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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

PV OF A CASH FLOW STREAM A rookie quarterback is negotiating his first NFL contract.His opportunity cost is 10%. He has been offered three possible 4-year contracts. Payments are guaranteed, and they
EVALUATING LUMP SUMS AND ANNUITIES Crissie just won the lottery, and she must choose among three award options. She can elect to receive a lump sum today of $61 million, to receive 10 end-of-year
LOAN AMORTIZATION Jan sold her house on December 31 and took a $10,000 mortgage as part of the payment. The 10-year mortgage has a 10% nominal interest rate, but it calls for semiannual payments
FUTURE VALUE FOR VARIOUS COMPOUNDING PERIODS Find the amount to which $500 will grow under each of these conditions:a. 12% compounded annually for 5 yearsb. 12% compounded semiannually for 5 yearsc.
PRESENT VALUE FOR VARIOUS DISCOUNTING PERIODS Find the present value of $500 due in the future under each of these conditions:a. 12% nominal rate, semiannual compounding, discounted back 5 yearsb.
FUTURE VALUE OF AN ANNUITY Find the future values of the following ordinary annuities:a. FV of $400 paid each 6 months for 5 years at a nominal rate of 12% compounded semiannuallyb. FV of $200 paid
PV AND LOAN ELIGIBILITY You have saved $4,000 for a down payment on a new car. The largest monthly payment you can afford is $350. The loan will have a 12% APR based on end-of-month payments. What is
EFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3 5% compounded daily.a. Based on the EAR (or EFF ), which bank should you use?b.
NOMINAL INTEREST RATE AND EXTENDING CREDIT As a jewelry store manager, you want to offer credit, with interest on outstanding balances paid monthly. To carry receivables, you must borrow funds from
REACHING A FINANCIAL GOAL Erika andKitty,who are twins, just received $30,000 each for their 25th birthday. They both have aspirations to become millionaires. Each plans to make a$5,000 annual
REQUIRED LUMP SUM PAYMENT Starting next year, you will need $10,000 annually for 4 years to complete your education. (One year from today you will withdraw the first$10,000.) Your uncle deposits an
REACHING A FINANCIAL GOAL Six years fromtoday you need $10,000. You plan to deposit$1,500 annually, with the first payment to bemade a year fromtoday, in an account that pays an 8% effective annual
FV OF UNEVEN CASH FLOW Youwant to buy a housewithin 3 years, and you are currently saving for the down payment. You plan to save $5,000 at the end of the first year, and you anticipate that your
AMORTIZATION SCHEDULEa. Set up an amortization schedule for a $25,000 loan to be repaid in equal installments at the end of each of the next 3 years. The interest rate is 10% compounded annually.b.
AMORTIZATION SCHEDULE WITH A BALLOON PAYMENT You want to buy a house that costs $100,000. You have $10,000 for a down payment, but your credit is such that mortgage companies will not lend you the
NONANNUAL COMPOUNDINGa. You plan to make five deposits of $1,000 each, one every 6 months, with the first payment beingmade in 6months. Youwill thenmake nomore deposits. If the bank pays 4%nominal
PAYING OFF CREDIT CARDS Simon recently received a credit card with an 18% nominal interest rate. With the card, he purchased an Apple iPhone 5 for $372 71. The minimum payment on the card is only $10
PV AND A LAWSUIT SETTLEMENT It is nowDecember 31, 2013 t 0 , anda jury just found in favor of a woman who sued the city for injuries sustained in a January 2012 accident. She requested recovery of
REQUIRED ANNUITY PAYMENTS Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the
REQUIRED ANNUITY PAYMENTS A father is now planning a savings program to put his daughter through college. She is 13, plans to enroll at the university in 5 years, and should graduate 4 years
TIME VALUE OF MONEY Answer the following questions:a. Assuming a rate of 10% annually, find the FV of $1,000 after 5 years.b. What is the investment’s FV at rates of 0%, 5%, and 20% after 0, 1, 2,
What effective annual rate does each bank pay? If you deposit $5,000 in each bank today, how much will you have in each bank at the end of 1 year? 2 years? 2. If all of the banks are insured by the
Differentiate between dollar return and rate of return.AppendixLO1
Why is the rate of return superior to the dollar return in terms of accounting for the size of investment and the timing of cash flows?AppendixLO1
What does "investment risk" mean?AppendixLO1
Set up an illustrative probability distribution for an investment.AppendixLO1
What is a payoff matrix?AppendixLO1
Which of the two stocks graphed in Figure 5-2 is less risky? Why?AppendixLO1
How does one calculate the standard deviation?AppendixLO1
Which is a better measure of risk if assets have different expected returns: (1) the standard deviation or (2) the coefficient of variation? Why?AppendixLO1
Explain the following statement: "Most investors are risk averse."How does risk aversion affect rates of return?AppendixLO1
