Chapter 7 Exercises
Student ID No.: _
1. Bond Yields [LO2] Bourdon Software has 6.4 percent coupon bonds on the market
with 18 years to maturity. The bonds make semiannual payments and currently sell for
106.8 percent of par. What is the current yield on
Chapter 8 Exercises
1. Stock Values [LO1] The next dividend payment by Halestorm, Inc., will be $2.04 per
share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If
the stock currently sells for $37 per share, what is the re
Chapter 13
RETURN, RISK, AND
THE SECURITY
MARKET LINE
1
Chapter Outline
Expected Returns and Variances
Portfolios
Risk: Systematic and Unsystematic
Diversification and Portfolio Risk
Systematic Risk and Beta
The Security Market Line
2
Dollar Returns
Total
Chapter 16
FINANCIAL LEVERAGE
AND CAPITAL
STRUCTURE POLICY
1
Chapter Outline
The Capital Structure Question
The Effect of Financial Leverage
Capital Structure and the Cost of Equity Capital
M&M Propositions I and II with Corporate Taxes
Bankruptcy Costs
O
Chapter 10
MAKING CAPITAL
INVESTMENT DECISIONS
1
Chapter Outline
Project Cash Flows: A First Look
Incremental Cash Flows
Pro Forma Financial Statements and Project Cash Flows
More about Project Cash Flow
Alternative Definitions of Operating Cash Flow
Some
Chapter 14
COST OF CAPITAL
1
Chapter Outline
The Cost of Capital: Some Preliminaries
The Cost of Equity
The Costs of Debt and Preferred Stock
The Weighted Average Cost of Capital
Divisional and Project Costs of Capital
2
Why Cost of Capital Is Important
W
Chapter 10 Exercises
1. Relevant Cash Flows [LO1] Parker & Stone, Inc., is looking at setting up a new
manufacturing plant in South Park to produce garden tools. The company bought some
land six years ago for $3.5 million in anticipation of using it as a
Year
Sales
Variable Costs
Gross Profit
Fixed Costs
Depreciation
EBIT
Taxes
Net Income
Pro Forma Income Statements
0
1
200000
125000
75000
12000
30000
33000
11220
21780
Cash Flows
Operating Cash Flow
Changes in NWC
Net Capital Spending
Cash Flow From Asset
Year
Sales
Variable Costs
Gross Profit
Fixed Costs
Depreciation
EBIT
Taxes
Net Income
Pro Forma Income Statements
0
1
200000
125000
75000
12000
30000
33000
11220
21780
Cash Flows
Operating Cash Flow
Changes in NWC
Net Capital Spending
Cash Flow From Asset
Investment Analysis and
Portfolio Management
Capital Asset Pricing and Arbitrage
Pricing Theory
Erik Wang, Ph.D.
School of Management and Economics
CUHK, Shenzhen
5
The Capital Asset Pricing Model
Assumptions
Markets are competitive, equally profitable
Chapter 12 Answers
Q1.
A top-down approach to security valuation begins with an analysis of the global and domestic
economy. Analysts who follow a top-down approach then narrow their attention to an industry
or sector likely to perform well, given the exp
Chapter 15 Exercises & Answers
Q4.
Turn back to Figure 15.1, which lists the prices of various IBM options. Use the data in
the figure to calculate the payoff and the profits for investments in each of the following
January 2012 expiration options, assumi
Chapter 18 Exercises & Answers
1. Based on current dividend yields and expected capital gains, the expected rates of
return on portfolios A and B are 11% and 14%, respectively. The beta of A is 0.8, while
that of B is 1.5. The T-bill rate is currently 6%,
Chapter 10 Exercises & Answers
Q12.
You buy an eight-year bond that has a 6% current yield and a 6% coupon (paid annually).
In one year, promised yields to maturity have risen to 7%. What is your holding-period
return?
The current yield and the annual cou
Chapter 13 Answers
Q16.
a. False. Higher beta means that the risk of the firm is higher and the
discount rate applied to value cash flows is higher. For any expected path
of earnings and cash flows, the present value of the cash flows, and
therefore, the
Chapter 11 Exercises & Answers
Q8.
Find the duration of a 6% coupon bond making annual coupon payments if it has three
years until maturity and a yield to maturity of 6%. What is the duration if the yield to
maturity is 10%?
When YTM = 6%, the duration is
Investment Analysis and
Portfolio Management
Risk and Return: Past and Prologue
Efficient Diversification
Erik Wang, Ph.D.
School of Management and Economics
CUHK, Shenzhen
4
Rates of Return
Holding-Period Return (HPR)
Rate of return over given invest
Investment Analysis and
Portfolio Management
Investments: Background and Issues
Asset Classes and Financial Instruments
Erik Wang, Ph.D.
School of Management and Economics
CUHK, Shenzhen
1
Real versus Financial Assets
Nature of Investment
Reduce curre
You are going to borrow $250,000 to buy a house. W
monthly payment be if the interest rate is .58% per m
borrow the money for 30 years?
PV =
NPER =
RATE =
250,000
360 (30 years * 12 mo
0.58% (Same as .0058)
Monthly Payment =
($1,656.55)
Formula
=PMT(B5,B4
Chapter 7
INTEREST RATES AND
BOND VALUATION
1
Chapter Outline
Bonds and Bond Valuation
Bond Ratings
2
Differences Between Debt and Equity
Debt
Not an ownership interest
Creditors do not have voting
rights
Interest is considered a cost
of doing business
Chapter 6
DISCOUNTED CASH
FLOW VALUATION
1
Chapter Outline
Future and Present Values of Multiple Cash
Flows
Valuing Level Cash Flows: Annuities and
Perpetuities
Comparing Rates: The Effect of Compounding
2
Multiple Cash Flows FV
Example 6.1
You think you
Rule of 72
Earlier, we discussed the Rule of 72, a useful approximation for many interest rates and
periods for the time it takes a lump sum to double in value. We are only concerned with
the time it takes money to double, so the dollar amounts are irrele
Chapter 1
INTRODUCTION TO
CORPORATE FINANCE
1
Chapter Outline
Corporate Finance and the Financial Manager
Forms of Business Organization
The Goal of Financial Management
The Agency Problem and Control of the
Corporation
Financial Markets and the Corporati
Chapter 5 Exercises
Student ID No.: _
1. Simple Interest versus Compound Interest [LO1] First City Bank pays 8 percent simple
interest on its savings account balances, whereas Second City Bank pays 8 percent interest
compounded annually. If you made a dep
Chapter 5
INTRODUCTION TO
VALUATION: THE TIME
VALUE OF MONEY
1
Chapter Outline
Future Value and Compounding
Present Value and Discounting
More about Present and Future Values
2
Basic Definitions
Present Value earlier money on a time line
Future Value late