FINANCIAL MANAGEMENT 2017 - QUIZ AND CASE STUDY GUIDES
Corporate Finance, 4e (Berk / DeMarzo)
Chapter 5 Interest Rates
Corporate Finance, 4e (Berk / DeMarzo)
Chapter 5 Interest Rates
5.1 Interest Rate Quotes and Adjustments
1) Which of the following statements is FALSE?
- A) Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows.
- B) The effective annual rate indicates the amount of interest that will be earned at the end of one year.
- C) The annual percentage rate indicates the amount of simple interest earned in one year.
- D) The annual percentage rate indicates the amount of interest including the effect of compounding.
Answer: D
Diff: 1
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Conceptual
2) Which of the following equations is INCORRECT?
- A) - 1= APR
- B) Equivalent n-Period Discount Rate = (1 + r)n- 1
- C) 1 + EAR =
- D) Interest Rate per Compounding Period =
Answer: A
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Conceptual
3) The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is closest to:
- A) 7.72%
- B) 8.00%
- C) 8.30%
- D) 8.66%
Answer: C
Explanation: C) EAR = (1 + APR/k)k - 1 = (1 + .08/12)12 - 1 = .083 or 8.3%
Diff: 1
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
4) The effective annual rate (EAR) for a loan with a stated APR of 10% compounded quarterly is closest to:
- A) 9.65%
- B) 10.00%
- C) 10.38%
- D) 12.50%
Answer: C
Explanation: C) EAR = (1 + APR/k)k - 1 = (1 + .10/4)4 - 1 = .1038 or 10.38%
Diff: 1
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
5) The effective annual rate (EAR) for a savings account with a stated APR of 4% compounded daily (use 365 day year) is closest to:
- A) 3.92%
- B) 4.00%
- C) 4.08%
- D) 14.60%
Answer: C
Explanation: C) EAR = (1 + APR/k)k - 1 = (1 + .04/365)365 - 1 = .04088 or 4 .08%
Diff: 1
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
Use the table for the question(s) below.
Consider the following investment alternatives:
Investment |
Rate |
Compounding |
A |
6.25% |
Annual |
B |
6.10% |
Daily |
C |
6.125 |
Quarterly |
D |
6.120 |
Monthly |
6) Which alternative offers you the highest effective rate of return?
- A) Investment A
- B) Investment B
- C) Investment C
- D) Investment D
Answer: D
Explanation: D) EAR (A) = (1 + APR/k)k - 1 = (1 + .0625/1)1 - 1 = .0625 or 6.250%
EAR (B) = (1 + APR/k)k - 1 = (1 + .0610/365)365 - 1 = .06289 or 6.289%
EAR (C) = (1 + APR/k)k - 1 = (1 + .06125/4)4 - 1 = .06267 or 6.267%
EAR (D) = (1 + APR/k)k - 1 = (1 + .0612/12)12 - 1 = .06295 or 6.300%
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
7) Which alternative offers you the lowest effective rate of return?
- A) Investment A
- B) Investment B
- C) Investment C
- D) Investment D
Answer: A
Explanation: A) EAR (A) = (1 + APR/k)k - 1 = (1 + .0625/1)1 - 1 = .0625 or 6.250%
EAR (B) = (1 + APR/k)k - 1 = (1 + .0610/365)365 - 1 = .06289 or 6.289%
EAR (C) = (1 + APR/k)k - 1 = (1 + .06125/4)4 - 1 = .06267 or 6.267%
EAR (D) = (1 + APR/k)k - 1 = (1 + .0612/12)12 - 1 = .06295 or 6.300%
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
8) The highest effective rate of return you could earn on any of these investments is closest to:
- A) 6.250%
- B) 6.267%
- C) 6.295%
- D) 6.310%
Answer: C
Explanation: C) EAR (A) = (1 + APR/k)k - 1 = (1 + .0625/1)1 - 1 = .0625 or 6.250%
EAR (B) = (1 + APR/k)k - 1 = (1 + .0610/365)365 - 1 = .06289 or 6.289%
EAR (C) = (1 + APR/k)k - 1 = (1 + .06125/4)4 - 1 = .06267 or 6.267%
EAR (D) = (1 + APR/k)k - 1 = (1 + .0612/12)12 - 1 = .06295 or 6.300%
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
9) The lowest effective rate of return you could earn on any of these investments is closest to:
- A) 6.150%
- B) 6.250%
- C) 6.289%
- D) 6.300%
Answer: B
Explanation: B) EAR (A) = (1 + APR/k)k - 1 = (1 + .0625/1)1 - 1 = .0625 or 6.250%
EAR (B) = (1 + APR/k)k - 1 = (1 + .0610/365)365 - 1 = .06289 or 6.289%
EAR (C) = (1 + APR/k)k - 1 = (1 + .06125/4)4 - 1 = .06267 or 6.267%
EAR (D) = (1 + APR/k)k - 1 = (1 + .0612/12)12 - 1 = .06295 or 6.300%
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
Use the information for the question(s) below.
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $200,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4000 (paid at the end of each month). Your firm can borrow at 6% APR with quarterly compounding.
