You Are Considering an Investment with the Following Cash Flows

question 3

Multiple Choice

You are considering an investment with the following cash flows. If the required rate of return for this investment is 15.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not?

• A)Yes; The IRR exceeds the required return.
• B)Yes; The IRR is less than the required return.
• C)No; The IRR is less than the required return.
• D)No; The IRR exceeds the required return.
• E)You cannot apply the IRR rule in this case.

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Definitions:

Conversion Value

The worth of a convertible security if it is converted into a different asset, usually common stock, at the current market price.

Convertible Bond

A type of bond that can be converted into a predetermined amount of the issuing company's equity at certain times during the bond's life, usually at the discretion of the bondholder.

Common Stock

Equity ownership in a corporation, with voting rights and potential for dividends, representing a claim on part of the company’s earnings and assets.

Conversion Ratio

The specified number of shares that can be exchanged for one unit of the convertible security.