Explain the following statement: "An asset held as part of a portfolio is generally less risky than the same asset held in isolation."AppendixLO1
What is meant by perfect positive correlation, perfect negative correlation, and zero correlation!AppendixLO1
In general, can the riskiness of a portfolio be reduced to zero by increasing the number of stocks in the portfolio? Explain.AppendixLO1
What is an average-risk stock? What will be its beta?AppendixLO1
Why is beta the theoretically correct measure of a stock's riskiness?AppendixLO1
If you plotted the returns on a particular stock versus those on the Dow Jones Index over the past five years, what would the slope of the regression line you obtained indicate about the stock's
Differentiate among the expected rate of return (k), the required rate of return(k), and the realized, after-the-fact return (k) on a stock. Which would have to be Larger to get you to buy the stock,
What are the differences between the relative volatility graph (Figure 5-9), where"betas are made," and the SML graph (Figure 5-10), where "betas are used"? Discuss both how the graphs are
What happens to the SML graph in Figure 5-10 when inflation increases or decreases?AppendixLO1
What happens to the SML graph when risk aversion increases or decreases?AppendixLO1
What would the SML look like if investors were indifferent to risk, that is, if they had zero risk aversion?AppendixLO1
How can a firm influence its market risk as reflected in its beta?AppendixLO1
Explain the following statement: "The stand-alone risk of an individual project may be quite high, but viewed in the context of a project's effect on stockholders'risk, the project's true risk may
How would the correlation between returns on a project and returns on the firm's other assets affect the project's risk?AppendixLO1
Are there any reasons to question the validity of the CAPM? Explain.AppendixLO1
Does earnings volatility necessarily imply risk? Explain.AppendixLO1
Why is stock price volatility more likely to imply risk than earnings volatility?AppendixLO1
The probability distribution of a less risk)' expected return is more peaked than that of a riskier return. What shape would the probability distribution have for (a) completely certain returns and
Security A has an expected return of 7 percent, a standard deviation of expected returns of 35 percent, a correlation coefficient with the market of —0.3, and a beta coefficient of —0.5. Security
Suppose you owned a portfolio consisting of S250,000 worth of long-term U.S. government bonds.a. Would your portfolio be riskless?b. Xow suppose you hold a portfolio consisting of S250.000 worth of
A life insurance policy is a financial asset. The premiums paid represent the investments cost.a. How would you calculate the expected return on a life insurance policy?b. Suppose the owner of a life
If investors' aversion to risk increased, would the risk premium on a high-beta stock increase more or less than that on a low-beta stock? Explain.AppendixLO1
If a companv's beta were to double, would its expected return double?AppendixLO1
Is it possible to construct a portfolio of stocks that has an expected return equal to the riskfree rate?AppendixLO1
A stock had a 12 percent return last year, a year in which the overall stock market declined in value. Does this mean that the stock has a negative beta?AppendixLO1
Differentiate between working capital and net working capital.AppendixL01
Differentiate between net working capital and net operating working capital.AppendixL01
Identify and explain three alternative current asset investment policies.AppendixL01
Use the DuPont equation to show how working capital policy affects a firm’s expected ROE.AppendixL01
Differentiate between permanent current assets and temporary current assets.AppendixL01
Define the following terms: inventory conversion period, average collection period, and payables deferral period. Explain how these terms are used to form the cash conversion cycle.AppendixL01
How would a reduction in the cash conversion cycle increase profitability?AppendixL01
What are some actions a firm can take to shorten its cash conversion cycle?AppendixL01
Suppose a firm’s cash flows do not occur uniformly throughout the month.What effect would this have on the accuracy of the forecasted borrowing requirements based on a monthly cash budget? How
What two definitions of cash are commonly encountered?AppendixL01
Differentiate between marketable securities held for operating (transactions)purposes and securities held for other reasons.AppendixL01
How has the development of credit and debit cards affected firms’ currency holdings?AppendixL01
How would the use of credit cards affect a firm’s cash conversion cycle assuming it previously allowed customers 30 days to pay for their purchases?AppendixL01
How does a firm’s ability toborrowaffect its optimal holdings of cash and securities?AppendixL01
Common stocks that are traded on the NYSE are liquid in the sense that they can be sold and converted to cash on short notice. Are stocks a good choice for a firm’s marketable securities portfolio?
