What is a floating-rate bond?
> Marlin Manufacturing is considering whether to add new capacity to its production line with the addition of a $1 million assembly center. This purchase would result in an increase in earnings before interest and taxes of $400,000 per year. It would cost
> Looking back at Regardless of Your Major: Understanding the Role of the Cost of Capital on page 446, what should be the opportunity cost of funds in valuing the cash flows from the ownership of a McDonald’s franchise? How would you respond to your friend
> What are the basic sources of financing included in a firm’s capital structure? Specifically, what financing sources are excluded from the firm’s capital structure when calculating firm WACC?
> Describe the three-step process for estimating WACC.
> Figure 14.3 contains average yields to maturity for corporate bonds of differing maturities and default ratings. The yields are based on spreads to Treasury securities. Using the figure, what is the spread to Treasury for an A-rated corporate bond with a
> Explain the rationale given for the differences we observe in interest rates among countries discussed in Finance in a Flat World: Why Do Interest Rates Differ Among Countries? on page 468.
> What is a firm’s WACC?
> List and describe the types of real options often encountered in investment opportunities. Why is it important to identify real options as part of the risk analysis of new investments?
> What is the difference between accounting break-even and NPV break-even? Which will offer the higher break-even level of output, and why?
> Describe each of the five steps involved in carrying out a simulation analysis to assess project risk.
> Finance in a Flat World: Currency Risk on page 422 discussed the currency risk that multinational firms face. Between July 2008 and December 2009, the value of the yen relative to the U.S. dollar went up by about 17 percent, and as a result, when compani
> The Guo Chemical Corporation is considering the purchase of a chemical analysis machine. The purchase of this machine will result in an increase in earnings before interest and taxes of $70,000 per year. The machine has a purchase price of $250,000, and
> OTR Trucking runs a fleet of long-haul trucks and has recently expanded into the Midwest, where it has decided to build a maintenance facility. This project will require an initial cash outlay of $20 million and will generate annual cash inflows of $4.5
> How do you perform a sensitivity analysis of an investment proposal, and what is its purpose? Contrast the use of scenario analysis with that of simulation analysis.
> What is the objective of project risk analysis, and why is it critical to the investment decision-making process?
> Regardless of Your Major: Project Risk for Entrepreneurs on page 410 discussed the risks that entrepreneurs face, with about 40 percent of new businesses shutting their doors during their first year. If you had to pick a business to start, what would it
> What are sunk costs, and how should they be considered when evaluating an investment’s cash flows?
> Describe net operating working capital, and explain how changes in this quantity affect an investment proposal’s cash flows.
> If depreciation is not a cash flow item, why does it affect the level of cash flows from a project?
> Discuss how free cash flow differs from a firm’s operating cash flow.
> When a firm finances a new investment, it often borrows part of the money, so the interest and principal payments this creates are incremental to the project’s acceptance. Why are these expenditures not included in the project’s cash flow computation?
> New investments often require that the firm invest additional money in working capital. Give some examples of what this means.
> Corporate overhead expenses related to utilities and other corporate expenses are generally not relevant to the analysis of new investment opportunities. Why?
> You are considering adding new elliptical trainers to your firm’s product line of fitness equipment, and you feel you can sell 5,000 of these per year for five years (after which time this project is expected to shut down when it is learned that being fi
> In Regardless of Your Major: The Internet on Airline Flights—Making It Happen on page 374, we described an investment proposal involving the sale of internet services on airlines. How would you approach the problem of calculating the cash flows for such
> Throughout the examples in this chapter, we have assumed that the initial investment in working capital is later recaptured when the project ends. Is this a realistic assumption? Do firms always recover 100 percent of their investment in accounts receiva
> For years, GM treated each car brand as if it were a separate company, considering all new car sales as incremental sales. Critically evaluate this position.
> In Finance in a Flat World: Entering New Markets on page 390, we described the importance of thinking globally when making investments. Pick a new product that you have just learned about that is being sold domestically, and describe how the product migh
> When McDonald’s moved into India, it faced a particularly difficult task. The major religion in India is the Hindu religion, and Hindus don’t eat beef—in fact, most of the 1 billion people living in India are vegetarians. Still, McDonald’s ventured into
> Should anticipated inflation be incorporated into project cash flow forecasts? If so, how?
