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2012 April

Discussion in 'CB1' started by Robert, Aug 19, 2019.

  1. Robert

    Robert Very Active Member

    2012 April

    No 5

    Which of the following best supports the assertion that the payment of a dividend signals confidence on the part of the directors?

    A. The dividend is paid out of past profits that have actually been earned.

    B. The directors are keen to receive dividends from their own shareholdings.

    C. The directors have to find the cash with which to pay the dividend.

    D. The shareholders will react badly to the non-payment of a dividend.

    Can I know why the answer is C ?

    No 6

    The net present value criterion is generally claimed to provide the most consistent and relevant basis for the selection of investment projects.

    Which of the following situations creates the greatest threat to the validity of evaluating projects using net present value in practice?

    A. Net present value ignores risk.

    B. Shareholders may disagree with the results of a net present value calculation.

    C. The calculation of net present value can lead to two solutions.

    D. Managers may wish to undertake the project for selfish reasons and could manipulate the analysis.

    Can I know why the answer is D ? why the answer cannot be C?

    No 11
    “If the company retains earnings then, in theory, the share price will rise.” Why is this so ?
     
    Robert, Aug 19, 2019
    #1
  2. Lynn Birchall

    Lynn Birchall ActEd Tutor Staff Member

    Hi

    Short replies, but hopefully enough to answer your questions:
    5 : Because paying out cash indicates that the directors are confident they won't need that cash in future. For example, they may be confident they can replace it by future business success.
    6 : By definition NPV can't have 2 solutions - you'll come up with a single discounted value of the future cashflows. IRR is the method that can lead to two solutions.
    11 : Retained earnings can be reinvested in the business to grow future profits. Expectations of higher future profits should lead to higher share price.

    Best wishes
    Lynn
     
    Lynn Birchall, Aug 21, 2019
    #2
    Divas Thareja likes this.

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