Question: How are total risk, non diversifiable risk,

> What three tax situations may result from the sale of an asset that is being replaced?

> Assume that a firm makes a $2,500 deposit into a short-term investment account. If this account is currently paying 0.7% (yes, that’s right, less than 1%!), what will the account balance be after 1 year?

> How do you calculate the book value of an asset?

> Explain how to use each of the following inputs to calculate the initial investment: (a) cost of the new asset, (b) installation costs, (c) proceeds from the sale of the old asset, (d) tax on the sale of the old asset, and (e) change in net working capit

> What effect do sunk costs and opportunity costs have on a project’s net cash flows?

> What three types of net cash flows may exist for a given project? How can expansion decisions be treated as replacement decisions? Explain

> Does the assumption concerning the reinvestment of intermediate cash inflow tend to favor NPV or IRR? In practice, which technique is preferred and why?

> Diagram and describe the three types of net cash flows for a capital budgeting project.

> Explain how the terminal cash flow is calculated for replacement projects.

> How are the net operating cash flows that are associated with a replacement decision calculated?

> Why is it important to evaluate capital budgeting projects on the basis of incremental cash flows?

> What is the decision rule that managers follow when they use the IRR method to accept or reject investment proposals? How is that decision rule related to the firm’s market value?

> Your broker calls to offer you the investment opportunity of a lifetime, the chance to invest in mortgage-backed securities. The broker explains that these securities are entitled to the principal and interest payments received from a pool of residential

> What is the internal rate of return (IRR) on an investment? How is it determined?

> How is the before-tax cost of debt converted into the after-tax cost?

> Explain the similarities and differences between NPV, PI, and EVA.

> What decision rule do managers follow when they use NPV to accept or reject investment ideas? How is an investment’s NPV related to the firm’s market value?

> How is the net present value (NPV) calculated for a project with a conventional cash flow pattern?

> What weaknesses are commonly associated with the use of the payback period to evaluate a proposed investment?

> What is the payback period? How is it calculated?

> How is a net present value profile used to compare projects? What causes conflicts in the ranking of projects via net present value and internal rate of return?

> How do the constant-growth valuation model and capital asset pricing model methods for finding the cost of common stock differ?

> Do the net present value (NPV) and internal rate of return (IRR) agree with respect to accept–reject decisions? With respect to ranking decisions? Explain.

> Rimier Corp. forecasts sales of $650,000 for 2020. Assume that the firm has fixed costs of $250,000 and variable costs amounting to 35% of sales. Operating expenses are estimated to include fixed costs of $28,000 and a variable portion equal to 7.5% of s

> What is the financial manager’s goal in selecting investment projects for the firm? Define the capital budgeting process, and explain how it helps managers achieve their goal.

> How would you calculate the cost of preferred stock?

> What is an efficient portfolio? How can the return and standard deviation of a portfolio be determined?

> What methods can be used to find the before-tax cost of debt?

> What are the net proceeds from the sale of a bond? What are flotation costs, and how do they affect a bond’s net proceeds?

> What are the typical sources of long-term capital available to the firm?

> What does the firm’s capital structure represent?

> What role does the cost of capital play in the firm’s long-term investment decisions? How does it relate to the firm’s ability to maximize shareholder wealth?

> What is the weighted average cost of capital (WACC), and how is it calculated?

> Why is the cost of financing a project with retained earnings less than the cost of financing it with a new issue of common stock?

> During the year, Xero Inc. experienced an increase in net fixed assets of $300,000 and had depreciation of $200,000. It also experienced an increase in current assets of $150,000 and an increase in accounts payable and accruals of $75,000. If operating c

> What premise about share value underlies the constant-growth valuation (Gordon growth) model that we use to measure the cost of common stock equity, rs?

> What is risk in the context of financial decision making?

> Why is the correlation between asset returns important? How does diversification allow risky assets to be combined so that the risk of the portfolio is less than the risk of the individual assets in it?

> What does the coefficient of variation reveal about an investment’s risk that the standard deviation does not?

> What relationship exists between the size of the standard deviation and the degree of asset risk?

> What does a plot of the probability distribution of outcomes show a decision maker about an asset’s risk?

> Explain how the range is used in scenario analysis.

> Compare the following risk preferences: (a) risk averse, (b) risk neutral, and (c) risk seeking. Which risk preference is most common among financial managers? What is the difference between risk aversion and risk tolerance?

> Define return, and describe how to find the total rate of return on an investment.

> Define and specify the general equation for the value of any asset, V0.

> Determine the operating cash flow (OCF) for Kleczka Inc., based on the following data. (All values are in thousands of dollars.) During the year the firm had sales of $2,500, cost of goods sold totaled $1,800, operating expenses totaled $300, and depreci

> What impact would the following changes have on the security market line and therefore on the required return for a given level of risk? (a) An increase in inflationary expectations. (b) Investors become less risk averse.

> Explain the meaning of each variable in the capital asset pricing model (CAPM) equation. What is the security market line (SML)?

> What risk does beta measure? How can you find the beta of a portfolio?

> How does international diversification enhance risk reduction? When might international diversification result in subpar returns? What are political risks, and how do they affect international diversification?

> What does the efficient-market hypothesis (EMH) say about (a) securities prices, (b) their reaction to new information, and (c) investor opportunities to profit? What is the behavioral finance challenge to this hypothesis?

> Describe the events that occur in an efficient market in response to new information that cause the expected return to exceed the required return. What happens to the market value?