10) The effective annual rate on your firm's borrowings is closest to:
- A) 6.00%
- B) 6.14%
- C) 6.25%
- D) 6.30%
Answer: B
Explanation: B) EAR = (1 + APR/k)k - 1 = (1 + .06/4)4 - 1 = .06136 or 6.14%
Diff: 1
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
11) The effective annual rate for a credit card that charges a 19.9% APR compounded daily is closest to:
- A) 18.15%
- B) 19.9%
- C) 22.0%
- D) 24.2%
Answer: C
Explanation: C) EAR = (1 + .199/365)365 - 1 = .220116
Diff: 1
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
12) The effective annual rate for a certificate of deposit that pays 3.9% APR compounded monthly is closest to:
- A) 3.83%
- B) 3.90%
- C) 3.97%
- D) 4.04%
Answer: C
Explanation: C) EAR = (1 + .039/12)12 - 1 = .039705
Diff: 1
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
13) Wesley Mouch's auto loan requires monthly payments and has an effective annual rate of 6.43%. The APR on this auto loan is closest to:
- A) 6.00%
- B) 6.25%
- C) 6.50%
- D) 6.62%
Answer: B
Explanation: B) APR = ( - 1) × 12 = .062479
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
14) Interest on James Taggart's credit card balances are compounded daily at an effect annual rate of 14.91%. The APR on his credit card is closest to:
- A) 13.90%
- B) 13.95%
- C) 14.91%
- D) 16.08%
Answer: A
Explanation: A) APR = ( - 1) × 365 = .139006
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
15) Suppose the interest rate is 9% APR with monthly compounding. Then the present value of an annuity that pays $250 every three months for the next five years is closest to:
- A) $2280
- B) $3985
- C) $3990
- D) $3995
Answer: B
Explanation: B) EAR = (1 + .09/12)12 - 1 = .093807
APR = ( - 1) × 4 = .090677
PVA = PMT = 250 = $3,984.49
Diff: 3
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
16) Floyd Ferris invested $3000 into an account five years ago. Today his account has grown to have a balance of $3927.50. Given that his account offered monthly compounding of interest, the APR on this account is closest to:
- A) 5.00%
- B) 5.25%
- C) 5.40%
- D) 5.54%
Answer: C
Explanation: C) APR = ( × 12 = .054
Diff: 3
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
Use the information for the question(s) below.
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $200,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4000 (paid at the end of each month). Your firm can borrow at 6% APR with quarterly compounding.
17) The effective monthly discount rate that you should use to evaluate the truck lease is closest to:
- A) 0.487%
- B) 0.498%
- C) 1.500%
- D) 1.535%
Answer: B
Explanation: B) EAR = (1 + APR/k)k - 1 = (1 + .06/4)4 - 1 = .06136 or 6.14%
Monthly rate = (1 + EAR)(1/12) - 1 = (1.06136)(1/12) - 1 = .004975 = 0.498%
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
18) The present value of the lease payments for the delivery truck is closest to:
- A) $206,900
- B) $207,050
- C) $207,680
- D) $198,420
Answer: B
Explanation: B) First we need to calculate the monthly discount rate for the lease arrangement.
EAR = (1 + APR/k)k - 1 = (1 + .06/4)4 - 1 = .06136 or 6.14%
Monthly rate = (1 + EAR)(1/12) - 1 = (1.06136)(1/12) - 1 = .004975 = 0.4975%
PV = 4000 × (1/0.004975) × (1 - 1/(1.00497560)) = 207,051.61
Diff: 3
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
19) You are considering purchasing a new automobile that will cost you $28,000. The dealer offers you 4.9% APR financing for 60 months (with payments made at the end of the month). Assuming you finance the entire $28,000 and finance through the dealer, your monthly payments will be closest to:
- A) $1454
- B) $527
- C) $467
- D) $457
Answer: B
Explanation: B) First we need the monthly interest rate = APR/k = .049/12 = .004083 or .4083%.
28,000 = PMT × (1/0.004083) × (1 - 1/(1.00408360))
PMT = $527.11
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
20) You are considering purchasing a new truck that will cost you $34,000. The dealer offers you 1.9% APR financing for 48 months (with payments made at the end of the month). Assuming you finance the entire $34,000 and finance through the dealer, your monthly payments will be closest to:
- A) $708
- B) $725
- C) $736
- D) $1086
Answer: C
Explanation: C) First we need the monthly interest rate = APR/k = .019/12 = .001583 or .1583%.
34,000 = PMT × (1/0.001583) × (1 - 1/(1.00158348))
PMT = $736.15
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
Use the information for the question(s) below.
You are in the process of purchasing a new automobile that will cost you $27,500. The dealership is offering you either a $2500 rebate (applied toward the purchase price) or 1.9% financing for 48 months (with payments made at the end of the month). You have been pre-approved for an auto loan through your local credit union at an interest rate of 6.5% for 48 months.
21) If you take the $2500 rebate and finance your new car through your credit union your monthly payments will be closest to:
- A) $520
- B) $573
- C) $593
- D) $799
Answer: C
Explanation: C) First we need the monthly interest rate = APR/k = .065/12 = .005417 or .5417%.
25,000 = PMT × (1/0.005417) × (1 - 1/(1.00541748))
PMT = $592.87
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
22) If you forgo the $2500 rebate and finance your new car through the dealership your monthly payments (with payments made at the end of the month) will be closest to:
- A) $520
- B) $573
- C) $595
- D) $799
Answer: C
Explanation: C) First we need the monthly interest rate = APR/k = .019/12 = .001583 or .1583%.
27,500 = PMT × (1/0.001583) × (1 - 1/(1.00158348))
PMT = $595.41
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
Use the information for the question(s) below.
You are purchasing a new home and need to borrow $250,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.25% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay 2 points, they can offer you a lower rate of 6.0% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points you will need to borrow an additional $5000 to cover points you are paying the lender.
23) Assuming you don't pay the points and borrow from the mortgage lender at 6.25%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to:
- A) $694
- B) $708
- C) $1540
- D) $1600
Answer: C
Explanation: C) First we need the monthly interest rate = APR/k = .0625/12 = .005208 or .5208%.
250,000 = PMT × (1/0.005208) × (1 - 1/(1.005208360))
PMT = $1539.29
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
24) Assuming you pay the points and borrow from the mortgage lender at 6.00%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to:
- A) $708
- B) $1530
- C) $1540
- D) $1600
Answer: B
Explanation: B) First we need the monthly interest rate = APR/k = .0600/12 = .005000 or 0.50%.
255,000 = PMT × (1/0.005) × (1 - 1/(1.005360))
PMT = $1528.85
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
Use the information for the question(s) below.
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.9% APR. You monthly payments are $617.16 and you have just made your 24th monthly payment on your SUV.
25) The amount of your original loan is closest to:
- A) $14,808
- B) $22,212
- C) $32,000
- D) $37,020
Answer: C
Explanation: C) First we need the monthly interest rate = APR/k = .059/12 = .004917 or 0.4917%.
