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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

1O-5A. (Calculating operating cashflows) Assume that a new project will annually generate revenues of $2,000,000 and cash expenses, including both fixed and variable costs, of $800,000, while
1O-2A. (Relevant cash flows) Captins' Cereal is considering introducing a variation of its current breakfast cereal, Crunch Stuff. This new cereal will be similar to the old with the exception that
IO-IA. (Capital gains tax) The J. Harris Corporation is considering selling one of its old assembly machines. The machine, purchased for $30,000 five years ago, had an expected life of 10 years and
10-9. When might two mutually exclusive projects having unequal lives be incomparable? Howısnould managers deal with this problem?ı
10-8. What causes the time disparity ranking problem? \Vhat reinvesonent rate assumptionsıare associated with the net present value and internal rate of return capital-budgeting criteria?ı
10-7. How should managers compare two mutually exclusive projects of unequal size? Wouldıyour approach change if capital rationing existed?ı
10-6. What are common reasons for capital rationing? Is capital rationing rational?ı
10-5. What are mutually exclusive projects? \Vhy might the existence of mutually exclusive projıects cause problems in the implementation of the discounted cash flow capital-budgeting
10-4. How do sunk costs affect the determination of cash flows associated with an invesonentıproposal?ı
10-3. If a project requires additional investment in working capital, how should this be treatedıin calculating cash flows?ı
10-2. If depreciation is not a cash flow item, why does it affect the level of cash flows from a projıect in any way?ı
10-1. Why do we focus on cash flows rather than.accounting profits in making our capitalıbudgeting decisions? \Vhy are we interested only in incremental cash flows rather than total cashıflows?ı
ST-4.BOND ARGILE TERATHON$1,000 (VALUE) $872 (VALUE)YEAR C, (t)(PV(C,» C, (t)(PV(C,»1 $ 80 $ 74 $ 65 $ 60 2 80 137 65 111 3 80 191 65 155 4 80 235 65 191 5 80 272 65 221 6 80 302 65 246 7 80 327 65
ST-3. $1,045 = 15 $70 1-1(1 + k) (1+) $1,000 (+) At 6%: $70 (9.712) +$1,000 (0.417) = $1,096.84 At 7%: Value must equal $1,000. Interpolation: $51.84 Expected rate of return: k = 6% + (1%) = 6.54%
ST-2. If interest is paid semiannually:14 $40 $1,000 Value (Vb) = L + -----'--1=l (1 + 0.05)1 (1 + 0.05/4 Thus,$40(9.899) = $395.96$1,000(0.505) = 505.00 Value (Vb) = $900.96 If interest is paid
ST-l.20 Value (V,) = ~ ~ + $1,000 b £.J 1 20 1=I (1.07) (1.07)Thus, present value of interest: $80 (10.594) = $ 847.52 present value of par value: $1,000 (0.258) = 258.00 Value (V) = $1,105.52 bIf
7-14B. (BOTld valuatiOTl) International, Inc., issues 20-year $1,000 bonds that pay $120 annually.The market price for the bonds is $1,250. Your required rate of return is 8 percent.a. What is the
7-12B. (Bondholder's expected return) Blake Company's $1,000 bonds pay 8 percent interest annually and have 25 years until maturity. You can purchase the bond for $915.a. What return do you expect to
7.:11B. (Bond valuation) Carl Corporation four-year $1,000 par bonds pay 12 percent interest.Your required rate of return is 9 percent. The current market price for the bond is $1,350.a. Determine
7-9B. (Bond valuation) Visador Corporation bonds pay $70 in annual interest, with a $1,000 par value. The bonds mature in 17 years. Your required rate of return is 8.5 percent.a. Calculate the value
7-8B. (Bondholder's expected return) Zebner Corporation's bonds mature in 14 years and pay 7 percent interest annually. If you purchase the bonds for $1,110, what is your expected rate of return?
