Answers to Concepts Review and Critical Thinking Questions 2. The recognition and matching principles in financial accounting call for revenues, and the costs associated with producing those revenues, to be booked when the revenue process is essentially c

Chapter 5
Time value of Money
Main Issues:
Future Value and Compounding
Present Value and Discounting
5.1 Future Values and compounding
Future value: the amount of money an investment will grow to over
some period of time at a given interest rate
Suppos

Chapter 6
Discounted Cash Flow Valuation
Issues:
Valuation of Multiple Cash Flows
Valuation of Level Cash Flows
Understanding how interest rates are quoted
6.1 Multiple cash flows
Present value of multiple cash flows
T
Ci
Present Value of multiple cash fl

Chapter 13
Risk and Return
Diversification effects
Systematic risk principle
SML and CAPM
13.1 Expected Returns and Variances
Expected Returns
Expected returns are based on the probabilities of possible outcomes.
n
E ( R) pi Ri
i 1
Example: suppose you ha

Chapter 11
Project Analysis and Evaluation
Evaluating NPV Estimates: What-If Analyses
Break-Even Analysis
11.1 Evaluating NPV Estimates
NPV estimates are only estimates:
A positive NPV is a good start now we need to take a closer look.
Forecasting risk:

Chapter 7
Bond Valuation
Issues:
How to value Bonds
Interest rate risk and default Risk
Effects of inflation on interest rates
7.1 Valuing Bonds
Bond Definitions
Par value (face value):
The principal amount of a bond that is repaid at the end of the ter

Chapter 8: Stock Valuation
Issues:
Valuing stocks by dividend growth models and multiple
approaches
Features of common and preferred stocks
8.1 Valuing stock: Dividend discount model
Cash Flows to Stockholders
If you buy a share of stock, you can receive

Chapter 12
Lessons from capital market history
Historical risk-return tradeoff
Efficient Market Hypothesis
RiskReturn Tradeoff
o Two key lessons from capital market history:
There is a reward for bearing risk.
The greater the potential reward, the great

BUSS207 Chapter 5
Practice Problems
1. (a) Suppose you need $15,000 in 3 years. If you can earn 6% annually, how much do you need to
invest today?
(b) If you could invest the money at 8%, would you have to invest more or less than at 6%? How
much?
2. Supp

BUSS207 Chapter 6 Practice Problems
1. Answer following questions.
(a) An investment will provide you with $100 at the end of each year for the next 10 years. What is the
present value of that annuity if the discount rate is 8% annually?
(b) What is the p

Chapter 9
Net Present Value and
Other Investment Criteria
Understand the net present value rule and why it is the best
decision criteria
Understand other investment criteria and their weaknesses
Capital Budgeting decisions:
Analysis of potential projects

CHAPTER 15 B-1 Answers to Concepts Review and Critical Thinking Questions 1. 3. It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this, value is created. No. The cost of capital depends on the risk o

Answers to Concepts Review and Critical Thinking Questions
1. a. b. c. d. If inventory is purchased with cash, then there is no change in the current ratio. If inventory is purchased on credit, then there is a decrease in the current ratio if it was initi

Answers to Concepts Review and Critical Thinking Questions
4. The general method for valuing a share of stock is to find the present value of all expected future dividends. The dividend growth model presented in the text is only valid (i) if dividends are

Answers to Concepts Review and Critical Thinking Questions
1. A payback period less than the projects life means that the NPV is positive for a zero discount rate, but nothing more definitive can be said. For discount rates greater than zero, the payback

Answers to Concepts Review and Critical Thinking Questions 1. In this context, an opportunity cost refers to the value of an asset or other input that will be used in a project. The relevant cost is what the asset or input is actually worth today, not, fo

Answers to Concepts Review and Critical Thinking Questions 2. With a sensitivity analysis, one variable is examined over a broad range of values. With a scenario analysis, all variables are examined for a limited range of values.
Solutions to Questions an