Question

Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 70 percent of the firm's overall sales. Division A is also the riskier of the two divisions. Division B is the smaller and Icast risky of the two. When management is deciding which of the various divisional projects should be accepted, the managers should: A. Allocate more funds to Division A since it is the largest of the two divisions. B. Fund all of Division B's projects first since they tend to be less risky and then allocate the remaining funds to the Division A projects that have the highest net present values. C. Allocate the company's funds to the projects with the highest net present values based on the firm's weighted average cost of capital D. Assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values. E. Fund the highest net present value projects from each division based on an allocation of 70 percent of the funds to Division A and 30 percent of the funds to Division B. The MNO stock has annual net income of $8000. Other stocks with similar risk and growth prospects sell at 22 times camnings per share (but several stocks with lower growth prospects and greater risk sell at 20 times income, and several other stocks with less risk and greater growth prospects have P/e ratios of 30). What is the value of MNO? A. S240,000 B. $192,000 C. $176,000 D. $160,000 E. 58000 A company with earnings that are currently negative (i.c., a net loss as reported income on the bottom line) A. Is worthless B. Has a negative value (i.c., stockholders must pay for the losses) C. Is worth the present value of all future dividends that are expected and that are paid out of future carnings and shareholders' claim on capital). D. Is worth an infinite amount of money if the dividend growth model indicates that its income will grow very fast E. Is worth whatever management says it is

Answer 1

1.
Option D
We need to first consider risk and find the risk adjusted discount rate and then fund the highest net presenet values

2.
Option C
=Net Income*PE
=8000*22
=176000

3.
Option C
Value is equal to present value of all dividends in future