7-7B. (Bond valuation) Arizona Public Utilities issued a bond that pays $80 in interest, with a$1,000 par value. It matures in 20 years. Your required rate of return is 7 percent.a. Calculate the
7-6B. (Bond valuntion) Fingen 14-year, $1,000 par value bonds pay 9 percent interest annually.The market price of the bonds is $1,100 and your required rate of return is 10 percent.a. Compute the
7-5B. (Bondholder's expected return) Hoyden Co.'s bonds mature in 15 years and pay 8 percent interest annually. Ifyou purchase the bonds for $1,175, what is your expected rate of return?
7-4B. (Bondholder's expected rate ofreturn) Doisneau 20-year bonds pay 10 percent interest annually on a $1,000 par value. If you buy the bonds at $975, what is your expected rate of :eturn?
7-3B. (Bondholder's expected return) A bond's market price is $950. It has a $1,000 par valJ.le, wi])mature in eight years, and pays 9 percent interest (4.5 percent semiannually). What is your
7-2B. (Bond valuation) Pybus, Inc., bonds have a 10 percent coupon rate. The interest is paid semiannually and the bonds mature in 11 years. Their par value is $1,000. If your required rate of return
7-1B. (Bond valuation) Calculate the value of a bond that matures in 10 years and has a $1,000 face value. The coupon interest rate is 9 percent and the investor's required rate of return is 15
Find a bond indenture or at least a sample bond indenturt online and list at least three rights of the bondholders and three rights of the issuing firm.
7-14A. (Bond valuation) Stanley, Inc. issues IS-year $1,000 bonds that pay $85 annually. The market price for the bonds is $960. Your required rate of return is 9 percent.a. What is the value of the
7-12A. (Bondholder's expected retu17l) Jennifer Corporation's $1,000 bonds pay 5 percent interest annually and have 12 years until maturity. You can purchase the bond for $915.a. What return do you
7-11A. (Bond valuation) Vail Inc.'s seven-year $1,000 par bonds pay 9 percent interest. Your required rate of return is 7 percent. The current market price for the bond is $1, 100.a. Determine the
7-9A. (Bond valuation) Telink Corporation bonds pay $110 in annual interest, with a $1,000 par value. The bonds mature in 20 years. Your required rate of return is 9 percent.a. Calculate the value of
7-8A. (Bondholder's expected return) Abner Corporation's bonds mature in IS years and pay 9 percent interest annually. If you purchase the bonds for $1,250, what is your expected rate of return?
7-7A. (Bond valuation) You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 15 years. Your required rate of return is 12 percent.a. Calculate the value of the
7-5A. (Bondholder's expected rate ofreturn) XYZ International's bonds mature in 12 years and pay 7 percent interest annually. If you purchase the bonds for $1,150, what is your expected rate of
7-4A. (Bondholder's expected rate of return) Fitzgerald's 20-year bonds pay 9 percent interest annually on a $1,000 par value. If bonds sell at $945, what is the bond's expected rate of return?
7-3A. (Bondholder's expected rate ofreturn) The market price is $900 for a 10-year bond ($1,000 par value) that pays 8 percent interest (4 percent semiannually). What is the bond's expected rate of
7-2A. (Bond valuation) Enterprise, Inc., bonds have a 9 percent coupon rate. The interest is paid semiannually and the bonds mature in eight years. Their par value is $1,000. If your required rate of
7-1A. (Bond valuation) Calculate the value of a bond that matures in 12 years and has a $1,000 face value. The coupon interest rate is 8 percent and the investor's required rate of return is 12
ST-3. (Bondholder's expected rate ofreturn) Sharp Co. bonds are selling in the market for $1,045.These 15-year bonds pay 7 percent interest annually on a $1,000 par value. If they are purchased at
ST-2. (Bond valuation) SlliU1 Co.'s bonds, maturing in 7 years, pay 8 percent on a $1,000 face value. However, interest is paid semiannually. If your required rate of return is 10 percent, what is
ST-l. (Bond valuation) Trico bonds have a coupon rate of 8 percent, a par value of $1,000, and will mature in 20 years. If you require a return of 7 percent, what price would you be willing to pay
7-14. Explain duration.
7-13. Why is the value of a long-tenn bond more sensitive to a change in interest rates than that of a short-term bond?
7-12. Differentiate between a premium bond and discount bond. What happens to the premium or discount for a given bond over time?