PV = 617.16 × (1/0.004917) × (1 - 1/(1.00491760)) = $31,999.86
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
26) Assuming that you have made all of the first 24 payments on time, then the outstanding principal balance on your SUV loan is closest to:
- A) $14,808
- B) $20,300
- C) $22,212
- D) $32,000
Answer: B
Explanation: B) First we need the monthly interest rate = APR/k = .059/12 = .004917 or 0.4917%.
PV = 617.16 × (1/0.004917) × (1 - 1/(1.00491736)) = $20,316.92
Remember:
N = 36 (remaining payments 60 - 24 = 36)
Diff: 2
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
Use the information for the question(s) below.
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $200,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4000 (paid at the end of each month). Your firm can borrow at 6% APR with quarterly compounding.
27) Should you purchase the delivery truck or lease it? Why?
Answer: First we need to calculate the monthly discount rate for the lease arrangement.
EAR = (1 + APR/k)k - 1 = (1 + .06/4)4 - 1 = .06136 or 6.14%
Monthly rate = (1 + EAR)(1/12) - 1 = (1.06136)(1/12) - 1 = .004975 = 0.4975%
PV = 4000 × (1/0.004975) × (1 - 1/(1.00497560)) = $207,051.61
So leasing the truck will cost us 207051.61 - 200,000 = 7051.61 more than purchasing. Therefore, we are better off purchasing the truck.
Diff: 3
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
28) You are in the process of purchasing a new automobile that will cost you $25,000. The dealership is offering you either a $1000 rebate (applied toward the purchase price) or 3.9% financing for 60 months (with payments made at the end of the month). You have been pre-approved for an auto loan through your local credit union at an interest rate of 7.5% for 60 months. Should you take the $2000 rebate and finance through your credit union or forgo the rebate and finance through the dealership at the lower 3.9% APR?
Answer: Take the rebate!
Credit Union:
First we need the monthly interest rate = APR/k = .075/12 = .00625 or .625%.
Now:
PV = 24,000 (rebate 25,000 - 1,000)
I = .625
FV = 0
N = 60
Compute PMT = $480.91
Dealership:
First we need the monthly interest rate = APR/k = .039/12 = .00325 or .325%.
Now:
PV = 25,000 (no rebate)
I = .325
FV = 0
N = 60
Compute PMT = $459.29
Since 459.29 < 480.91, go with the dealership and forgo the rebate.
Diff: 3
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
29) You are purchasing a new home and need to borrow $325,000 from a mortgage lender. The mortgage lender quotes you a rate of 6. 5% APR for a 30-year fixed rate mortgage (with payments made at the end of each month). The mortgage lender also tells you that if you are willing to pay 1 point, they can offer you a lower rate of 6.25% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $3250 to cover points you are paying the lender. Assuming that you do not intend to prepay your mortgage (pay off your mortgage early), are you better off paying the 1 point and borrowing at 6.25% APR or just taking out the loan at 6.5% without any points?
Answer: Pay the points!
Points (6.25% APR)
First we need the monthly interest rate = APR/k = .0625/12 = .00520833 or .5208%.
Now:
PV = 328,250 ( 325,000 + 1 point)
I = .5208
FV = 0
N = 360 (30 years × 12 months)
Compute PMT = $2021.01
No Points
First we need the monthly interest rate = APR/k = .065/12 = .005417 or .5417%.
Now:
PV = 325,000 (no points)
I = .5417
FV = 0
N = 360 (30 years × 12 months)
Compute PMT = $2054.22
Since $2021.01 < $2054.22, pay the points!
Diff: 3
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
Use the information for the question(s) below.
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.9% APR. You monthly payments are $617.16 and you have just made your 24th monthly payment on your SUV.
30) Assuming that you have made all of the first 24 payments on time, then how much interest have you paid over the first two years of your loan?
Answer: $3129.09
First figure out the outstanding balance:
We need the monthly interest rate = APR/k = .059/12 = .004917 or 0.4917%.
Now
I = .4917
FV = 0
N = 36 (remaining payments = 60 - 24 = 36)
PMT = 617.16
Compute PV = $20,316,80
Next figure out the original loan amount:
First we need the monthly interest rate = APR/k = .059/12 = .004917 or 0.4917%.
Now
I = .4917
FV = 0
N = 60 (original number of payments)
PMT = 617.16
Compute PV = $31,999.55
So the amount of principal paid = 31,999.55 - 20,316.80 = 11,682.75.
You have paid a total of 24 × 617.16 = $14,811.84.
So amount of Interest = 14,811.84 - 11,682.75 = 3129.09.
Diff: 3
Section: 5.1 Interest Rate Quotes and Adjustments
Skill: Analytical
5.2 Application: Discount Rates and Loans
1) Hugh Akston took out a 30-year mortgage with an EAR of 5.9%. If Hugh borrowed $300,000 to buy his home, then his monthly payment will be closest to:
- A) $835
- B) $1750
- C) $1780
- D) $10,240
Answer: B
Explanation: B) APR = ( - 1) × 12 = .057462
PMT = = 1750.00
Diff: 3
Section: 5.2 Application: Discount Rates and Loans
Skill: Analytical
Use the following information to answer the question(s) below.
Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%.
