FI 801- Corporate Finance- Professor Johnson
Problem Set #1
Chapter 2 Problems
1. In the year 2000 XYZ Corp. had total revenues of $2 million, costs of good sold of $400,000,
and overhead expenses of $500,000. Depreciation was $300,000. During the year XY
Finance 801
Chapter 1
Introduction to Corporate Finance
Some Basic Questions
1. What should a firm invest in?
2. How should a firm finance its investments?
3. How do investment and financing needs change over
time?
2
The Assets of a Firm
Fixed Assets
-Ta
FIN 801
Chapter 2
Accounting Issues
.
The Balance Sheet
A snapshot of firms assets and liabilities at a specific point in time
Balance sheet reports book values of assets and liabilities (GAAP)
Financial managers care primarily about market values
-For cu
Finance 801
Chapter 4
Net Present Value
NPV: The One-Period Case
Suppose investor has the choice between
(Choice 1) $10,000 delivered today
(Choice 2) $11,424 delivered one-year from now
Interest rates are 12%. Which option should the investor choose?
One
Finance 801
Chapter 5
NPV versus its Competitors
Overview
Key features of NPV rule:
Recognizes the time value of money
Recognizes the risk of the project
Calculations only affected by cash flows and risk
Additive: NPV(A + B) = NPV(A) + NPV(B)
Competit
Finance 801
Chapter 7
NPV and Corporate Strategy
(Real Options)
What is an option (as opposed to an obligation)
The Five factors with
respect to a project
investment:
1. Market value of
assets
2. Interest Rate
3. Investment Cost
4. Time to until a
de
Finance 801
Chapter 10
Risk and Return: A First Look
(Where will we go next?)
Returns
Dollar Return on an investment =
Percentage Return = Dollar Return/Original Investment
Typically the cash you get out of investment is a dividend plus a capital gain
Cas
CHAPTER 13
Risk, Return and Capital Budgeting
13.1 The Cost of Equity Capital
For safe projects, calculate Net-Present-Value as:
T
Ct
C
t
NPV = 0 t
1 1 r
f
For risky projects:
NPV =
T Ct
C
0 t 1 r t
1
Where:
Ct = project cash flows in period t
Ct =
Finance 801
Chapter 11
Risk and Return
Expected Return, Variance and Covariance
In Chapter 9 we used historical data to estimate the relationship governing
security returns
Ultimately we are interested in the probability distribution governing these
retur