Chapter 8 Cost of Capital 122
Appendix
What Is the Best Proxy for the Risk Free Rate?
While three month treasury bills have been generally used as proxies for the risk free rate,
long term treasury bonds are gaining support, primarily because they, like s
NPV Calculator
NPV Components
Discount Rate
Inputs
Investment
Period 1
Period 2
Period 3
Period 4
Period 5
Period 6
Period 7
-$
$
$
$
10%
115,000.00 Make sure this is negatve
80,000.00
80,000.00
128,000.00
Period 8
Note: Highlight range in
$120,011.27 NPV
SINGLE CASH FLOW
Present Value
Single Cash Flow - Present Value
Inputs
Single Cash Flow
Discount Rate / Period
$1,000.00
20
6.0%
6
$1,400.00
$1,200.00
$1,000.00
$800.00
Number of Periods
5
5
$600.00
Cash Flows
$400.00
Present Value
$200.00
$0.00
0
1
2
3
4
Which one of the following defines the internal rate
of return for a project?
a)
Discount rate that creates a zero cash
flow from assets
b)
Discount rate that results in a zero
net present value for the project
c)
Discount rate that results in a net
prese
A
1
2
3
4
5
6
7
8
9
BOND VALUATION
B
C
D
E
F
G
H
I
J
Annual Payments
Inputs
Number of Periods to Maturity (T)
Face Value (PAR)
8
8
$1,000
20
2.35%
4
$20.00
4
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
Discount Rate /
Common Stock
Par vs. Book (assets-liabilities = net worth / # of shares of issued outstanding stock) vs.
Market Value
Common stock shareholders have 3 rights:
o Votesone vote per share & different types of voting (cumulative & straight)
o Receives divid
Business Finance Final Review
Holding Period Return: total return on an asset over a specific period of time or holding
periodcapital appreciation and income
o Income + (End of Period Value Initial Value) / Initial Value
o Example: Ella buys a stock for $
Chapter 1- Time is fwoney 47
r-n c-
Q'Wull 113% ii
V1111
This appendix begins by setting, out a tow hints that will help students avoid common
mistakes. These include setting, one s calculate: to show more than two places behind the
decimai. 17 his
Chapter 5 Time ii'cntre zilppi'icnrfem': Security Vmunon and Expected Return 69
maturity-matching financiai rule of thumb.
Solving For Expected Returns
The expected return for a share of stock, the yields to maturity for a bond, and the internal
rate of r
Chapter 1 A Financial Model of the Corporation
2.
Answers To Questions
1. Managers are employees of stockholders, the corporation's owners. The job of managers is to
maximize the wealth of shareholders.
a) Fixed claims are legally-enforced. If they are no
Calculator Keystrokes for the TI Business Analyst Calculator
Note that I did not tend to round here. Also, you can refer to your calculators
instructions.
Here are a couple of general things you should do with your calculator.
First, set your register to
Decomposition of Risk
There are lots of ways of sub-dividing people. For example, there are men and women; old and young;
ethnicity; race; language-spoken; intelligence; height; etc. etc. . Risk is the same thing. When you hear
someone speak of risk, it c
48
Chapter 4 Time is Money
7. An annuity has a nite number of cash ows, whereas a perpetuitys cash flows go on
forever, at least conceptually. Annuities due have payments at the beginning of each period. .
Ordinary annuities have payments at the end of ea
Finding the Required Rate of Return for an Investment
Risk and Return
The trade-off between risk and return is almost intuitive: We instinctively understand
that if we are going to invest in a bond of United Airlines that we would do so only if we
expecte
Chapter 2 Markets, Value and the Firm 16 3
l l
E
that this is nothing more than the NPV criteria for capital budgeting introduced in a common / ,> 1
sense way. )_ H
Because estimating the value of the cash ows of a project is integral to wealth creation
STOCK VALUATION
Dividend Discount Model
Inputs
Cost of Equity Capital
Dividend Discount Model
Year
Dividend Growth Rate
Dividend
Continuation Value
Dividend + Continuation Value
PV of Dividend + Contin. Value
Stock Value
11.5%
0
$6.64
23
1
12.0%
$7.44
$7.