> Explain the cumulative feature of preferred stock. What is the purpose of a call feature in a preferred stock issue?

> What claims do preferred stockholders have with respect to distribution of earnings (dividends) and assets?

> What are the advantages to both U.S.-based and foreign corporations of issuing stock outside their home markets? What are American depositary receipts (ADRs)? What are American depositary shares (ADSs)?

> Classify the following changes in each of the accounts as either an inflow or an outflow of cash. During the year (a) marketable securities increased, (b) land and buildings decreased, (c) accounts payable increased, (d) vehicles decreased, (e) accounts

> Explain the relationships among authorized shares, outstanding shares, treasury stock, and issued shares.

> How does a rights offering protect a firm’s stockholders against the dilution of ownership?

> What risks do common stockholders take that other suppliers of capital do not?

> Assuming that all other variables remain unchanged, what effect would each of the following have on stock price? (a) The firm’s risk premium increases. (b) The firm’s required return decreases. (c) The dividend expected next year decreases. (d) The growt

> Explain the linkages among financial decisions, return, risk, and stock value.

> Explain each of the three other approaches to common stock valuation: (a) book value, (b) liquidation value, and (c) P/E multiples. Which of them is considered the best?

> Describe the free cash flow valuation model, and explain how it differs from the dividend valuation models. What is the appeal of this model?

> Describe, compare, and contrast the following common stock dividend valuation models: (a) zero-growth, (b) constant-growth, and (c) variable-growth.

> What are the key differences between debt and equity?

> What is a conversion feature? A call feature? What are stock purchase warrants?

> The installed cost of a new computerized controller was $65,000. Calculate the depreciation schedule by year assuming a recovery period of 5 years and using the appropriate MACRS depreciation percentages .

> How is the cost of bond financing typically related to the cost of short term borrowing? In addition to the maturity of a bond, what other major factors affect its cost to the issuer?

> Differentiate between standard debt provisions and restrictive covenants included in a bond indenture. What are the consequences if a bond issuer violates any of these covenants?

> What are typical maturities, denominations, and interest payments of a corporate bond? What mechanisms protect bondholders?

> List and briefly describe the potential issuer- and issue-related risk components that are embodied in the risk premium. Which are the purely debt-specific risks?

> Briefly describe the following theories of the general shape of the yield curve: (a) expectations theory, (b) liquidity preference theory, and (c) market segmentation theory.

> For a given class of similar-risk securities, what does each of the following yield curves reflect about interest rates: (a) downward sloping, (b) upward sloping, and (c) flat? What is the “normal” shape of the yield curve?

> What is the term structure of interest rates, and how is it related to the yield curve?

> Does the valuation process apply only to assets that provide an annual cash flow? Explain

> What are the three key inputs to the valuation process?

> Why is it important for financial managers to understand the valuation process?

> If we know that a firm has a net profit margin of 4.5%, total asset turnover of 0.72, and a financial leverage multiplier of 1.43, what is its ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings

> Compare the basic characteristics of Eurobonds and foreign bonds.

> What is the current yield for a bond? How are bond prices quoted? How are bonds rated, and why?

> What is the real rate of interest? Differentiate it from the nominal rate of interest.

> It is never too soon to begin investing for a child’s college education. Using the information provided at MyLab Finance, determine the present value you would need to invest today to ensure that your child receives the college education she deserves.

> It is tax time and you would like to make a tax-deductible contribution to an individual retirement account (IRA). Using the information provided at MyLab Finance, find the future value of an IRA contribution that grows until you retire.

> How are present value and future value calculations related?

> What effect does increasing the required return have on the present value of a future amount? Why?

> What is meant by “the present value of a future amount”? What is the general equation for present value?

> What effect would a decrease in the interest rate have on the future value of a deposit? What effect would an increase in the holding period have on future value?

> How is the compounding process related to the payment of interest on savings? What is the general equation for future value?

> Bluestone Metals Inc. is a metal fabrication firm that manufactures prefabricated metal parts for customers in a variety of industries. The firm’s motto is “If you need it, we can make it.” The CEO of

> What effect does compounding interest more frequently than annually have on (a) future value and (b) the effective annual rate (EAR)? Why?

> Define and differentiate among the three basic patterns of cash flow: (1) a single amount, (2) an annuity, and (3) a mixed stream.

> What are the two basic weaknesses of the simplified approaches to preparing pro forma statements?

> How do you calculate the future value of a mixed stream of cash flows? How do you calculate the present value of a mixed stream?

> Describe the judgmental approach for simplified preparation of the pro forma balance sheet.

> Why does the presence of fixed costs lead to errors in a pro forma income statement constructed using the percent-of-sales method? What is a better method?

> Because tax time comes around every year, you smartly decide to make equal contributions to your IRA at the end of every year. Using the information provided at MyLab Finance, calculate the future value of your IRA contributions when you retire.

> What is a perpetuity? Why is the present value of a perpetuity equal to the annual cash payment divided by the interest rate? Why doesn’t this chapter provide an equation showing you how to calculate the future value of a perpetuity?

> What is the cause of uncertainty in the cash budget, and what two techniques can be used to cope with this uncertainty?

> How can the formula for the future value of an annuity be modified to find the future value of an annuity due?

> Cooper Industries Inc. began 2019 with retained earnings of $25.32 million. During the year, it paid four quarterly dividends of $0.35 per share to 2.75 million common stockholders. Preferred stockholders, holding 500,000 shares, were paid two semiannua