Questions and Answers of Foundations of Finance

Suppose that we want to estimate the value of a 1-day float reduction for Starbucks Corporation (SBUX). Starbucks’ 2014 sales revenues were reported at $16.448 billion. Let’s assume that prudent
Nikora Ltd., based in Georgia, produces meat and milk products. The company sold old machinery for 100,000 Georgian Lari (GEL) and decided to put this amount in a term deposit, which usually pays 10
Nadja from Austria wants to make a single investment and have $100,000 after her graduation in 5 years. She did found a microfinance organization that offered her 15 percent per annum; however, Nadja
In September 1963, the first issue of the comic book X-MEN was issued. The original price for that issue was $0.12. By September 2016, 53 years later, the value of the near-mint copy of this comic
Maria wants to buy an apartment in the city center after her graduation in 4 years. An apartment costs $20,000 and the price is expected to increase by 4 percent each year. Maria wants to sell her
Anurag wants to earn $500,000 in 15 years by making equal semi-annual deposits. The bank will pay an interest of 10 percent annually. What must Anurag’s semi-annual deposit be?
A construction company called Alians Group is considering buying new machinery for one of its projects. Leasing Company, which deals in heavy machinery, owns that particular equipment and is looking
Pension fund offers two types of plans for retirement, which is 25 years away. Plan 1 requires you to have a deposit of $1,000 each year during the first 10 years—a total of $10,000, after which
Hotel Victoria purchased a new building for $150,000 in Brisbane, Australia. It paid $25,000 down and agreed to sign a leasing contract with a bank for the next 10 years in 10 equal end-of-year
Nina is planning to pay $50,000 for her master’s degree 4 years from today. She wants to accumulate these funds through semi-annual equal savings in a bank that offers 10 percent annual interest
Maria wants to sponsor her son for high school. She plans to withdraw $2,000 at the beginning of each year for 10 years, from a special account that will pay 12 percent annually. In order to achieve
7 years ago Alfa Bank invested $1,000,000 at a 5 percent annual interest rate. If the bank invests an additional $20,000 a year for 15 years, at the beginning of each year, at a 5 percent annual
George is considering buying a new house and has to borrow $50,000 to pay for it. He plans to take a mortgage loan from a bank for 10 years, which requires monthly payments and the interest rate is
George Andronikashvili has a trade credit with balance of $6,000. George signed a special note, which enables him to pay 4 percent of the debt balance each month, which is $240. How many months
When we speak of “benefits” from investing in an asset, what do we mean?
Why is it difficult to measure future cash flows?
How is risk defined?
How does the standard deviation help us measure the riskiness of an investment?
Does greater risk imply a bad investment?
What is the additional compensation for assuming greater risk called?
In Figure 6-2, which rate of return is the risk-free rate? Why? FIGURE 6-2 Historical Rates of Return Securities Small- company stocks Large- company stocks Intermediate-term government bonds
Give specific examples of systematic and unsystematic risk. How many different securities must be owned to essentially diversify away unsystematic risk?
What method is used to measure a firm’s market risk?
After reviewing Figure 6-5, explain the difference between the plotted dots and the firm’s characteristic line. What must be done to eliminate the variations? FIGURE 6-5 Monthly Holding-Period
How does opportunity cost affect an investor’s required rate of return?
What are the two components of the investor’s required rate of return?
How does beta affect the risk premium in the CAPM equation?
Assuming the market is efficient, what is the relationship between a stock’s price and the security market line?
You are considering two investments, X and Y. The distributions of possible returns are shown below:Compute the expected return and standard deviation for each investment. Would you have a preference
Given the following price data for PepsiCo and the S&P 500 Index, compare the returns and the volatility of the returns, and estimate the relationship of the returns for PepsiCo and the S&P
What is the beta of a portfolio if funds are allocated equally between two securities listed in London Stock Exchange (LSE) and Shanghai Stock Exchange (SSE)?
Differentiate between realized and expected returns.
Donna, a chartered financial analyst (CFA), is willing to invest in the Alternative Investments Market (AIM) in the United Kingdom. She collected the information on two different companies (provided
Go to www.moneychimp.com. Select the link Volatility. Complete the retirement planning calculator, making the assumptions that you believe are appropriate for you. Then go to the Monte Carlo
The expected dividends on Estate Lancaster plc. share is £0.17 (around $0.26) in 1 year. Assume you hold this share for a year. Calculate the holding-period dollar gain and return on the share if
Visit the Financial Times Web site and refer to the article “A step-by-step guide to asset allocation” to apply the six main steps on asset allocation on a portfolio of shares of your choice
You are provided data on three companies listed in Alternative Investments Market (AIM) in the United Kingdom. Assume the risk-free rate and the market index return is 3 percent and 5 percent,
The data shared below is extracted from Financial Times website on the betas of four companies listed in the FTSE 100 market index in the UK namely Vodafone, Tesco, British Petroleum, and British
The beta on Marks & Spencer Group plc. as on 19 October, 2015, is 0.9392. Assume that the return on U.K. Treasury bills is 1.94 percent and that the return on FTSE All Share market index is 5
Why do intrinsic and market values vary? At what circumstance they might be equal?
What is the difference between the required and expected rates of return of a common stock?
How do debentures, subordinated debentures, and mortgage bonds differ with regard to their risk? How would investors respond to the varying types of risk?
How is a Eurobond different from a bond issued in Asia that is denominated in dollars?
Why would a convertible bond increase much more in value than a bond that is not convertible?
What are some important features of a bond? Which features determine the cash flows associated with a bond?
What restrictions are typically included in an indenture in order to protect the bondholder?
How does the bond rating affect an investor’s required rate of return? What actions could a firm take to receive a more favorable rating?
Explain the different types of value.
Why should the market value equal the intrinsic value?
