Suppose the Firm's Required Rate of Return Is Stated in Nominal

question 16

Multiple Choice

Suppose the firm's required rate of return is stated in nominal terms, but the project's expected cash flows are expressed in real rands.In this situation, other things held constant, the calculated NPV would

• A) Be correct.
• B) Be biased downward.
• C) Be biased upward.
• D) Possibly have a bias, but it could be upward or downward.
• E) More information is needed; otherwise, we can make no reasonable statement.

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Definitions:

Coupon Rate

Yearly interest earnings from a bond, shown as a percentage of its face value.

Par Value

A nominal value assigned to a share of stock as indicated in the corporate charter, not necessarily reflecting its market value.

Yield

The income return on an investment, such as the interest or dividends received, expressed annually as a percentage based on the investment's cost, its current market value, or its face value.

Quoted Price

The last price at which a security or commodity traded, often used as a reference to gauge market value.