CHAPTER 5
DISCOUNTED CASH FLOW VALUATION
Answers to Concepts Review and Critical Thinking Questions
1.
Assuming positive cash flows and a positive interest rate, both the present and the future value will
rise.
2.
Assuming positive cash flows and a positi

CHAPTER 8
NET PRESENT VALUE AND OTHER
INVESTMENT CRITERIA
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 b

1. A Max, Inc. deposited $2,000 in a bank account that pays 12% interest annually.
How many periods would it take for the deposit to grow to $6,798 if the interest is
compounded semiannually?
n=log(FV/PV)(klog(1+r/k) = log(6798/2000)/(2log(1+0.12/2)=10.50

ch01
Student: _
1.
Tim has been promoted and is now in charge of all fixed asset purchases. In other words, Tim is in charge
of:
A. capital structure management.
B. asset allocation.
C. risk management.
D. capital budgeting.
E. working capital management.

PV of a Stock Derivation
Thus, PV of a stock is present value of all future expected dividends.
Zero Growth Model Formula Derivation
The firm will pay a constant dividend forever.
That means the dividends are the same each period.
This becomes a perpetuit

Chapter 3
Analysis of Financial
Statements
Learning Outcomes
Know:
How to standardize financial statements for
comparison purposes
How to compute and interpret important
financial ratios
Understand the problems and pitfalls in
financial statement analysis

PAYBACK PERIOD
Definition: Time to recover initial investment
Decision Rule: ACCEPT is Payback Period < Preset Limit
NET PRESENT VALUE
Definition: NPV = PV of all future cash flows + Initial Outlay
Decision Rule: ACCEPT if NPV > 0
PROFITABILITY INDEX
Defi

Chapter 2
Financial Statements,
Cash Flow, and Taxes
Learning Outcomes
Examine Balance Sheet and Income Statement.
Differentiate between accounting value (or
book value) and market value.
Explain the difference between average and
marginal tax rates.
2-1

Corporate Finance Review
Definitions
Bonds are chapter 6 slide
1. Call premium: The amount by which the call price exceeds the par value of the bond.
2. Call provision: Agreement giving the issuer the option to repurchase bond at a specific
price prior to

CHAPTER 5
DISCOUNTED CASH FLOW VALUATION
Answers to Concepts Review and Critical Thinking Questions
1.
Assuming positive cash flows and a positive interest rate, both the present and the future value will
rise.
2.
Assuming positive cash flows and a positi

CHAPTER 6
INTEREST RATES AND BOND VALUTION
Answers to Concepts Review and Critical Thinking Questions
1.
No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury
securities have substantial interest rate risk.
2

CHAPTER 7
EQUITY MARKETS AND STOCK
VALUATION
Answers to Concepts Review and Critical Thinking Questions
1.
The value of any investment depends on its cash flows; i.e., what investors will actually receive. The
cash flows from a share of stock are the divi

CHAPTER 4
INTRODUCTION TO VALUATION: THE
TIME VALUE OF MONEY
Answers to Concepts Review and Critical Thinking Questions
1.
Compounding refers to the growth of a dollar amount through time via reinvestment of interest
earned. It is also the process of dete

CHAPTER 3
WORKING WITH FINANCIAL
STATEMENTS
Answers to Concepts Review and Critical Thinking Questions
1.
a. 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 i

CHAPTER 1
INTRODUCTION TO CORPORATE
FINANCE
Answers to Concepts Review and Critical Thinking Questions
1.
Capital budgeting (deciding on whether to expand a manufacturing plant), capital structure (deciding
whether to issue new equity and use the proceeds

Chapter 6: Interest Rates
and Bond Valuation
Bond Definitions
Who Issues Bonds?
Bond Characteristics
Bond Valuations
Bond Relationships
Computing YTM
Inflation and Interest Rates

Equity Markets and
Stock Valuation
Stock Valuation
Zero Growth Model
Constant Growth Model
Using the Dividend Growth
model to compute R
Non-Constant Growth
Model
Common Stock Features

Chapter 8: Net Present Value
and Other Investment Criteria
Payback Period
Net Present Value
Profitability Index
Internal Rate of Return
Modified Internal Rate of
Return

CHAPTER 10
SOME LESSONS FROM CAPITAL
MARKET HISTORY
Answers to Concepts Review and Critical Thinking Questions
1.
They all wish they had! Since they didnt, it must have been the case that the stellar performance was
not foreseeable, at least not by most.

CHAPTER 9
MAKING CAPITAL INVESTMENT
DECISIONS
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 a

CHAPTER 8
NET PRESENT VALUE AND OTHER
INVESTMENT CRITERIA
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 b

CHAPTER 11
RISK AND RETURN
Answers to Concepts Review and Critical Thinking Questions
1.
Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of
assets, this unsystematic portion of the total risk can be elim

CHAPTER 7
EQUITY MARKETS AND STOCK
VALUATION
Answers to Concepts Review and Critical Thinking Questions
1.
The value of any investment depends on its cash flows; i.e., what investors will actually receive. The
cash flows from a share of stock are the divi

CHAPTER 4
INTRODUCTION TO VALUATION: THE
TIME VALUE OF MONEY
Answers to Concepts Review and Critical Thinking Questions
1.
Compounding refers to the growth of a dollar amount through time via reinvestment of interest
earned. It is also the process of dete