> What are opportunity costs, and how should they affect an investment’s cash flows? Give an example.
> Should overhead expense ever be considered when evaluating investment cash flows?
> As you saw in the introduction, the Toyota Prius took some of its sales away from other Toyota products. Toyota has also licensed its hybrid technology to Ford Motor Company, which allowed Ford to introduce a Ford Fusion hybrid in 2010 that traveled 39 m
> The opening vignette on page 301 described Google first going public in 2004. Prior to going public, did Google’s stock have a market price? What principles would go into determining the value of a company that hadn’t gone public yet?
> As part of its planning for the coming Christmas season, Criswell Motorsports is considering whether to expand its product line that currently consists of skateboards to include gaspowered skateboards. The company feels it can sell 2,000 of these per yea
> The market’s required yield on preferred stock is actually a promised rate of return. Explain this statement.
> Compare the methods for valuing preferred stock and common stock.
> In Finance for Life: Herd Mentality on page 303, we learned that it is common for investors to follow the investment lead of others. If they are all investing in dotcom firms or biotech firms, you might be swayed to jump on the bandwagon and do the same.
> Why would a preferred stockholder want to have the cumulative dividend feature?
> Because preferred stock dividends must be paid before common stock dividends, should preferred stock be considered a liability and appear on the right side of the balance sheet alongside of the firm’s long-term debt?
> Why is preferred stock referred to as a hybrid security?
> Regardless of Your Major: Getting Your Fair Share on page 302 focuses on the valuation of a new business venture. If you were faced with the need to value this business, what would you want to know about the business?
> What is the difference between the expected return and the promised or contractual yield to maturity on a bond?
> Distinguish among a bond’s coupon interest rate, current yield, and yield to maturity.
> Why does a bond’s par or face value differ from its market value?
> The Heritage Farm Implement Company is considering an investment that is expected to generate revenues of $3 million per year. The project will also involve annual cash expenses (including both fixed and variable costs) of $900,000, while increasing depr
> In Finance for Life: Adjustable-Rate Mortgages on page 263, we learned the difference between fixed- and adjustable-rate mortgages. Why would you ever want to use an adjustable-rate mortgage (ARM)?
> Describe the relationship between yield to maturity and the value of a bond.
> What is the difference between a bond’s clean price and its dirty price, and what does the saying “buy clean, pay dirty” mean?
> Distinguish between public and private corporate debt.
> In Finance in a Flat World: International Bonds on page 280, we learned about the bonds issued in financial markets outside of the United States. What are the potential benefits and costs of investing in foreign-issue bonds?
> How does inflation impact the rate of interest observed in financial markets?
> Is the price of a long-term (longer-maturity) bond more or less sensitive to changes in interest rates than that of a short-term bond? Why?
> Why does the market value of a bond differ from its par value when the coupon interest rate does not equal the market yield to maturity on a comparable-risk bond?
> Distinguish between the following: a. Debentures and mortgage bonds b. Eurobonds, zero-coupon bonds, and junk bonds c. Premium and discount bonds
> Killibrew Enterprises is considering a new project that is expected to generate added revenues $1,250,000 and incur added cash expenses (including both fixed and variable costs) of $650,000, while increasing depreciation by $200,000 per year. If the firm
> What does a bond rating reflect? Why is the rating important to the firm’s management?
> What is the equity risk premium, and how is it calculated?
> Describe the information contained in Figure 7.2, identifying which securities have performed the best over long periods of time. Some investors with long investment time horizons invest exclusively in bonds. Why do you think that is so? Figure 7.2:
> Describe the five-step process used to calculate the variance in the rate of return for an investment.
> Why is the volatility or variance in an investment’s rate of return a reasonable indication of the risk of the investment?
> Describe the concept of an expected rate of return as if you were explaining it to your 10-year-old niece.
> How does the expected rate of return concept differ from that of the realized rate of return?
> How do cash dividends affect the realized rate of return from investing in shares of common stock?
> Describe the concept of a realized rate of return as if you were explaining it to your grandfather, who has never had a finance class.
> What is the “behavioral view” of market efficiency?