2) Dagny's monthly payments are closest to:
- A) $1110
- B) $1800
- C) $2215
- D) $2245
Answer: D
Explanation: D) PMT = = 2246.12
Diff: 2
Section: 5.2 Application: Discount Rates and Loans
Skill: Analytical
3) The total amount of interest that Dagny will pay during the first month of her mortgage is closest to:
- A) $1110
- B) $1785
- C) $1800
- D) $2245
Answer: C
Explanation: C) PMT = = 2246.12
First Month's Interest = $400,000 × .054/12 = $1800
First Month's Principal = $2246.12 - $1800 = $446.12
Diff: 1
Section: 5.2 Application: Discount Rates and Loans
Skill: Analytical
4) The total amount of principal that Dagny will pay during the first month of her mortgage is closest to:
- A) $246
- B) $446
- C) $1800
- D) $2245
Answer: B
Explanation: B) PMT = = 2246.12
First Month's Interest = $400,000 × .054/12 = $1800
First Month's Principal = $2246.12 - $1800 = $446.12
Diff: 2
Section: 5.2 Application: Discount Rates and Loans
Skill: Analytical
5) The total amount of interest that Dagny will pay during the first three months of her mortgage is closest to:
- A) $1345
- B) $5380
- C) $5395
- D) $6740
Answer: C
Explanation: C) PMT = = 2246.12
First Month's Interest = $400,000 × .054/12 = $1800
First Month's Principal = $2246.12 - $1800 = $446.12
Second Month's Interest = ($400,000 - 446.12) × .054/12 = $1797.99
Second Month's Principal = $2246.12 - $1797.99 = $448.13
Third Month's Interest = (400,000 - 446.12 - 448.13) × .054/12 = $1795.98
Third Month's Principal = $2246.12 - $1795.98 = $450.14
Total Interest = $1800 + $1797.99 + $1795.98 = $5393.97
Total Principal = $446.12 + $448.13 + $450.14 = $1344.39
Diff: 3
Section: 5.2 Application: Discount Rates and Loans
Skill: Analytical
6) The total amount of principal that Dagny will pay during the first three months of her mortgage is closest to:
- A) $1340
- B) $1345
- C) $5395
- D) $6740
Answer: B
Explanation: B) PMT = = 2246.12
First Month's Interest = $400,000 × .054/12 = $1800
First Month's Principal = $2246.12 - $1800 = $446.12
Second Month's Interest = ($400,000 - 446.12) × .054/12 = $1797.99
Second Month's Principal = $2246.12 - $1797.99 = $448.13
Third Month's Interest = (400,000 - 446.12 - 448.13) × .054/12 = $1795.98
Third Month's Principal = $2246.12 - $1795.98 = $450.14
Total Interest = $1800 + $1797.99 + $1795.98 = $5393.97
Total Principal = $446.12 + $448.13 + $450.14 = $1344.39
Diff: 3
Section: 5.2 Application: Discount Rates and Loans
Skill: Analytical
5.3 The Determinants of Interest Rates
1) Which of the following statements is FALSE?
- A) The interest rates that banks offer on investments or charge on loans depends on the horizon of the investment or loan.
- B) The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate.
- C) The interest rates that are quoted by banks and other financial institutions are nominal interest rates.
- D) Fundamentally, interest rates are determined by the Federal Reserve.
Answer: D
Diff: 1
Section: 5.3 The Determinants of Interest Rates
Skill: Conceptual
2) Which of the following statements is FALSE?
- A) The relationship between the investment term and the interest rate is called the term structure of interest rates.
- B) Real interest rates indicate the rate at which your money will grow if invested for a certain period.
- C) The yield curve is a potential leading indicator of future economic growth.
- D) The shape of the yield curve will be strongly influenced by interest rate expectations.
Answer: B
Diff: 1
Section: 5.3 The Determinants of Interest Rates
Skill: Conceptual
3) Which of the following statements is FALSE?
- A) The yield curve changes over time.
- B) The formulas for computing present values of annuities and perpetuities cannot be used in situations in which cash flows need to be discounted at different rates.
- C) We can use the term structure to compute the present and future values of a risk-free cash flow over different investment horizons.
- D) The yield curve tends to be inverted as the economy comes out of a recession.
Answer: D
Diff: 2
Section: 5.3 The Determinants of Interest Rates
Skill: Conceptual
4) Which of the following statements is FALSE?
- A) The plot of the relationship between the investment risk and the interest rate is call the yield curve.
- B) Each of the last six recessions in the United States was preceded by a period with an inverted yield curve.
- C) The nominal interest rate does not represent the increase in purchasing power that will result from investing.
- D) A risk-free cash flow received in two years should be discounted at the two-year interest rate.
Answer: A
Diff: 1
Section: 5.3 The Determinants of Interest Rates
Skill: Conceptual
5) Which of the following statements is FALSE?
- A) An inverted yield curve generally signals an expected decline in future interest rates.
- B) An inverted yield curve is often interpreted as a positive forecast for economic growth.
- C) All the formulas for computing present values of annuities and perpetuities are based upon discounting all of the cash flows at the same rate.
- D) The rate of growth of your purchasing power is determined by the real interest rate.
Answer: B
Diff: 2
Section: 5.3 The Determinants of Interest Rates
Skill: Conceptual
6) Which of the following formulas is INCORRECT?
- A) i = - 1
- B) 1 + rr=
- C) rr≈ i - r
- D) rr=
Answer: C
Diff: 2
Section: 5.3 The Determinants of Interest Rates
Skill: Conceptual
7) If the current inflation rate is 4.2% and you are earning a real rate of return on an investment of 3.8%, then the nominal rate on this investment is closest to:
- A) 3.8%
- B) 4.2%
- C) 8.0%
- D) 8.2%
Answer: D
Explanation: D) (1 + real)(1 + inf) = (1 + nom) → (1.038)(1.042) - 1 = .081596
Diff: 1
Section: 5.3 The Determinants of Interest Rates
Skill: Analytical
8) If an investment providing a nominal return of 12.25% only offers a real rate of return of 5.70%, then the inflation rate is closest to:
- A) 5.70%
- B) 6.20%
- C) 6.55%
- D) 12.25%
Answer: B
Explanation: B) (1 + nom)/(1 + real) = (1 + inf) → (1.1225)/(1.0570) - 1 = .061968
Diff: 1
Section: 5.3 The Determinants of Interest Rates
Skill: Analytical
9) If the current inflation rate is 5%, then the nominal rate necessary for you to earn an 8% real interest rate on your investment is closest to:
- A) 13.0%
- B) 13.4%
- C) 4.9%
- D) 3.0%
Answer: B
Explanation: B) nominal = (1 + inflation)(1 + real) - 1 = (1.05)(1.08) - 1 = .134 or 13.4%
Diff: 1
Section: 5.3 The Determinants of Interest Rates
Skill: Analytical
10) If the current inflation rate is 4% and you have an investment opportunity that pays 10%, then the real rate of interest on your investment is closest to:
- A) 10.0%
- B) 14.0%
- C) 6.0%
- D) 5.8%
Answer: D
Explanation: D) 1 + nominal = (1 + inflation)(1 + real)
real interest rate = - 1 = .057692 or 5.77%
Diff: 1
Section: 5.3 The Determinants of Interest Rates
Skill: Analytical
Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
Term |
1 year |
2 years |
3 years |
5 years |
10 years |
20 years |
Rate (EAR%) |
5.00% |
4.80% |
4.60% |
4.50% |
4.25% |
4.15% |
11) What is the shape of the yield curve and what expectations are investors likely to have about future interest rates?
