What is the primary concern of a firm’s creditors?
> Economic units that need to borrow money are said to be: a. Lender–savers b. Borrower–spenders c. Balanced budget keepers. d. None of the above.
> What are default risk premiums, and what do they measure?
> What are the key factors that most affect the level and shape of the yield curve?
> Describe the three most prominent bond rating systems?
> Explain why long-term bonds with zero coupons are riskier than short-term bonds that pay coupon interest?
> What is interest rate risk?
> Explain how bond yields are calculated?
> Explain conceptually how bonds are priced?
> What are zero coupon bonds, and how are they priced?
> We know that a vanilla bond with a coupon rate below the market rate of interest will sell for a discount and that a vanilla bond with a coupon rate above the market rate of interest will sell for a premium. What kind of bond or loan will sell at its par
> A bond has a 7 percent coupon rate, a face value of $1,000, and a maturity of four years. On a time line, lay out the cash flows for the bond?
> What are the main differences between the corporate bond markets and stock markets?
> If an asset’s expected return does not plot on the line in question 2 above, what does that imply about its price?
> How is the expected return on an asset related to its systematic risk?
> Why are returns on the stock market used as a benchmark in measuring systematic risk?
> Why does the total risk of a portfolio not approach zero as the number of assets in a portfolio becomes very large?
> What does the coefficient of variation tell us, and how is it related to the Sharpe Ratio?
> What is the correct way to annualize an interest rate in financial decision making?
> What is the APR, and why are lending institutions required to disclose this rate?
> Distinguish between quoted interest rate, interest rate per period, and effective annual interest rate?
> a. Investor A holds a 10-year bond, while investor B holds an 8-year bond. If interest rate increases by 1 percent, which investor has the higher interest rate risk? Explain. b. Investor A holds a 10-year bond paying 8 percent a year, while investor B al
> Refer above to the balance sheet and income statement for Abercrombie Supply Company for the year ended June 30, 2017. Calculate the following ratios: Refer data to problem 4.2: Prepare a common-size balance sheet from the following information for Aber
> What is the difference between a growing annuity and a growing perpetuity?
> What is the annuity transformation method?
> Give two examples of perpetuities?
> How do an ordinary annuity, an annuity due, and a perpetuity differ?
> Explain how to calculate the future value of a stream of cash flows?
> Why is it important to adjust all cash flows to a common date?
> Explain how to calculate the present value of a stream of cash flows?
> Explain why you would expect the discount factor to become smaller when based on the longer the time to payment?
> How does changing the compounding period affect the amount of interest earned on an investment?
> What is compounding, and how does it affect the future value of an investment?
> Because the conversion feature in a convertible bond is valuable to bondholders, convertible bond issues have lower coupon payments than otherwise similar bonds that are not convertible. Does this mean that a company can lower its cost of borrowing by se
> Why is a dollar today worth more than a dollar one year from now?
> What is a time line, and why is it important in financial analysis?
> Explain how the DuPont identity allows us to evaluate a firm’s performance?
> List some of the problems that financial analysts confront when analyzing financial statements?
> What are the limitations on traditional financial statement analysis?
> Explain what the SIC codes are, and discuss the pros and cons of using them in financial analysis?
> In what three ways can a financial manager choose a benchmark?
> What is the equation for ROA in the DuPont system, and how do the factors in that equation influence the ratio?
> What is the purpose of the DuPont system of analysis?
> What are the three major shortcomings of ROE?
> Why is the effective annual rate (EAR) superior to the annual percentage rate (APR) in measuring the true economic cost or return?
> List the profitability ratios discussed in this section, and explain how they differ from each other?
> List the leverage ratios discussed in this section, and explain how they are related?
> What are the efficiency ratios, and what do they measure? Why, for some firms, is the total asset turnover more important than the fixed asset turnover?
> What are common-size, or standardized, financial statements, and how are they prepared?
> Why does it make sense to standardize financial statements?
> Which type of tax rate, marginal or average, should be used in analyzing the expansion of a product line, and why?
> What does it mean when a firm’s cash flow to investors is negative?
> Explain how the four financial statements are related?
> What is EBITDA, and what does it measure?
> Explain whether or not each of the following statements is correct. a. A 15-year mortgage will have larger monthly payments than a 30-year mortgage of the same amount and same interest rate. b. If an investment pays 10 percent interest compounded annuall
> What is the difference between book value and market value?
> What are some objections to the preparation of marked-to-market balance sheets?
> What types of information does a firm’s annual report contain?
> What is the realization principle, and why may it lead to a difference in the timing of when revenues are recognized on the books and cash is collected?
