WGU Updated Financial-Management Exam Questions and Answers by eddison

The internal rate of return (IRR) represents the discount rate at which a project’s net present value (NPV) equals zero. Financial management theory states that a project should be accepted if its IRR exceeds the firm’s required rate of return (or hurdle rate), assuming conventional cash flows and no capital rationing.

In this scenario, the hospital has a minimum required return of 11% and sufficient capital to undertake all acceptable projects. Based on the provided IRR calculations, both Project A and Project B have IRRs exceeding 11%, making them financially acceptable under the IRR decision rule. Because there is no capital constraint and the investment horizon is sufficient, the hospital should accept both projects.

Financial management texts caution that IRR can sometimes produce misleading rankings when projects differ significantly in scale or timing. However, when evaluating independent projects with acceptable IRRs, the correct decision is to accept all projects that meet or exceed the required return. Option B correctly reflects this principle.

The Gordon growth model values a stock assuming dividends grow at a constant rate indefinitely. The formula is:

Stock Value = D₁ ÷ (r − g),

where D₁ is the expected dividend next year, r is the required rate of return, and g is the growth rate. Substituting the values:

$2 ÷ (0.10 − 0.05) = $2 ÷ 0.05 = $40.

This model is widely used in valuation for mature companies with stable dividend growth. It highlights the sensitivity of stock value to growth expectations and required returns. Option C correctly applies the Gordon growth model formula.