7-11. How does the market value of a bond differ from its par value when the coupon interest rate does not equal the bondholder's required rate of return?
7-10. Define the bondholder's expected rate of return.
7-9. Define (a) Eurobonds, (b) zero coupon bonds, and (c) junk bonds.
7-8. Distinguish between debentures and mortgage bonds.
7-7. IN'hat factors determine a bond's rating? IN'hy is the rating important to the finn:S manager?
7-6. Describe the bondholder's claim on the firm's assets and income.
7-5.a. How does a bond's par value differ from its market value?b. Explain the differences among a bond's coupon interest rate, the current yield, and a bondholder's required rate of return.
7-4. Explain the relationship between an investor's required rate of return and the value of a security.
7-3. Explain the three factors that determine the intrinsic or economic value of an asset.
7-2. IN'hat is a general definition of the intrinsic value of a security?
7-1. IN'hat are the basic differences among book value, liquidation value, market value, and intrinsic value?
ST-4.TIME STOCK PRICE HOLOING·PERIOD RETURN 1 $10 2 13 ($13 + $10) 1= 30.0%3 11 ($11 + $13) - 1 =-15.4%4 15 ($15 + $11) - 1 = 36.4%
ST-3.Kaifu Average return:4% + 6% + 0% + 2%3%4 Standard deviation:(4% - 3%)2 + (6% - 3%)2 + (0% - 3%)2 + (2% - 3%)2 = 2.58 4 - 1 Market Average return:2%+3%+1%-1%4 1.25 Standard deviation:(2% -
ST-2.Stock A 5% + .75(17% - 5%) =140/0 Stock B 5% + .90(17% - 5%) =15.8%Stock C 5% + 1.40(17% - 50/0) = 21.8%
ST-l.(A) (B) EXPECTED RETURN (i) WEIGHTED DEVIATION PROBABILITY P(k/) RETURN (kr) (A) x (S) (kr - k)2p(kJ).10 -10% -1% 52.9%.20 5% 1% 12.8%.30 10% 3% 2.7%.40 25% 10% 57.6%k= 130/0 (J2 = 126.00/0(J =
6-18B. (Required rate of return using CAPM) Hilary's common stock has a beta of 0.95. The expected rate of return for the market is 7 percent and the risk-free rate is 4 percent.a. Compute a fair
6-lOB. (Capital nsset pricing model) The expected return for the general market is 12.8 percent, and the risk premium in the market is 4.3 percent. Dupree, Yofota, and MacGrili have betas of .82,
6-9B. (Capital flSset pricing model) Breckenridge, Inc., has a beta of .85. If the expected market return is 10.5 percent and the risk-free rate is 7.5 percent, what is the appropriate required
6-8B. (Capital asset pricing model) Bobbi Manufacturing, Inc., is considering several investments.The rate on Treasury bills is currently 6.75 percent, and the expected return for the market is 12
6-6B. (Required rate ofreturn using CAPM)a. Compute afair rate of return for Compaq common stock, which has a 1.5 beta. The riskfree rate is 8 percent and the market portfolio (New York Stock
6-3B. (Expected rate ofntlJTn and l-1sk) B.]. wutney Enterprises is evaluating a security. Oneyear Treasury bills are currently paying 2.9 percent. Calculate the following investment's expected
6-2B. (Inflation and i1lteTest mtes) VVhat would you expect the nominal rate of interest to be if, the real rate is 5 percent and the expected inflation rate is 3 percent?
6-lB. (Inflatioll and intenst l-ates) Assume the expected inflation rate is 5 percent. If the cunent real rate of interest is 7 percent, what should the nominal rate of interest be?
10. The betas for Reynolds Computer and Andrews are 1.96 and 1.49, respectively, Compare the meaning of these betas relative to the preceding standard deviations calculated.
9. Make a comparison of the average returns and the standard deviations for the individual assets and the two portfolios that we designed. What conclusions can be reached by your comparis,ons?
