REAL OPTIONS AND OTHER TOPICS IN CAPITAL BUDGETING Keeping Your Options Open Briefly describe what investment timing options are and why theyare valuable. Explain why the following statement is true: “In general, the moreuncertainty there is about future market conditions, the more attractive it is to delay the decision.” If a firm fails to consider […]
Category Archives: Finance
Why should companies use project cash flow rather than accounting income when finding the NPV of a project?
CASH FLOW ESTIMATION AND RISK ANALYSIS Home Depot Keeps Growing Refer to Table 12-1 and answer these questions: (1) If the WACC increased to 15 percent, what would the new NPVbe? ($2,877) (2) Look at Part 1, Input Data. In what direction would NPV bechanged by an increase in each input variable? (3) If the […]
Which project or projects would you recommend if they are (a) independent or (b) mutually exclusive?
THE BASICS OF CAPITAL BUDGETING Competition in the Aircraft Industry How is capital budgeting similar to security valuation? How is itdifferent? What are some ways firms generate ideas for capital projects? Identify the major project classification categories, and explain whyand how they are used Why is the NPV regarded as being the primary capital budgetingdecision […]
What are three factors under the firm’s control that can affect its cost of capital?
THE COST OF CAPITAL Creating Value at GE Why should the cost of capital be calculated as a weighted averageof the various types of funds a firm generally uses, not the cost ofthe specific financing used during a given year? Identify the firm’s three major capital structure components, andgive their respective component cost symbols. Why […]
What type of security can be used to minimize both interest rate and reinvestment rate risk for an investor with a fixed investment horizon?
Sizing Up Risk in the Bond Market What is a bond?What are the four main types of bonds?Why are U.S. Treasury bonds not completely riskless?In addition to default risk, what key risk do investors in foreignbonds face? Define floating-rate bonds, zero coupon bonds, putable bonds,income bonds, convertible bonds, and inflation indexed bonds.How is the rate […]
What role do interest rates play in allocating capital to different potential borrowers?
Low Interest Rates Encourage Investment and Stimulate Consumer Spending What is the price paid to borrow debt capital called? What are the two items whose sum is the cost of equity? What four fundamental factors affect the cost of money? What role do interest rates play in allocating capital to differentpotential borrowers? What happens to […]
What four financial statements are typically included in the annual report?
What is the annual report, and what two types of information doesit provide? What four financial statements are typically included in the annualreport? Why is the annual report of great interest to investors? What is the balance sheet, and what information does it provide? How is the order of the items shown on the balance […]
How does the present value of a future payment change as the time to receipt is lengthened? As the interest rate increases?
Financial Management:Leverage and Capital Structure Do time lines deal only with years or could other periods be used?Set up a time line to illustrate the following situation: You currentlyhave $2,000 in a three-year certificate of deposit (CD) that pays aguaranteed 4 percent annually. Explain why this statement is true: “A dollar in hand today is […]
What do investors expect to receive when they buy a share of stock?
Financial Management:Leverage and Capital Structure What is management’s primary goal? What do investors expect to receive when they buy a share of stock? Do investors know for sure what they will receive? Explain. Based just on the name, which company would you regard as beingriskier, General Foods or South Seas Oil Exploration Company?Explain. When a […]
How much will you have in your fund when you retire if your return is 12% per year.
Fleming Golf has decided to sell a new line of golf clubs. The clubs will sell for $1,200 per set and have a variable cost of 80% of revenues per set. The company has spent $350,000 for a marketing study that determined the company will sell 75,000 sets per year for seven years. The company […]
