Question: Why would the owners of a business

> If the expected return on the market is 10 percent and the risk-free rate is 4 percent, what is the expected return for a stock with a beta equal to 1.5? What is the market risk premium?

> When are the nominal and real interest rates equal?

> David is going to purchase two stocks to form the initial holdings in his portfolio. Iron stock has an expected return of 15 percent, while Copper stock has an expected return of 20 percent. If David plans to invest 30 percent of his funds in Iron and th

> Explain why profit maximization is not the best goal for a company. What is a better goal?

> The market risk premium is 6 percent, and the risk-free rate is 5 percent. If the expected return on a bond is 6.5 percent, what is its beta?

> In February 2017 the risk free rate was 2.97 percent, the market risk premium was 6 percent and the beta for Twitter stock was 0.99. What is the expected return that was consistent with the systematic risk associated with the returns on Twitter stock?

> Refer to the information given in Problem 3.21. What is the cash flow from operating activity for Nimitz Rental? Refer to information given in problem 3.21: Nimitz Rental Company provided the following information to its auditors. For the year ended Mar

> Zephyr Sales Company has sales of $1.125 million. If the company’s management expects sales to grow 6.5 percent annually, how long will it be before sales doubles? Use a financial calculator to solve this problem.

> What are the two risk-hedging instruments discussed in the chapter?

> What are the major differences between public and private markets?

> Define average tax rate and marginal tax rate?

> Del Bridge Construction had long-term assets before depreciation of $990,560 on December 31, 2016 and $1,211,105 on December 31, 2017. How much cash flow was invested in long-term assets for Del Bridge during 2017?

> Hillman Corporation reported current assets of $3,495,055 for the year ending December 31, 2017 and current assets of $3,103,839 on December 31, 2016. Current liabilities for the firm were $2,867,225 and $2,760,124 at the end of 2017 and 2016 respective

> What does a competitive financial system imply about interest rates?

> What is treasury stock? Why do firms have treasury stock?

> Given the data for Oakland Mills Company in problem 3.7 above, compute the cash flows to investors from operating activity? Refer to data in problem 3.7: The Oakland Mills Company has disclosed the following financial information in its annual reports f

> How do capital market instruments differ from money market instruments?

> What are the main types of securities in the money markets?

> What is the relevant tax rate to use when making financial decisions? Explain why.

> What is the main difference between money markets and capital markets?

> Which financial institution is usually the most important to businesses?

> How do financial institutions act as intermediaries to provide services to small businesses?

> What are some of the ways in which a financial institution or intermediary can raise money?

> Cranjet Inc. is issuing 10,000 bonds, and its investment banker has guaranteed a price of $985 per bond. If the investment banker sells the entire issue to investors for $10,150,000. a. What is the underwriting spread for this issue? b. What is the perc

> List the ways a company’s financial manager can benchmark the company’s own performance?

> Why were commercial banks prohibited from engaging in investment banking activities until 1999?

> What is the role of the financial system, and what are the two major components of the financial system?

> What are the common forms of business organization discussed in this chapter?

> What are some of the working capital decisions that a financial manager faces?

> What three major decisions are of most concern to financial managers?

> Explain the difference between profitable and unprofitable firms?

> What are some of the regulations that pertain to boards of directors that were put in place to reduce agency conflicts?

> What can happen if a firm is poorly managed and its stock price falls substantially below its maximum potential price?

> What is net working capital?

> What are the major factors that affect a firm’s stock price?

> What are some of the drawbacks to setting profit maximization as the main goal of a company?

> An investor holds a 10-year bond paying a coupon rate of 9 percent. The yield to maturity of the bond is 7.8 percent. Would you expect the investor to be holding a par-value, premium, or discount bond? What if the yield to maturity were 10.2 percent? Exp

> What is the form of business organization taken by most large companies and why?

> What is double taxation?

> Explain what is meant by stockholders’ limited liability?

> Who are the owners in a corporation, and how is their ownership represented?

> What are the two basic sources of funds for all businesses?

> In recent years, investors have agreed that the market portfolio consists of more than just a group of U.S. stocks and bonds. If you are an investor who invests in only U.S. stocks and bonds, describe the effects on the risk in your portfolio?

> You are concerned about one of the investments in your fully diversified portfolio. You just have an uneasy feeling about the CFO, Iam Shifty, of that particular firm. You do believe, however, that the firm makes a good product and that it is appropriate

> What is the statement of cash flows, and what is its role?

> Explain why firms prefer to use accelerated depreciation methods over the straight-line method for tax purposes?

> Why are taxes and the tax code important for managerial decision making?

> Explain what you would assume the yield curve would look like during economic expansion and why?