- A) Inverted; Higher
- B) Normal; Higher
- C) Inverted; Lower
- D) Normal; Lower
Answer: C
Diff: 2
Section: 5.3 The Determinants of Interest Rates
Skill: Conceptual
12) The present value of receiving $1000 per year with certainty at the end of the next three years is closest to:
- A) $2737
- B) $2723
- C) $2733
- D) $2744
Answer: A
Explanation: A) = 1000/(1.05) + 1000/(1.048)2 + 1000/(1.046)3 = 2737
Diff: 2
Section: 5.3 The Determinants of Interest Rates
Skill: Analytical
13) Consider an investment that pays $1000 certain at the end of each of the next four years. If the investment costs $3500 and has an NPV of $74.26, then the four year risk-free interest rate is closest to:
- A) 4.50%
- B) 4.58%
- C) 4.55%
- D) 4.53%
Answer: D
Explanation: D) NPV = 74.26 = -3500 + 1000/(1.05)1 + 1000/(1.048)2 + 1000/(1.046)3 + 1000/(1 + x)4
3574.26 - 1000/(1.05)1 + 1000/(1.048)2 + 1000/(1.046)3 = 1000/(1 + x)4
837.60 = 1000/(1 + X)4 → (1 + X)4 = 1000/837.60 → X = .0453 or 4.53%
Diff: 3
Section: 5.3 The Determinants of Interest Rates
Skill: Analytical
14) The NPV of an investment that costs $2700 and pays $1000 certain at the end of one, three, and five years is closest to:
- A) 21.47
- B) $1665.62
- C) -100.26
- D) -71.38
Answer: D
Explanation: D) NPV = -2700 + 1000/(1.05)1 + 1000/(1.046)3 + 1000/(1.045)5 = -71.38
Diff: 2
Section: 5.3 The Determinants of Interest Rates
Skill: Analytical
15) Should the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.
Answer: The nominal interest rate should never be negative since by just holding your money you are earning a 0% return (no negative) on your money. The real rate, however, can be negative anytime that the inflation rate exceeds the nominal rate.
Diff: 1
Section: 5.3 The Determinants of Interest Rates
Skill: Conceptual
Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
Term |
1 year |
2 years |
3 years |
5 years |
10 years |
20 years |
Rate (EAR%) |
5.00% |
4.80% |
4.60% |
4.50% |
4.25% |
4.15% |
16) What is the NPV of an investment that costs $2500 and pays $1000 certain at the end of one, three, and five years?
Answer: NPV = -2500 + 1000/(1.05)1 + 1000/(1.046)3 + 1000/(1.045)5 = 128.62
Diff: 2
Section: 5.3 The Determinants of Interest Rates
Skill: Analytical
5.4 Risk and Taxes
1) Which of the following statements is FALSE?
- A) When we refer to the "risk-free interest rate," we mean the rate on U.S. Treasuries.
- B) Interest rates vary with the investment horizon.
- C) All borrowers, besides the U.S. Treasury, have some risk of default.
- D) When interest on a loan is tax deductible, the effective after-tax interest rate is τ × (1 - r).
Answer: D
Diff: 2
Section: 5.4 Risk and Taxes
Skill: Conceptual
2) Which of the following statements is FALSE?
- A) The equivalent after-tax interest rate is r - (τ × r).
- B) Interest rates vary based on the identity of the borrower.
- C) The ability to deduct the interest expense increases the effective after-tax interest rate paid on the loan.
- D) For loans to borrowers other than the U.S. Treasury, the stated interest rate is the maximum amount that investors will receive.
Answer: C
Diff: 2
Section: 5.4 Risk and Taxes
Skill: Conceptual
3) Which of the following statements is FALSE?
- A) U.S. Treasury securities are widely regarded to be risk-free because there is virtually no chance the government will default on these bonds.
- B) In general, if the interest rate is r and the tax rate is τ, then for each $1 invested you will earn interest equal to r and owe taxes of τ × r on the interest.
- C) Investors may receive less than the stated interest rate if the borrowing company has financial difficulties and is unable to fully repay the loan.
- D) Taxes reduce the amount of interest the investor can keep, and we refer to this reduced amount as the tax effective interest rate.
Answer: D
Diff: 2
Section: 5.4 Risk and Taxes
Skill: Conceptual
4) Which of the following statements is FALSE?
- A) The actual cash flow that the investor will get to keep will be reduced by the amount of any tax payments.
- B) The equivalent after-tax interest rate is r(1 - τ).
- C) The right discount rate for a cash flow is the rate of return available in the market on other investments of comparable risk and term.
- D) To compensate for the risk that they will receive less than promised if the firm defaults, investors demand a lower interest rate than the rate on U.S. Treasuries.