> Explain why interest rates follow the business cycle?
> Explain how the real rate of interest is determined?
> What is an IPO, and what role does an investment banker play in the process?
> What are some services that commercial banks provide to businesses?
> What is strong-form market efficiency? Semistrong-form market efficiency? Weak-form market efficiency?
> How and why do large business firms use money markets?
> Suppose three investments have equal lives and multiple cash flows. A high discount rate tends to favor: a. The investment with large cash flows early. b. The investment with large cash flows late. c. The investment with even cash flows. d. None of the i
> Why might a firm prefer to have a security issue underwritten by an investment banking firm?
> What critical economic role does the financial system play in the economy?
> What is a conflict of interest in a business setting?
> What are corporate raiders?
> Why is profit maximization an unsatisfactory goal for managing a firm?
> What is the fundamental determinant of an asset’s value?
> Explain why maximizing the current market price of a firm’s stock is an appropriate goal for the firm’s management?
> Identify three financial officers who typically report to the CFO and describe their duties?
> Explain why professional partnerships such as physicians’ groups organize as limited liability partnerships?
> What are some advantages and disadvantages of operating as a public corporation?
> Identify the steps involved in computing the future value when you have multiple cash flows?
> Explain why you would make an investment if the value of the expected cash flows exceeds the cost of the project?
> What are the three most basic types of financial decisions managers must make?
> Why are capital budgeting decisions among the most important decisions in the life of a firm?
> In the chapter text, you saw that the formula for a growing perpetuity can be obtained from the formula for the present value of a growing annuity if n is set equal to ∞. It is also possible to go the other way. In other words, the present value of a gro
> In this chapter we showed that the formula for a perpetuity can be obtained from the formula for the present value of an ordinary annuity if n is set equal to ∞. It is also possible to go the other way. In other words, the present value of an ordinary an
> What are agency costs? Explain.
> Why is stock value maximization superior to profit maximization as a goal for management?
> What are the two basic mechanisms through which funds flow through the financial system, and how do they differ?
> Identify three fundamental types of decisions that financial managers make and identify which part of the balance sheet each of these decisions affects?
> Bigbox, Inc. has bonds outstanding that will mature in eight years. These bonds pay interest semiannually and have a coupon rate of 4.6 percent. If the bonds are currently selling at $888.92, what is the yield to maturity that an investor who buys them t
> What is the Rule of 72?
> You are considering investing in a 10-year zero coupon bond that compounds interest semiannually. If the current market rate is 5.65 percent, what is the maximum price you should have pay for this bond?
> Seven years ago Eastern Corporation issued 20-year bonds that had a $1000 face value, paid interest annually, and that had a coupon rate of 7 percent. If the market rate of interest is 5.5 percent today, what is the current market price of an Eastern Cor
> Why does an investor want a diversified portfolio? Can an investor eliminate all risk?
> What would you recommend to an investor who is considering making an investment in a stock which plots below the security market line (SML)? Explain.
> You are considering investing in a mutual fund. The fund is expected to earn a return of 15 percent in the next year. If its annual return is normally distributed with a standard deviation of 6.5 percent, what return can you expect the fund to beat 95 pe
> A credit card offers financing at an APR of 18 percent, with monthly compounding on outstanding charges. What is the effective annual rate (EAR)?
> Annalise Genric wants to open a restaurant in a historic building. The property can be leased for 20 years, but not purchased. She believes her restaurant can generate a net cash flow of $76,000 the first year and expects an annual growth rate of 4 perce
> You plan to set up an endowment at your alma mater that will fund $200,000 of scholarships each year indefinitely. If the principal (the amount you donate) can be invested at 5.5 percent, compounded annually, how much do you need to donate to the univers
> Freisinger, Inc., is expecting a new project to start paying off, beginning at the end of next year. It expects cash flows to be as follows: If Freisinger can reinvest these cash flows to earn a return of 7.8 percent, what is the future value of this ca
> Compound growth is exponential over time. Explain?
> The state of Texas had 42,725 active patient care physicians in 2013 and by 2017 this number had grown to 47,663. What was the compound annual growth rate (CAGR) in the number of active care physicians during this period?
> Tina DeLeon deposited $2,500 today in an account paying 6 percent interest annually. What would be the simple interest earned on this investment in five years? With annual compounding, how much interest-on-interest would Tina earn in five years?
> Christopher Thompkins must decide how to invest $10,000 that he just inherited. What would be the future value of his investment after five years under each of the following three investment opportunities? a. 6.28% compounded quarterly. b. 6.20% compound
