If the ROE on a New Investment Is Less Than

question 6

Multiple Choice

If the ROE on a new investment is less than the firm's required rate of return

• A) the investment increases the firm's value.
• B) the investment leaves the firm's value unchanged.
• C) the effect on the firm's value is unpredictable.
• D) the investment reduces the firm's value.

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Definitions:

Preferred Share

A class of ownership in a corporation with a higher claim on assets and earnings than common stock, often receiving dividends before common shareholders.

Discount Rate

The interest rate that the Federal Reserve charges commercial banks for loans, or a rate used in discounted cash flow analysis to determine the present value of future cash flows.

Compounded Semi-annually

Interest calculation method where the interest is added to the principal twice a year, leading to a growth in the amount at a faster rate than simple interest.

Compounded Quarterly

This term refers to the calculation and addition of interest to the principal sum of a deposit or loan on a quarterly basis.