Answer: D
Diff: 1
Section: 5.4 Risk and Taxes
Skill: Conceptual
5) Assume that you presently have a monthly home mortgage with a stated interest rate of 7% APR. If your income tax rate is 20%, then the after tax EAR for your home mortgage is closest to:
- A) 5.6%
- B) 7.2%
- C) 5.8%
- D) 7.0%
Answer: C
Explanation: C) Step #1 find the EAR
EAR = (1 + .07/12)12 - 1 = 7.2%
Step #2 find the after tax cost
aftertax = before tax (1 - T) = .072 (1 - .2) = .0578 or approximately 5.8%
Diff: 2
Section: 5.4 Risk and Taxes
Skill: Analytical
Use the following information to answer the question(s) below:
Suppose the term structure of risk-free interest rates is given as:
Term 1 year 2 years 3 years 5 years 10 years
Rate 2.25% 2.80% 3.20% 4.10% 6.30%
6) The present value of an investment that pays $2000 in one year and $3000 in three years for certain is closest to:
- A) $4707
- B) $4685
- C) $4729
- D) $5000
Answer: B
Explanation: B) PV = 2000/(1.0225)1 + 3000/(1.032)3 = 4685.48
Diff: 2
Section: 5.4 Risk and Taxes
Skill: Analytical
7) The present value of an investment that pays $1000 in two years and $5000 in ten years for certain is closest to:
- A) $3660
- B) $3687
- C) $3707
- D) $4292
Answer: A
Explanation: A) PV = 1000/(1.028)^2 + 5000/(1.063)^10 = 3660.44
Diff: 2
Section: 5.4 Risk and Taxes
Skill: Analytical
Use the table for the question(s) below.
Suppose you have the following Loans/Investments
Credit Card |
14.90% APR (Monthly Compounding) |
Automobile Loan |
5.90% APR (Monthly Compounding) |
Home Equity Loan |
8.25% APR (Monthly Compounding) |
Money Market Fund |
5.10% EAR |
8) If your income tax rate is 30%, then the after-tax EAR for your home equity loan is closest to:
- A) 6.0%
- B) 5.9%
- C) 8.6%
- D) 5.8%
Answer: A
Explanation: A) Step #1 find the EAR
EAR = (1 + .0825/12)12 - 1 = 8.569%
Step #2 find the after tax cost
aftertax = before tax (1 - T) = .08569 (1 - .3) = .0599 or approximately 6.0%
Diff: 2
Section: 5.4 Risk and Taxes
Skill: Analytical
9) If your income tax rate is 30%, then the after-tax return you receive on your money market fund is closest to:
- A) 3.7%
- B) 5.1%
- C) 3.6%
- D) 4.2%
Answer: C
Explanation: C) This is already stated as an EAR, so aftertax = before tax (1 - T) = .051 (1 - .3) = .0357 or approximately 3.6%
Diff: 2
Section: 5.4 Risk and Taxes
Skill: Analytical
10) What is the effective after-tax rate of each instrument, expressed as an EAR?
Answer: Credit Card
Interest is not deductible so,
EAR = (1 + .149/12)12 - 1 = 15.96%
Car Loan
Interest is not deductible so,
EAR = (1 + .059/12)12 - 1 = 6.06%
Home Equity Loan
Step #1 find the EAR
EAR = (1 + .0825/12)12 - 1 = 8.569%
Step #2 find the after tax cost
aftertax = before tax (1 - T) = .08569 (1 - .3) = .0599 or approximately 6.0%
Money Market Fund
This is already stated as an EAR, so aftertax = before tax (1 - T) = .051 (1 - .3) = .0357 or approximately 3.6%
Diff: 2
Section: 5.4 Risk and Taxes
Skill: Analytical
5.5 The Opportunity Cost of Capital
1) Which of the following statements is FALSE?
- A) The investor's opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted.
- B) Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk.
- C) The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment.
- D) For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.
Answer: D
Diff: 1
Section: 5.5 The Opportunity Cost of Capital
Skill: Conceptual
2) Which of the following statements is FALSE?
- A) The actual return kept by an investor will depend on how the interest is taxed.
- B) The equivalent after-tax interest rate is r(1 - τ).
- C) The highest interest rate, for a given horizon, is the rate paid on U.S. Treasury securities.
- D) It is important to use a discount rate that matches both the horizon and the risk of the cash flows.
Answer: C
Diff: 1
Section: 5.5 The Opportunity Cost of Capital
Skill: Conceptual
3) A tax free municipal bond pays an effective annual rate of 7.2%. If your tax rate is 30%, then the effective annual rate that a comparable corporate bond would have to offer you to earn an equivalent after tax return would be closest to:
- A) 5.0%
- B) 7.2%
- C) 9.4%
- D) 10.3%
Answer: D
Explanation: D) Before tax = after tax/(1 - T) = .072/(1 - .3) = .10285714
Diff: 2
Section: 5.5 The Opportunity Cost of Capital
Skill: Analytical
5.6 Appendix: Continuous Rates and Cash Flows
1) You are offered an investment that pays 8% APR compounded continuously. The effective annual rate for this investment is closest to:
- A) 7.70%
- B) 8.00%
- C) 8.33%
- D) 8.50%
Answer: C
Explanation: C) EAR = eAPR - 1 = e.08 - 1 = .083287
Diff: 1
Section: 5.A Appendix: Continuous Rates and Cash Flows
Skill: Analytical
2) You are offered an investment that offers and effective annual rate of 8%. If this investment offers continuous compounding, then the APR for this investment is closest to:
- A) 7.70%
- B) 8.00%
- C) 8.25%
- D) 8.33%
Answer: A
Explanation: A) APR = ln(1 + EAR) = ln(1.08) = 0.076961
Diff: 1
Section: 5.A Appendix: Continuous Rates and Cash Flows
Skill: Analytical
3) Wyatt Oil is considering drilling a new oil well that is initially expected to produce oil at a rate of 10 million barrels per year. Wyatt has a long-term contract that allows them to sell the oil at a profit of $2.50 per barrel. The cost of drilling the rig is $175,000,000. If the rate of oil production from the rig declines by 3% over the year and the discount rate is 9% per year (EAR), then using continuous compounding, the NPV of this new oil well is closest to:
