1. What is leverage? 2. What are the two major types of leverage? Define each. 3. When does it make the most sense to have high leverage? 4. Assume that you can invest $50,000 for one year in a project that is expected to have a 20% profit. You can borrow money at a 12% interest rate. If you borrow $40,000 and invest $10,000 of your own money, what will your rate of return be if things go as expected? 5. Considering the information in question 4 above, what would be your rate of return on your investment if the project winds up with a 15% loss instead of a 20% profit? a 6. What is the rule of OPM? 7. If you have a choice of leasing a machine that you can return after each month, or buying the machine, if you buy it, that would be an example of what type of leverage? 1. Why does investment analysis focus on cash flow rather than revenue and expense? 2. Suppose that two projects each cost $10,000. The first project returns $3,000 a year for 7 years. The second project returns $5,000 a year for two years. Which has the better payback period? Is that the better project to invest in? 3. Explain compounding and discounting. 4. How much will $8,000 invested at 3 percent simple interest be worth in three years? What will it be worth if the interest rate is 5 percent? 5. How much will $8,000 invested at 3 percent interest be worth in three years if it is compounded annually? Quarterly? How much if the interest rate is 5 percent? a 6. If someone offered to pay you $5,000 a year for five years and you could earn 6 percent interest per year, how much would that be worth today? 7. Suppose that you have $50,000 and need to invest it so that you will have $1,000,000 twenty years from now to repay a debt. What interest rate do you have to earn, assuming monthly compounding? 8. Suppose that you have $50,000 available today and can invest it at 7% per year. How long will it be before you have accumulated $500,000 in the investment? 9. Coffin Corporation wants to buy a new hearse for $60,000. It will last for five years. They expect to make 100 trips per year. Coffin uses a discount rate of 6 percent. If they charge $150 per trip, will they have a positive net present value for the investment? 10. Assume that Executive Corporation is considering investing $5,000 to- day in a new piece of equipment that will provide a service they can charge for. The annual cash profits from the machine will be $600, $700, $800, $900, $1,000, $1,100, $1,200 for each of the seven years of its useful life. What is the IRR on the investment? 4 5. Assume that a 30 year, 5%, semiannual, $10,000 bond was issued ten years ago. Today current market rates are 4.5%. How much could that bond be sold for today? 1. What is leverage? 2. What are the two major types of leverage? Define each. 3. When does it make the most sense to have high leverage? 4. Assume that you can invest $50,000 for one year in a project that is expected to have a 20% profit. You can borrow money at a 12% interest rate. If you borrow $40,000 and invest $10,000 of your own money, what will your rate of return be if things go as expected? 5. Considering the information in question 4 above, what would be your rate of return on your investment if the project winds up with a 15% loss instead of a 20% profit? a 6. What is the rule of OPM? 7. If you have a choice of leasing a machine that you can return after each month, or buying the machine, if you buy it, that would be an example of what type of leverage? 1. Why does investment analysis focus on cash flow rather than revenue and expense? 2. Suppose that two projects each cost $10,000. The first project returns $3,000 a year for 7 years. The second project returns $5,000 a year for two years. Which has the better payback period? Is that the better project to invest in? 3. Explain compounding and discounting. 4. How much will $8,000 invested at 3 percent simple interest be worth in three years? What will it be worth if the interest rate is 5 percent? 5. How much will $8,000 invested at 3 percent interest be worth in three years if it is compounded annually? Quarterly? How much if the interest rate is 5 percent? a 6. If someone offered to pay you $5,000 a year for five years and you could earn 6 percent interest per year, how much would that be worth today? 7. Suppose that you have $50,000 and need to invest it so that you will have $1,000,000 twenty years from now to repay a debt. What interest rate do you have to earn, assuming monthly compounding? 8. Suppose that you have $50,000 available today and can invest it at 7% per year. How long will it be before you have accumulated $500,000 in the investment? 9. Coffin Corporation wants to buy a new hearse for $60,000. It will last for five years. They expect to make 100 trips per year. Coffin uses a discount rate of 6 percent. If they charge $150 per trip, will they have a positive net present value for the investment? 10. Assume that Executive Corporation is considering investing $5,000 to- day in a new piece of equipment that will provide a service they can charge for. The annual cash profits from the machine will be $600, $700, $800, $900, $1,000, $1,100, $1,200 for each of the seven years of its useful life. What is the IRR on the investment? 4 5. Assume that a 30 year, 5%, semiannual, $10,000 bond was issued ten years ago. Today current market rates are 4.5%. How much could that bond be sold for today