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 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
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 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
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 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 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
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 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
Assume that the yield curves in the United States, France, and Japan are flat. If the U.S. yield curve then
suddenly become so positively sloped, do you think the yield curves in France and Japan would be
affected? If so, how?
ANSWER: The yield curves in
Chapter 2
2-15
a. P(H)=1/2=0.5
b. P(T / H)=P(T)=0.5
c. P(TT)=P(T) times P(T)= (0.5)(0.5)=0.25
d. P(TH)=P(T) times P(H)=(0.5)(0.5)=0.25
e. We first calculate P(TH)=0.25, then calculate P(HT)=(0.5)(0.5)=0.25. To find the probability of
either one occurring,
2. Impact of Credit Risk on Yield. What effect does a high credit risk have on securities?
ANSWER: Investors require a higher risk premium on securities with a high default risk.
6. Forward Rate. What is the meaning of the forward rate in the context of t
11. Impact of Expected Inflation. How might expectations of higher global oil prices affect the demand
for loanable funds, the supply of loanable funds, and interest rates in the United States? Will this
affect the interest rates of other countries in the
10. Marketability. Commercial banks use some funds to purchase securities and other funds to make
loans. Why are the securities more marketable than loans in the secondary market?
ANSWER: Securities are more standardized than loans and therefore can be mo
5. The Beige Book. What is the Beige book and why is it important to the FOMC?
ANSWER: The Beige book is a consolidated report of regional economic conditions in each of the 12
districts. This book is sent to FOMC members before their meeting so that they
1. Interest Rate Movements. Explain why interest rates changed as they did over the past year.
ANSWER: This exercise should force students to consider how the factors that influence interest
rates have changed over the last year, and assess how these chan