A company has 525 shares of $61 par value preferred stock outstanding. It also has 21,000 shares of common stock outstanding, an
d the total value of its stockholders' equity is $716,625. The company's book value per common share equals:
1 answer:
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Answer: B. There are two IRRs so you cannot use the IRR as a criterion for accepting the opportunity.
Explanation:
The Internal Rate of Return can be useful in capital budgeting to enable a company know if an investment will be profitable. It is defined as the discount rate that causes the Net Present Value(NPV) to be zero. If the IRR is greater than the required return then the project should be accepted as it will have a profitable NPV.
IRR has some problems however and one of them is reflected here. There can sometimes be two IRRs and when this happens, using IRR as a viability measure cannot be done because a single rate is needed for comparison with the required return.
