Chapter 10 - Net Present Value and Other Capital Budgeting Criteria
When a firm is evaluating the expected cash flows from investments or projects, there are several
different decision criteria or methods that can be used. The different tec
CHAPTER 5 VALUING BONDS
to do, and why would they do it?
1. What does a call provision allow issuers
A call provision on a bond issue allows the issuer to pay off the bond debt early at a cost of the
principal plus any call premium. Mo
CHAPTER 6 VALUING STOCKS
! 1. As owners, what rights and advantages do shareholders obtain?
Shareholders are able to participate in the economic growth of publicly traded firms without
having to manage business entities directly. They
CHAPTER 7 CHARACTERIZING RISK AND RETURN
LG3 3. How do we define risk in this chapter and how do we measure it?
Risk is defined as the volatility of an assets returns over time. Specifically, the standard
deviation of returns is used t
Material from Chapter 7 (For Exam 3)
Diversification: Forming Portfolios to Reduce Risk
Combining investments into a portfolio is called diversification and it reduces overall risk.
For a stock investment, there are two major components to its total ris
Tips for Excel:
If you want to type the function into excel,
you must put = before the function.
To insert a function, click on fx. This is the
easiest technique to use since it brings up a
worksheet for inputs.
NPER and RATE both require one of the cash
Review Sheet for FI 393 Exam 2
Formula Sheet will be provided.
Multiple Choice - 10 questions worth 3 points each for 30% of exam grade
Bond Characteristics (see What is a Bond? and Bond Characteristics in Lecture Notes)
Chapter 7: Characterizing Risk and Return
Return is the reward for investing.
Dollar Return versus Percentage Return
Example: Investment Return In 2013, Campbells stock price at the beginning of the
year was $35.92. It paid a $1.16 per
Chapter 6 Valuing Stocks
Common Stock: Introduction
When you buy a share of common stock, you are buying part ownership in a corporation
Common Stockholders are the residual owners of the firm
Common Stockholders receive voting rights
CHAPTER 8 ESTIMATING RISK AND RETURN
LG3 10-7 CAPM Required Return Hastings Entertainment has a beta of 0.65. If the
market return is expected to be 11 percent and the risk-free rate is 4 percent, what is Hastings
Chapter 9: Calculating the Cost of Capital
Concept of Cost of Capital
As investors, we often make decisions to purchase a stock or a bond based on how the investment's
expected return compares to our required rate of return. This same type of decision p
Practice Questions Solutions
! Why dont we multiply the cost of preferred stock by 1 minus the tax rate, as we do
Because dividends on preferred stock, unlike interest on debt, are paid out of after-tax
income. There is no tax advan
Additional WACC Problems:
KVR Industries has 6.5 million shares of common stock outstanding with a market price of
$14.00 per share. The company also has outstanding preferred stock with a market value
of $10 million, and 25,000 bonds outstanding, ea
Chapter 10 Practice Problem Solutions
! Compute the NPV for Project M and accept or reject the project with the cash flows
shown below if the appropriate cost of capital is 8 percent.
$350 $480 $520 $600 $100
Review Sheet for Exam 3
I will provide formulas needed for the exam.
Multiple Choice 10 multiple choice questions worth three points each (30% of exam)
Chapter 8 (including some material from Chapter 7)
Diversification and correlation
Review Sheet for FI 393
! Choice (30% of exam)
! Goal of the firm
! Simple time value of money questions (PV, FV, I/YR, N)
! Calculate EAR
Bond Characteristics (see What is a Bond? and Bond C
Chapter 5 Bond Valuation
What is a bond?
A long-term debt instrument in which a borrower agrees to make payments of principal and
interest, on specific dates, to the holders of the bond.
The bond issuer is borrowing money to invest in projects and operati
EXERCISE 10-15 (1520 minutes)
Discount on Notes Payable.
*PV of $20,000 annuity @ 10% for
5 years ($20,000 X 3.79079)
Capitalized value of eq
EXERCISE 6-4 (1520 minutes)
Future value of an ordinary
annuity of $5,000 a period
for 20 periods at 8%
$228,809.80 ($5,000 X 45.76196)
Factor (1 + .08)
Future value of an annuity
due of $5,000 a period at 8% $ 247,115
Present value of an o
BONANZA WHOLESALERS INC.
Computation of Internal Conversion Price Index
for Inventory Pool No. 1 Double Extension Method
Current inventory at
17,000 X $36 =
9,000 X $26 =
Current inventory at
EXERCISE 5-15 (2535 minutes)
Zubin Mehta Corporation
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Adjustments to reconcile net income
to net cash provided by operating
Answers to Questions in the book
1. Differentiate broadly between financial accounting and managerial accounting.
Financial accounting is the process that culminates in the preparation of financial reports on the
enterprise for use by both internal and ex