Macro Final Study Guide
3 Tools the Fed has to change the money supply
1. Open Market Purchases the purchase or sale of government securities by the
Fed.
2. Changing the Discount Rate the interest rate the fed charges member banks to
borrow
3. Changing th
1. Based on the profitability index (PI) rule, should a project with the following cash flows be accepted if the
discount rate is 11 percent? Why or why not?
2. You are analyzing the following two mutually exclusive projects and have developed the followi
CHAPTER 2 THE U.S. ECONOMY
PROBLEMS
1. Draw a productionpossibilities curve with consumer goods on one axis and investment goods on the other axis. a. Identify the opportunity cost of increased investment. b. What will happen to future production po
CHAPTER 1 THE CHALLENGE OF ECONOMICS
PROBLEMS
1. According to Figure 1.1, what is the opportunity cost of increasing consumer output from OF to OD? In figure 1.1, the move from OF to OD along the consumer goods axis moves the economy from point X to
CHAPTER 10
THE BUSINESS CYCLE
PROBLEMS
1. How much more output will the average American have next year if the $12 trillion U.S. economy grows by: a. 2 percent? b. 5 percent? c. 1.0 percent? (Assume a population of 295 million): a) $814 b) $2033 c)
CHAPTER 3
SUPPLY AND DEMAND
PROBLEMS
1. Using Figure 3.7 as a guide, determine the approximate size of the market surplus or shortage that would exist at a price of (a) $40, (b) $20. Using Figure 3.7, and the new demand curve:(a) at a price 0f $40,
CHAPTER 15
ECONOMIC GROWTH
PROBLEMS
1. China's output grew at an amazing rate of 10 percent per year in the 1990s. At that rate how long will it take for China's GDP to double? (see Table 15.1). With its population increasing at 0.6 percent per year
Weighted Average Cost of Capital
Banikanta Mishra
XIMBhubaneswar
(Weighted Average) Cost of Capital
A company says that its current WACC is 20%.
What does this 20% Cost of Capital loosely mean?
For every $1 raised by the company now,
it has to pay out
(i
Capital Structure
FinancialManagement
BanikantaMishra
RavenshawUniversity
JanuaryMarch2009
Effect of Change in D/E Ratio
How does a firm determine its optimal (best)
Capital Structure or Financial Leverage (measured by D/E or D/V)?
To answer that question
CASHFLOWS
BanikantaMishra
XIMBhubaneswar
CID:2010
Operating Cash Flow: Base
Numbers
Net Sales OR Revenue
 Cost of Goods Sold (Exclude NonCash
Charges)
 Taxes
= Operating CF
Professor Banikanta
2
Example
$1,509 Net Sales

750 COGS (w/o NonCash Charges
Weighted Average Cost of
Capital
FinancialManagement
BanikantaMishra
RavenshawUniversity
JanuaryMarch2009
(Weighted Average) Cost of
Capital
A company says that its current WACC is 20%.
What does this 20% Cost of Capital loosely mean?
For every $1 raised
WACC: Beyond the Basics
BanikantaMishra
XIMBhubaneswar
CID:2010
WACC from a Portfolio
Perspective
If we think of the firm as a portfolio of debt and equity,
then WACC WD RD WERE
D
E
OR WACC
RD RE
V
V
But, from the CAPM perspective,
if A is the eta of the
Capital Structure:
Review
Valuation
XIM B
Professor Banikanta Mishra
Effect of Change in D/E Ratio
How does a firm determine its optimal (best)
Capital Structure or Financial Leverage (measured by D/E or D/V)?
To answer that question, we ask the followin
TimeValueofMoney:
SingleCashFlows
FinancialManagement
BanikantaMishra
XavierInstituteofManagement,Bhubaneswar
December2008March2009
Real Rate
Even in the absence of inflation,
Even assets without risk
(say a guaranteed bank deposit)
Give a return (say the
Capital Structure
BanikantaMishra
XIMBhubaneswar
CID:2010
Effect of Change in D/E Ratio
How does a firm determine its optimal (best)
Capital Structure or Financial Leverage (measured by D/E or D/V)?
To answer that question, we ask the following questions:
Special Topics in Capital
Budgeting
FinancialManagement
BanikantaMishra
RavenshawUniversity
JanuaryMarch2009
Option to Wait & Watch
You have the following data on a project:
Investment required if invest today = $60,000
Investment required if invest at ye
CapitalBudgeting
FinancialManagement
BanikantaMishra
RavenshawUniversity
JanuaryMarch2009
Evaluating Investment
Opportunities
We learnt earlier that a financemanager has to
decide
Which projects are acceptable and which not
and
Among two mutuallyexclusi
CASHFLOWS
BanikantaMishra
XIMBhubaneswar
CID:2010
Operating Cash Flow: Base
Numbers
Net Sales OR Revenue
 Cost of Goods Sold (Exclude NonCash
Charges)
 Taxes
= Operating CF
Professor Banikanta
2
Example
$1,509 Net Sales

750 COGS (w/o NonCash Charges
Capital Structure
Banikanta Mishra
XIMBhubaneswar
Effect of Change in D/E Ratio
How does a firm determine its optimal (best)
Capital Structure or Financial Leverage (measured by D/E or D/V)?
To answer that question, we ask the following questions:
As a f
Capital Budgeting
Banikanta Mishra
XIMBhubaneswar
Evaluating Investment Opportunities
We learnt earlier that a financemanager has to decide
Which projects are acceptable and which not
and
Among two mutuallyexclusive acceptable projects,
which is the be
Weighted Average Cost of
Capital
FinancialManagement
BanikantaMishra
RavenshawUniversity
JanuaryMarch2009
(Weighted Average) Cost of
Capital
A company says that its current WACC is 20%.
What does this 20% Cost of Capital loosely mean?
For every $1 raised
WACC: Beyond the Basics
BanikantaMishra
XIMBhubaneswar
CID:2010
WACC from a Portfolio
Perspective
If we think of the firm as a portfolio of debt and equity,
then WACC WD RD WERE
D
E
OR WACC
RD RE
V
V
But, from the CAPM perspective,
if A is the eta of the
FinancialManagement(BanikantaMishra):SampleQuestions
1. From among five projects, ABC Corporation found only two A and B  acceptable.
Both projects are equally risky. ProjectA requires an investment of $100,000 and is
expected to give perpetual cashflo
Special Topics in Capital
Budgeting
FinancialManagement
BanikantaMishra
RavenshawUniversity
JanuaryMarch2009
Option to Wait & Watch
You have the following data on a project:
Investment required if invest today = $60,000
Investment required if invest at ye
COCProject
Company:PowerFinanceCorporation
Dataason31stMarch2009
CompetitorCompanies:
RuralElectrificationCorporation
IDFC
IFCI
TourismFinance
1. What is the rating, if any, of your company's bonds?
Instrument Category
Rating
Rating Outlook
Long Term
AAA
NPV and Other Criteria
Banikanta Mishra
XIMBhubaneswar
Choosing Among Investment Projects
Two important isssues
1) ACCETABILITY
Is ProjectA acceptable?
Is ProjectB acceptable?
2) (PREFERENCE) RANKING
If both A and B are acceptable,
but we cannot choose