Answer:
The correct answer is A)NPV would be understated.
Explanation:
NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.
The Salvage value is added at the end of the cash flow. So is a cash inflow.
And if we ignore salvage value the difference, the cash inflows will be smaller, so the NPV would be understated.
The amount of money needed now to begin the perpetual payments is
P = A/I =15,000÷0.05=300,000
The amount that would need to have been deposited 25 years ago is
P=A÷(1+r)^t
P=300,000÷(1+0.05)^(25)
P=88,590.83
Answer:
D) Dividend payout ratio
Explanation:
Internal Growth Rate of a firm is the maximum growth rate at which the firm can grow without involving external financing i.e. without assuming additional debt or equity infusion in the firm. At this level of growth the cash available from the operations can be used to fund the company.
It is calculated using the formula
IGR= ROA* b / (1-ROA * b)
where
IGR is the Internal Growth Rate
ROA is return on assets
b is the retention ratio or (1-dividend payout ratio)
To answer the question we look at each option
If ROA (Return on Asset) is decreased the numerator decreases and denominator increases in equation (1) and thus the Internal growth rate decreases, so ROA is not the answer
If Net Income is reduced the Return on Assets also falls thus as in the above case Internal growth Rate decreases
If retention ratio is reduced the numerator decreases and denominator increase leading to a fall in IGR
If dividend payout ratio is decreased the retention ratio increases leading to the increase in numerator and decrease in denomonator leading to an increase in the IGR. Thus Decreasing the dividend payout ratio will increase the IGR.
If Return on Equity is reduced i.e. indirectly Net Income is reduced for the same equity the similar effect as in part for Net Income and thus reduces the IGR.
So decreasing dividend payout ratio increases the interna growth rate of a firm