> What are two basic services that investment banks provide in the economy?

> Suppose that a group of accountants wants to start an accounting business. What organizational form would they most likely choose, and why?

> What is the difference between stockholders and stakeholders?

> Why don’t small businesses make greater use of the direct credit markets since these markets enable firms to finance their activities at a very low cost?

> What does it mean when a company’s return on assets (ROA) is equal to its return on equity (ROE)?

> Define book-value accounting and market-value accounting?

> Explain why total financial assets in the economy must equal total financial liabilities?

> If interest rates are expected to increase, should investors look to long-term bonds or short-term securities? Explain.

> What economic conditions would prompt investors to take advantage of a bond’s convertibility feature?

> Explain why bond prices and interest rates are negatively related. What are the roles of the coupon rate and the termtomaturity in this relation?

> When will the annual percentage rate (APR) be the same as the effective annual rate (EAR)?

> Which of the following investments will have the highest future value at the end of three years? Assume that the effective annual rate for all investments is the same. a. You earn $3,000 at the end of three years (a total of one payment). b. You earn $1,

> Raymond Bartz is trying to choose between two equally risky annuities, each paying $5,000 per year for five years. One is an ordinary annuity, the other is an annuity due. Which of the following statements is most correct? a. The present value of the ord

> Define annuity due. Would an investment be worth more if it were an ordinary annuity or an annuity due? Explain?

> What is the difference between a perpetuity and an annuity?

> What is the key economic principle involved in calculating the present value or future value of multiple cash flows?

> If you were given a choice between investing in a savings account that paid quarterly interest and one that paid monthly interest, which one should you choose if they both offered the same stated interest rate and why?

> Explain the difference between future value and present value?

> What are the two factors to be considered in time value of money?

> Why is ROE generally much higher than ROA for banks relative to other industries?

> Define interest rate risk. How can the CFOs manage this risk?

> How would one explain a low receivables turnover ratio?

> CSB, Inc., has a beta of 1.35. If the expected market return is 14.5 percent and the risk-free rate is 5.5 percent, what is the appropriate required return of CSB (using the CAPM)?

> How does the business cycle affect the nominal interest rate and inflation rate?

> The going concern assumption of GAAP implies that the firm: a. Is going under and needs to be liquidated at historical cost. b. Will continue to operate and its assets should be recorded at historical cost. c. Will continue to operate and that all assets

> What are over-the-counter markets (OTCs), and how do they differ from organized exchanges?

> Explain what the marketability of a security is and how it is determined?

> Depreciation and amortization expenses are: a. Part of current assets on the balance sheet. b. After-tax expenses that reduce a firm’s cash flows. c. Long-term liabilities that reduce a firm’s net worth. d. Noncash expenses that cause a firm’s after-tax

> What are typically the main components of an executive compensation package?

> Which one of the following characteristics does not pertain to corporations? a. Can enter into contracts. b. Can borrow money. c. Are the easiest type of business to form. d. Can be sued. e. Can own stock in other companies.

> What are some of the things that managers do to manage a firm’s working capital?

> Define yield to maturity. Why is it important?

> What is the appropriate decision criterion for financial managers to use when selecting a capital project?

> Economic units that need to borrow money are said to be: a. Lender–savers b. Borrower–spenders c. Balanced budget keepers. d. None of the above.

> What are default risk premiums, and what do they measure?

> What are the key factors that most affect the level and shape of the yield curve?

> Describe the three most prominent bond rating systems?

> Explain why long-term bonds with zero coupons are riskier than short-term bonds that pay coupon interest?

> What is interest rate risk?

> Explain how bond yields are calculated?

> Explain conceptually how bonds are priced?

> What are zero coupon bonds, and how are they priced?

> We know that a vanilla bond with a coupon rate below the market rate of interest will sell for a discount and that a vanilla bond with a coupon rate above the market rate of interest will sell for a premium. What kind of bond or loan will sell at its par

> A bond has a 7 percent coupon rate, a face value of $1,000, and a maturity of four years. On a time line, lay out the cash flows for the bond?

> What are the main differences between the corporate bond markets and stock markets?

> If an asset’s expected return does not plot on the line in question 2 above, what does that imply about its price?

> How is the expected return on an asset related to its systematic risk?

> Why are returns on the stock market used as a benchmark in measuring systematic risk?

> Why does the total risk of a portfolio not approach zero as the number of assets in a portfolio becomes very large?

> What does the coefficient of variation tell us, and how is it related to the Sharpe Ratio?

> What is the correct way to annualize an interest rate in financial decision making?

> What is the APR, and why are lending institutions required to disclose this rate?