2. Future value Aa ‘2
The principal of the time value of money is probably the single most important concept in financial management. One
of the most frequently encountered applications involves the calculation of a future value.
The process for convertin

11. The payback period Aa Aa E1
The payback method helps firms establish and identify a maximum acceptable payback period that helps in their
capital budgeting decisions.
Consider this case:
Cute Camel Woodcraft Company is a small firm, and several of i

2. Cost ofdebt Aa Aa '5
The before—tax cost of debt! is the interest rate that a firm pays on any new debt financing.
Explanation: Close A
The interest rate that a firm pays on new debt is defined as its before—tax cost of debt, rd. However, because inter

7. The computation and interpretation of the degree of financial leverage (DFL) A3 Aa EL
It’s December 31. Last year, Torres Industries had sales of $120,000,000, and it forecasts that next year’s sales will
be $114,000,000. Its fixed costs have been and

9. Factors that impact the yield curve Aa Aa '5
There are three factors that can affect the shape of the Treasury yield curve (r*t, IPt, and MRPt) and five factors that
can affect the shape of the corporate yield curve (r*t, IPt, MRPt, DRPt, and LPt). The

7. Calculating interest rates Aa Aa a
The real risk—free rate (r*) is 2.8% and is expected to remain constant. Inﬂation is expected to be 8% per year for
each of the next five years and 7% thereafter.
The maturity risk premium (MRP) is determined from the

6. Determinants of market interest rates Aa Aa a
Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components
(determinants) and the symbols associated with each characteristic:
Characteristic Component

4. Capital gains and losses Aa Aa E
An investment’s capital gain or loss is an important component of its yield. Read each statement about capital gains
and indicate whether it is true or false.
Statement
A capital gain results when the ending (sale) pric

3. Future value of annuities - 1 M Aa a
When payments are made at the end of each period, you will treat them as an ordinary annuity! .
Explanation: Close A
You will treat payments as an ordinary annuity when they are made at the end of each period, and y

10. Finding the interest rate and the number of years Aa Aa IE
The future value and present value equations also help in finding the interest rate and the number of years that
correspond to present and future value calculations.
If a security of $12,800 w

11. Semiannual and other compounding periods Aa Aa E
Semiannual compounding implies that interest is compounded 2 ~/ times per year.
Explanation: Close A
Semiannual compounding occurs when interest is compounded twice a year, which is the same thing as sa

8. Uneven cash flows Aa Aa EL
A series of cash flows may not always necessarily be an annuity. Cash flows can also be uneven and variable in amount, but the
concept of the time value of money applies to uneven cash flows as well. Consider the following ca

4. Future value of annuities - 2 Aa Aa '=
Which of the following statements about annuities are true? Check all that apply.
J |:| When equal payments are made at the end of each period for a certain time period, they are treated as an
annuity due.
J An or

7. Calculate annuity cash flows Aa Aa IE
Your goal is to have $20,000 in your bank account by the end of four years. If the interest rate remains constant at
6% and you want to make annual identical deposits, how much will you need to deposit in your acco

5. Presentvalue Aa Aa E
To ﬁnd the present value of a cash ﬂow expected to be paid or received in the future, you will divide \l the
future value cash ﬂow by (1 +r)n.
What is the value today of a $158,000 cash flow expected to be received 17 years from

9. Optimal capital budget Aa Aa EL
Wyle Manufacturing is considering the following capital projects. The internal rate of return (IRR) has been calculated for each project.
Cost
Project (Millionsof dollars) IRR
$40 1 1.6%
$40 1 1.2%
$80 10.8%
The op

1. Basic concepts Aa Aa EL
Finance, or financial management, requires the knowledge and precise use of the language of the field.
Match the terms relating to the basic terminology and concepts of the time value of money on the left with the
descriptions o

12. The NPV and payback period Aa Aa '5
What information does the payback period provide?
Suppose Acme Manufacturing Corporation’s CFO is evaluating a project with the following cash inflows. She does not
know the project’s initial cost; however, she does

8. The computation and interpretation of the degree of combined leverage (DCL) Aa Aa [a
You and your colleague Maya are currently participating in a finance internship program at Tucker Group (Tucker).
Your current assignment is to work together to review

5. Cost of new common stock Aa Aa EL
Flotation costs! represent the fees that firms pay to investment bankers to help them issue new common stock.
Explanation: Close A
Companies generally use investment bankers to help them issue new common stock. The fee

10. Calculating the degrees of leverage Aa Aa E
GIobo—Chem Co. forecasts the following income statement for the next year:
Globe-Chem Co.
Income Statement
For the Year Ended on December 31
Net sales $960,000
Less: Variable costs 532,000
Less: Fixed costs

4. Determining the optimal capital structure Aa Aa JEL
Understanding the optimal capital structure
Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc.
has gathered the following financi

10. Cash flow patterns and the modified rate of return calculation Aa Aa EL
Bohemian Manufacturing Company Inc. is analyzing a project with the following cash flows:
Year Cash Flow
Year 0 —$720,000
Year 1 $300,000
Year 2 —$600,000
Year 3 $720,000
Year 4 $

1. Basic concepts Aa Aa EL
Match the terms relating to the basic terminology and concepts of capital structure management on the left with the
descriptions of the terms on the right. Read each description carefully and type the letter of the description i

10. The relationship between WACC and investors’ required rates of return A3 A3 E
The required rate of return of an investor is the rate of return that an investor demands to purchase a firm’s stocks
or bonds and thus provide funds for capital investment.

8. Marginal cost of capital (MCC) schedule Aa Aa E
As a company raises more and more funds, the cost of those funds begins to rise. As this occurs, the weighted average cost of each new dollar
rises. This is called the marginal cost of capital. A graph th

5. Capital structure theory
As a ﬁrm takes on more debt, its probability of bankruptcy
Aa Aa *3
increases V/ . Other factors held constant, a ﬁrm whose earnings are relatively volatile
faces a greater" chance of bankruptcy. Therefore, when other factors a

6. Understanding the IRR and NPV Aa Aa E1
The net present value (NPV) and internal rate of return (IRR) methods of investment analysis are interrelated and
are sometimes used together to make capital budgeting decisions.
Consider this case:
Last Tuesday

3. Cost of money Aa Aa IE
Four fundamental factors affect the cost of money: (1) the return that borrowers expect to earn on their
investments, (2) the preference of savers to spend their income in the current period rather than delay their
consumption un

13. Variations in capital structures Aa Aa E
Capital structures vary among firms in the United States and around the world. Relationships, attitudes, tax codes,
and accounting differences contribute to some of the differences. As U.S. firms become increas