- A) -$333,333,000
- B) $28,128,000
- C) $33,333,000
- D) $39,340,000
Answer: D
Explanation: D) rcc = ln(1 + .09) = .086178
gcc = ln(1 - .03) = -0.030459
NPV = -175,000,000 + = 39,339,837
Diff: 3
Section: 5.A Appendix: Continuous Rates and Cash Flows
Skill: Analytical
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Key Contents: Financial Management and Corporate Finance
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Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business, University of Western Ontario
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown
International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick, Columbia University
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Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University, Jarrad Harford, University of Washington
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Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, Virginia Polytechnic Instit. and State University
Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
------
Part 1: Fundamental Concepts and Basic Tools of Finance
1. Financial Management
2. Financial Statements
3. The Time Value of Money (Part 1)
4. The Time Value of Money (Part 2)
5. Interest Rates
Part 2: Valuing Stocks and Bonds and Understanding Risk and Return
6. Financial Management Bonds and Bond Valuation
7. Stocks and Stock Valuation
8. Risk and Return
Part 3: Capital Budgeting
9: Capital Budgeting Decision Models
10: Cash Flow Estimation
11: The Cost of Capital
Part 4: Financial Planning and Evaluating Performance
12. Forecasting and Short-Term Financial Planning
13. Working Capital Management
14. Financial Ratios and Firm Performance
Part 5: Other Selected Finance Topics
15. Raising Capital
16. Capital Structure
17. Dividends, Dividend Policy, and Stock Splits
18. International Financial Management
Appendix 1 Future Value Interest Factors
Appendix 2 Present Value Interest Factors
Appendix 3 Future Value Interest Factors of an Annuity
Appendix 4 Present Value Interest Factors of an Annuity
Appendix 5 Answers to Prepping for Exam Questions
------
1. Overview of Financial Management
2. Sizing Up a Business: A Non-Financial Perspective
3. Understanding Financial Statements
4. Measuring Financial Performance
5. Managing Day-To-Day Cash Flow
6. Projecting Financial Requirements and Managing Growth
7. Time Value of Money Basics and Applications
8. Making Investment Decisions
9. Overview of Capital Markets: Long-Term Financing Instruments
10. Assessing the Cost of Capital: What Investors Require
11. Understanding Financing and Payout Decisions
12. Designing an Optimal Capital Structure
13. Measuring and Creating Value
14. Comprehensive Case Study: Wal-Mart Stores, Inc.
1. Overview of Financial Management
• 1.1: Financial Management and the Cash Flow Cycle
• 1.2: The Role of Financial Managers
• 1.3: A Non-Financial Perspective of Financial Management
• 1.4: Financial Management’s Relationship with Accounting and Other Disciplines
• 1.5: Types of Firms
• 1.6: A Financial Management Framework
• 1.7: Relevance for Managers
• 1.8: Summary
• 1.9: Additional Readings
• 1.10: End of Chapter Problems
2. Sizing Up a Business: A Non-Financial Perspective
• 2.1: Sizing Up The Overall Economy
o 2.1.1: GDP Components
o 2.1.2: Sector-Related Fluctuations
o 2.1.3: Inflation and Interest Rates
o 2.1.4: Capital Markets
o 2.1.5: Economic Size-Up Checklist
• 2.2: Sizing Up the Industry
o 2.2.1: Industry Life Cycles
o 2.2.2: The Competitive Environment
o 2.2.3: Opportunities and Risks
o 2.2.4: Industry Size-up Checklist
• 2.3: Sizing Up Operations Management and Supply Risk
• 2.4: Sizing Up Marketing Management and Demand Risk
• 2.5: Sizing Up Human Resource Management and Strategy
• 2.6: Sizing Up Home Depot: An Example
• 2.7: Relevance for Managers
• 2.8 Summary
• 2.9: Additional Readings and Information
• 2.10: End of Chapter Problems
3. Understanding Financial Statements
• 3.1: Understanding Balance Sheets
o 3.1.1: Understanding Assets
o 3.1.2: Understanding Liabilities
o 3.1.3: Understanding Equity
• 3.2: Understanding Income Statements
o 3.2.1: Understanding Revenues, Costs, Expenses, and Profits
o 3.2.2: Connecting a Firm’s Income Statement and Balance Sheet
• 3.3: Understanding Cash Flow Statements
o 3.3.1: Cash Flows Related to Operating Activities
o 3.3.2: Cash Flows from Investing Activities
o 3.3.3: Cash Flows from Financing Activities
• 3.4: Relevance for Managers
• 3.5: Summary
• 3.6: Additional Readings and Sources of Information
• 3.7: End of Chapter Problems
4. Measuring Financial Performance
• 4.1: Performance Measures
o 4.1.1: Return on Equity
o 4.1.2: Profitability Measures
o 4.1.3: Resource Management Measures
o 4.1.4: Liquidity Measures
o 4.1.5: Leverage Measures
o 4.1.6: Application: Home Depot
• 4.2: Reading Annual Reports
• 4.3: Relevance for Managers
• 4.4: Summary
• 4.5: Additional Readings and Sources of Information
• 4.6: End of Chapter Problems
5. Managing Day-To-Day Cash Flow
• 5.1: Cash Flow Cycles
• 5.2: Working Capital Management
o 5.2.1: Managing Inventory
o 5.2.2: Managing Accounts Receivable
o 5.2.3: Managing Accounts Payable
o 5.2.4: Application: Home Depot
