Table 12.3 Tangshan Mining Company Is Considering Investment in One of Two

question 52

Multiple Choice

Table 12.3
Tangshan Mining Company is considering investment in one of two mutually exclusive projects M and N which are described below. Tangshan Mining's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Tangshan estimates that the beta for project M is 1.20 and the beta for project N is 1.40.
-Using the risk-adjusted discount rate method of project evaluation, the better investment for Tangshan Mining is ________. (See Table 12.3)

• A) Project M because it has a higher NPV
• B) Project N because it has a higher NPV
• C) Project N because it has a higher IRR
• D) Project M because it has a higher IRR

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Definitions:

Retention Ratio

The percentage of net income that is retained by a company rather than distributed to its shareholders as dividends.

Quarterly Earnings

A corporation's earnings reported on a quarterly basis, giving investors and analysts an interim view of financial performance and profitability.

Stock Split

A company strategy to divide its existing shares into a larger number of shares to enhance the liquidity of the shares.

Market Price

The now prevailing cost at which one can buy or sell an asset or service.