> Visible Fences is introducing a new product and has an expected change in net operating income of $900,000. The company has a 34 percent marginal tax rate. This project will also produce $300,000 of depreciation per year. In addition, this project will c
> Compare and contrast the notions of weak-form, semi-strong-form, and strong-form market efficiency.
> What is the efficient markets hypothesis? Explain this concept in your own words.
> What is your tolerance for risk? Take the risk tolerance quiz referenced in Finance for Life: Determining Your Tolerance for Risk on page 206 and found at the website www.rce.rutgers.edu/money/riskquiz.
> Under what circumstances would you prefer to use the geometric average rate of return as opposed to the arithmetic average rate of return?
> What is the relationship between the geometric average rate of return and compound interest?
> What can you conclude about the relative risk of investing in the United States versus Japan from Figure 7.4? Figure 7.4: 50.00% | Compound annual rate of return | Standard Diviation 45.00% 40.00% Developed Markets Emerging Markets 35.00% 28.71% 3
> What does Figure 7.4 tell us about how the U.S. stock market has performed when compared to all the alternatives included in the figure over the period 1988–2015? Figure 7.4: 50.00% | Compound annual rate of return | Standard Divi
> In Regardless of Your Major: Using Statistics on page 194, we note that statisticians analyze data. Moreover, in your statistics class you learned how to describe random outcomes using statistical measures such as expected value and variance. How does ou
> How do you calculate the present value of an annuity? A perpetuity? A growing perpetuity?
> What is a level perpetuity? A growing perpetuity?
> Faraway Fabricators, Inc., is considering the expansion of its welding and stamping division and estimates that this will require the firm’s accounts receivable to increase by 12 percent of the added sales. Moreover, Faraway estimates t
> Distinguish between an ordinary annuity and an annuity due.
> Assume you bought a home and took out a 30-year mortgage on it 10 years ago. How would you determine how much principal on your mortgage you still have to pay off?
> What is the relationship between the present value interest factor (from Chapter 5) and the annuity present value interest factor (from Equation [6–2])?
> How do you calculate the future value of an annuity?
> What is an annuity? Give some examples of annuities.
> In the Payday Loans feature on page 129, we examined these short-term, high-interest loans. Go to the Responsible Lending Organization website at www. responsiblelending.org/payday-lending/. What are some of their concerns about payday and other small do
> Compare some of the different financial calculators that are available on the Internet. Look at Kiplinger Online calculators (www.kiplinger.com/tools/index.html), which include how much you need to retire, the value of boosting your 401(k) contributions
> How would an increase in the interest rate (i) or a decrease in the number of periods until the payment is received (n) affect the present value (PV) of a sum of money?
> How would an increase in the interest rate (i) or a decrease in the number of periods (n) affect the future value (FVn) of a sum of money?
> What is the relationship between the number of times interest is compounded per year on an investment and the future value of that investment? What is the relationship between the number of times compounding occurs per year and the EAR?
> Morten Food Products, Inc., is a regional manufacturer of salty food snacks. The firm competes directly with the national brands including Frito-Lay—but only in the southeastern part of the United States. Next year Morten expects total revenues of $300 m
> What is the time value of money? Give three examples of how the time value of money might take on importance in business decisions.
> What can we learn about a firm from its price-earnings ratio and market-to-book ratio?
> What is the DuPont system of financial statement analysis, and how is it applied to the analysis of a company’s return on equity?
> What are the two determinants of a firm’s operating return on assets?
> What are the differences among gross profit margin, operating profit margin, and net profit margin?
> What two ratios are typically used to measure how a firm has financed its assets (i.e., its capital structure)?
> What does the term liquidity mean in the context of a firm’s financial condition, and what financial ratios can the analyst use to assess liquidity?
> List and describe the five basic questions used to discuss financial statement analysis.
> What are common-size financial statements, how are they constructed, and why are they useful to the financial analyst?
> In Finance in a Flat World on page 105, we noted that differences in accounting standards around the world can influence financial ratios. Describe how differences in the way goodwill is treated in the United States versus Hong Kong might influence finan
> Determine the IRR to the nearest percent for the following projects: a. An initial outlay of $10,000 resulting in cash inflows of $2,000 at the end of Year 1, $5,000 at the end of Year 2, and $8,000 at the end of Year 3 b. An initial outlay of $10,000 re