What are the three important elements of asset valuation?
What two factors determine an investor’s required rate of return?
How does the required rate of return affect a bond’s value?
What assumption is being made about the length of time a bond is held when computing the yield to maturity?
What does the current yield tell us?
How are the yield to maturity and the current yield different?
Why does a bond sell at a discount when the coupon rate is lower than the required rate of return and vice versa?
As interest rates increase, why does the price of a long-term bond decrease more than that of a short-term bond?
In December 2010, Alpha Technologies Plc. issued coupon bonds with par value £100. The coupon rate is 8 percent annually and the bonds will be redeemed at par value in December 2015. What is the
ITB Plc. has recently issued three alternative coupon bonds with different times to maturity.a. Calculate the market price of each bond, assuming a yield to maturity of 8 percent (face value 5
Nissan issued 20-year bonds with annual coupon rate 8 percent redeemed at par ($1,000). If the current market price of Nissan bonds is $945, what is the yield to maturity?
Assume that Barclays Plc. issued coupon bonds with fixed coupon rate 5 percent redeemed at par (£100) in 5 years. What is the price of Barclays bonds if the market interest rate is 5 percent? What
Alph Plc.’s bonds mature at par in 10 years. The bonds pay annual coupon rate 9 percent. If the current market price of this bond is $1,320, what is the yield to maturity of Alpha’s bonds?
The market price of Energy Group Plc. bonds is currently $730. The bonds were issued several years ago with par value ($1,000) and mature in 7 years. The company promises its bond holders to pay
What features of preferred stock are different from bonds?
What provisions are available to protect a preferred stockholder?
What cash flows associated with preferred stock are included in the valuation model equation (8-1)? Why is the valuation model simplified in equation (8-2)? D (1+rps) + D (1+rps) + D% (1 + rps)0 (8-1)
What features of common stock indicate ownership in the corporation versus preferred stock or bonds?
In what two ways does a shareholder benefit from ownership?
How does internal growth versus the infusion of new capital affect the original shareholders?
Describe the process for common stock valuation.
In computing the required rate of return for common stock, why should the growth factor be added to the dividend yield?
Explain the difference between a stockholder’s required and expected rates of return.
How does an efficient market affect the required and expected rates of return?
Deutsche Bank has several preferred stock issues outstanding. One issue, a 7.35 percent preferred stock, was sold at its par value of $25. The stock pays an annual dividend of $1.84. The firm has the
During 2014, Nike’s common stock had been selling for between $73 and $96. Most recently, it was selling at $90 per share. Its most recent earnings per share was $3.50, and the firm was expected to
In Example 8-1, we calculated the value of Deutsche Bank’s preferred stock, where the stock had a par value of $25 and a coupon dividend rate of 7.35 percent, which resulted in a $1.84 dividend. In
In Example 8-2, we valued Nike at $80, given your required rate of return of 15 percent. This answer was based on an anticipated growth rate of 13.6 percent. Also, the stock was expected to pay a
Define the required rate of return on common equity. How is it measured?
What is the difference between dividend yield and capital gain yield?
Queens Park Plc. issued preference shares with par value $100 and annual preferred dividend of 10 percent. What is the price of Queens Park Plc’ preference shares if the appropriate discount rate
Davis Plc. has in its share capital 100,000, $10 preferred shares paying 12 percent dividends. They are currently trading at $40 per share.a. Calculate the cost of preference shares.b. Calculate the
Midwest Energy Group issued preference shares (par value $10) that pay 8 percent dividend annually. If the company’s required rate of return is 15 percent, what is the value of one preference share?
The dividend policy of Scorpio Inc. has been recently changed to payout 40 percent of its earnings to shareholders. The company has just paid dividends of $3 per share.a. Calculate the growth rate of
Bristol Plc. has just paid a dividend of $1.5 per share per year. If the growth rate of dividends is 5 percent, calculate the value of one share if a company of this risk class is required to return
Candy Inc. issued preferred shares with par value of $100 and 5% annual preferred dividends. If the market price of Candy Inc is $35 per share,a. Calculate the cost of preference shares.b. Would you
Donna, a chartered financial analyst (CFA) wants to advise her client about investment in preference shares. The client needs to invest in either Queens Plc. or Royal Plc.’s preferred shares.
The current share price of Victoria Plc. is $49. The company has just paid a dividend of $2.5 per share. Dividends are expected to rise by 5 percent per year indefinitely. The company is in a higher
AC&H Group Plc. has just paid dividends of $2.75 per share. The expected growth rate of dividends is 7 percent annually and the current market price of AC&H is $90 per share. Calculate the cost of
HighTech Inc. was founded by Roger Mortimer last year. The company is developing a new technology that may enhance significantly the speed of the Internet. There has been a debate in the board of
How is an investor’s required rate of return related to an opportunity cost?
How do flotation costs impact the firm’s cost of capital?
Define the costs of debt, preferred equity, and common equity financing.
The cost of common equity financing is more difficult to estimate than the costs of debt and preferred equity. Explain why.
What is the dividend growth model, and how is it used to estimate the cost of common equity financing?
Describe the capital asset pricing model and how it can be used to estimate the cost of common equity financing.
What practical problems are encountered in using the CAPM to estimate common equity capital cost?
A firm’s capital structure and its target capital structure proportions are important determinants of a firm’s weighted average cost of capital. Explain.
Explain in words the calculation of a firm’s weighted average cost of capital. What exactly are we averaging, and what do the weights represent?
What are the implications for a firm’s capital investment decisions of using a companywide cost of capital when the firm has multiple operating divisions that have unique risk attributes and
If a firm has decided to move from a situation in which it uses a company-wide cost of capital to divisional costs of capital, what problems is it likely to encounter?

Showing 500 - 600 of 970