portfolio diversification is CORRECT? 2 If there is a low correlation between the common stocks held in a portfolio, the volatility inherent in the portfolio (measured with beta, B) should also be lower. b. Once a portfolio has about 40 stocks, contributing additional stocks to the portfolio will reduce its volatility and diversifiable risk - but only by a small amount. In order to minimize overall volatility, some investment managers buy and hold different asset dasses (ie, common stocks, bonds, and cash) in a portfolio d. An investor cannot eliminate any market risk if he or she holds a very large and well-diversified portfolio of stocks. e All of these statements about portfolio diversification are correct

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