8. Now assume that you have decided to invest equal amounts of money in Reynolds Computer, Andrews, and the long-term government securities. Calculate the monthly returns for your three-asset
7. The returns on an annualized basis that were realized from holding long-term government bonds for the 24 months ending May 2003 appear on page 215. Calculate the average monthly holding-period
6. Plot the returns ofyour two-stock portfolio against the Market Index as you did for the individual stocks in question 3. How does this graph compare to the graphs for the individual stocks?
5. Assume that you have decided to invest one-half of your money in Reynolds Computer and the remaining amount in Andrews. Calculate the monthly holding-period returns for your two-stock portfolio.
4. From your graphs in question 3, describe the nature of the relationship between the Reynolds Computer stock returns and the returns for the Market Index. Make the same comparison for Andrews.
3. Plot (a) the holding-period returns for Reynolds Computer against the Market Index, and(b) the Andrews holding-period returns against the Market Index. (Use Figure 6-8 as the format for the graph.)
2. Calculate the average monthly holding-period return and the standard deviation of these returns for the Market Index, Reynolds Computer, and Andrews.
1. Use the price data on page 21S for the Market Index, Reynolds Computer, and Andrews to calculate the holding-period returns for the 24 months ending May 2003.
Using an internet search engine, conduct a search for "risk and return." What do you find?
6-18A. (Required rate of return using CAPM) Whimey common stock has a beta of 1.2. The expected rate of return for the market is 9 percent and the risk-free rate is S percent.a. Compute a fair rate
6-16A. (Capital asset pricing model) Anita, Inc. is considering the following investments. The current rate on Treasury bills is 5.5 percent, and the expected return for the market is 11
6-12A (Measuring risk and rates ofreturn)a. Given the following holding-period rerurns, compute the average rerurns and the standard deviations for the Zemin Corporation and for the market.MONTH
6-11A. (Computing holding-period returns) From the following price data, compute the holdingperiod rerurns for Asman and Salinas.TIME ASMAN SALINAS 1 $10 $30 2 12 28 3 11 32 4 13 35~..How would you
6-lOA. (Capital asset pricing model) The expected return for the general market is 12.8 percent, and the risk premium in the market is 4.3 percent. Tasaco, LBM, and Exxos have betas of .864, .693,
6-9A. (Capital asset pricing model) CSB, Inc. has a beta of .765. If the expected market return is 11.5 percent and the risk-free rate is 7.5 percent, what is the appropriate required rate of rerum
6-8A (Capital asset pricing model) Johnson Manufacruring, Inc., is considering several investments.The rate on Treasury bills is currently 6.75 percent, and the expected rerum for the market is 12
6-6A. (Required rate ofreturn using CAPM)a. Compute a fair rate ofreturn for Intel common stock, which has a 1.2 beta. The risk-free rate is 6 percent and the market portfolio (New York Stock
6-2A. (Inflation and interest 1Yltes) Assume the expected inflation rate is 3.8 percent. If the current real rate of interest is 6.4 percent, what should the nominal rate of interest be?
6-1A. (Inflation and interest rates) What would you expect the nominal rate of interest to be if the real rate is 4.5 percent and the expected inflation rate is 7.3 percent?
6-9. Ifwe were to graph the returns of a stock against the returns of the S&P 500 Index, and the points did not follow a very ordered pattern, what could we say about that stock? If the stock's
6-8. How do we measure the beta for a portfolio?
6-7. Define the security market line. What does it represent?
6-6. What is the meaning of beta? How is it used to calculate k, the investor's required rate of return?
6-5. What is (a) unsystematic risk (company-unique or diversifiable risk) and (b) systematic risk(market or nondiversifiable risk)?
6-4.a. What is meant by the investor's required rate of return?.t>. How do we measure the riskiness of an asset?c. How should the proposed measurement of risk be interpreted?
6-3. Explain the concept "term structure of interest rates."
6-2. Explain the effect of inflation on rates of return.
6-1. Over the past seven decades, we have had the opportunity to observe the rates of return and variability of these returns for different types of securities. Sununarize these observations.
The financial statements for Clarrods Ltd are given below for the two years ending 30 June 2013 and 30 June 2014. Clarrods Ltd operates a department store in the centre of a small town.Income

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