What are the three primary tasks of the financial manager regarding inventory management?AppendixL01
What are the four credit policy variables?AppendixL01
Define days sales outstanding (DSO). What can be learned from it, and how is it affected by seasonal sales fluctuations?AppendixL01
What is credit quality, and how is it assessed?AppendixL01
How does collection policy influence sales, the collection period, and the bad debt loss percentage?AppendixL01
How can cash discounts be used to influence sales volume and the DSO?AppendixL01
How do legal considerations affect a firm’s credit policy?AppendixL01
What is trade credit?AppendixL01
What is the difference between free trade credit and costly trade credit? What is the formula for finding the nominal annual cost of trade credit? Does the nominal cost of trade credit understate the
What is a promissory note, and what terms are normally included in promissory notes?AppendixL01
What is a line of credit? A revolving credit agreement?AppendixL01
What’s the difference between simple interest and add-on interest as bankers use these terms?AppendixL01
If a firm borrowed $500,000 at a rate of 10% simple interest with monthly interest payments and a 365-day year, what would be the required interest payment for a 30-day month? If interest must be
If this loan had been made on a 10% add-on basis payable in 12 end-of-month installments, what would be the monthly payments? What is the annual percentage rate? The effective annual rate?
How does the cost of costly trade credit generally compare with the cost of short-term bank loans?AppendixL01
What is commercial paper?AppendixL01
What types of companies use commercial paper to meet their short-term financing needs?AppendixL01
What types of short-term credit are classified as accrued liabilities?AppendixL01
What is the cost of accrued liabilities? If accruals have such a low cost, why don’t firms use them even more?AppendixL01
From the borrower’s standpoint, what are the advantages and disadvantages of securing a loan?AppendixL01
What two types of current assets are frequently used as security for short-term loans?AppendixL01
How could borrowers take advantage of lenders if UCC-1s did not exist?AppendixL01
KEY TERMS Define each of the following terms:a. Working capital; net working capital; net operating working capitalb. Relaxed investment policy; restricted investment policy; moderate investment
CURRENT ASSETS INVESTMENT POLICY Calgary Company is thinking of modifying its current assets investment policy. Fixed assets are $600,000, sales are projected at $3 million, the EBIT/Sales ratio is
CURRENT ASSETS FINANCING Vanderheiden Press Inc. and Herrenhouse Publishing Company had the following balance sheets as of December 31, 2014 (thousands of dollars):Vanderheiden Press Herrenhouse
What are some pros and cons of holding high levels of current assets in relation to sales?Use the DuPont equation to help explain your answer.AppendixL01
Define the cash conversion cycle (CCC) and explain why, holding other things constant, a firm’s profitability would increase if it lowered its CCC.AppendixL01
What are the two definitions of cash, and why do corporate treasurers often use the second definition?AppendixL01
What is a cash budget, and how can this statement be used to help reduce the amount of cash that a firm needs to carry? What are the advantages and disadvantages of daily over monthly cash budgets,

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