• 5.2.4.1: Orange Computers and Little Orange Computers
• 5.2.4.2: Home Depot
• 5.3: Short-Term Financing
o 5.3.1: Bank Loans
o 5.3.2: Commercial Paper
o 5.3.3: Banker’s Acceptance
• 5.4: Relevance for Managers
• 5.5: Summary
• 5.6: Additional Readings
• 5.7: End of Chapter Problems
6. Projecting Financial Requirements and Managing Growth
• 6.1: Generating Pro Forma Income Statements
o 6.1.1: Establishing the Cost of Goods Sold and Gross Profit
o 6.1.2: Establishing Expenses
o 6.1.3: Establishing Earnings
• 6.2: Generating Pro Forma Balance Sheets
o 6.2.1: Establishing Assets
o 6.2.2: Establishing Liabilities and Equity
• 6.3: Generating Pro Forma Cash Budgets
o 6.3.1: Establishing Cash Inflows
o 6.3.2: Establishing Cash Outflows
o 6.3.3: Establishing Net Cash Flows
• 6.4: Performing Sensitivity Analysis
o 6.4.1: Sales Sensitivity
o 6.4.1: Interest Rate Sensitivity
o 6.4.3: Working Capital Sensitivity
• 6.5: Understanding Sustainable Growth and Managing Growth
• 6.6: Relevance for Managers
• 6.7: Summary
• 6.8: Additional Readings and Resources
• 6.9: Problems
7. Time Value of Money Basics and Applications
• 7.1: Exploring Time Value of Money Concepts
o 7.1.1: Future Values
o 7.1.2: Present Values
o 7.1.3: Annuities
o 7.1.4: Perpetuities
• 7.2: Applying Time Value of Money Concepts to Financial Securities
o 7.2.1: Bonds
o 7.2.2: Preferred Shares
o 7.2.3: Common Equity
• 7.3: Relevance for Managers
• 7.4: Summary
• 7.5: Additional Readings
• 7.6: End of Chapter Problems
8. Making Investment Decisions
• 8.1: Understanding the Decision-Making Process
• 8.2: Capital Budgeting Techniques
o 8.2.1: Payback
• 8.2.1.1: Strengths and Weaknesses of the Payback Method
o 8.2.2: Net Present Value
• 8.2.2.1: Strengths and Weaknesses of the Net Present Value Method
o 8.2.3: Internal Rate of Return
• 8.2.3.1: Strengths and Weaknesses of the Internal Rate of Return Method
• 8.2.3.2: Modified Internal Rate of Return
• 8.3: Capital Budgeting Extensions
o 8.3.1: Profitability Index
o 8.3.2: Equivalent Annual Cost and Project Lengths
o 8.3.3: Mutually Exclusive Projects and Capital Rationing
• 8.4: Relevance for Managers
• 8.5: Summary
• 8.6: Additional Readings
• 8.7: End of Chapter Problems
9. Overview of Capital Markets: Long-Term Financing Instruments
• 9.1: Bonds
o 9.1.1: Changing Bond Yields
o 9.1.2: Bond Features
o 9.1.3: Bond Ratings
• 9.2: Preferred Shares
• 9.3: Common Shares
o 9.3.1: Historical Returns
• 9.4: Capital Markets Overview
o 9.4.1: Private versus Public Markets
o 9.4.2: Venture Capital and Private Equity
o 9.4.3: Initial Offerings versus Seasoned Issues
o 9.4.4: Organized Exchanges versus Over-The-Counter Markets
o 9.4.5: Role of Intermediaries
• 9.5: Market Efficiency
o 9.5.1: Weak Form
o 9.5.2: Semi-strong Form
o 9.5.3: Strong Form
o 9.5.4: U.S. Stock Market Efficiency
• 9.6: Relevance for Managers
• Appendix: Understanding Bond and Stock Investment Information
• 9.7: Summary
• 9.8: Additional Readings
• 9.9: End of Chapter Problems
10. Assessing the Cost of Capital: What Investors Require
• 10.1: Understanding the Cost of Capital: An Example
• 10.2: Understanding the Implications of the Cost of Capital
• 10.3: Defining Risk
• 10.4: Estimating the Cost of Debt
• 10.5: Estimating the Cost of Preferred Shares
• 10.6: Estimating the Cost of Equity
o 10.6.1: Dividend Model Approach
o 10.6.2: Capital Asset Pricing Model
• 10.6.2.1: Risk-Free Rate
• 10.6.2.2: Market Risk Premium
• 10.6.2.3: Beta
• 10.7: Estimating Component Weights
• 10.8: Home Depot Application
• 10.9: Hurdle Rates
• 10.10: Relevance for Managers
• 10.11: Summary
• 10.12: Additional Readings
• 10.13: Problems
11. Understanding Financing and Payout Decisions
• 11.1: Capital Structure Overview
• 11.2: Understanding the Modigliani-Miller Argument: Why Capital Structure Does Not Matter
• 11.3: Relaxing the Assumptions: Why Capital Structure Does Matter
o 11.3.1: Understanding the Impact of Corporate Taxes
o 11.3.2: Understanding the Impact of Financial Distress
o 11.3.3: Combining Corporate Taxes and Financial Distress Costs
o 11.3.4: Impact of Asymmetric Information
• 11.4: Understanding Payout Policies
o 11.4.1: Paying Dividends
o 11.4.2: Repurchasing Shares
o 11.4.3: Do Dividend Policies Matter?
• 11.5: Relevance for Managers
• 11.6: Summary
• 11.7: Additional Resources
• 11.8: End of Chapter Problems
• Appendix: Why Dividend Policy Doesn’t Matter: Example
12. Designing an Optimal Capital Structure
• 12.1: Factor Affecting Financing Decisions: The FIRST Approach
o 12.1.1: Maximizing Flexibility
o 12.1.2: Impact on EPS: Minimizing Cost
• 12.1.2.1: A Simple Valuation Model
• 12.1.2.2: Earnings before Interest and Taxes Break-Even: What Leverage Really Means
• 12.1.2.3: Does Issuing Equity Dilute the Value of Existing Shares?
o 12.1.3: Minimizing Risk
o 12.1.4: Maintaining Shareholder Control
o 12.1.5: Optimal Training
• 12.2: Tradeoff Assessment: Evaluating FIRST Criteria
• 12.3: Relevance for Managers
• 12.4: Summary
• 12.5: Additional Resource
• 12.6: End of Chapter Problems
13. Measuring and Creating Value
• 13.1: An Overview of Measuring and Creating Value
• 13.2: Measuring Value: The Book Value Plus Adjustments Method
o 13.2.1: Pros and Cons of the Book Value of Equity Plus Adjustments Method
• 13.3: Measuring Value: The Discount Cash Flow Analysis Method
o 13.3.1: Estimating Free Cash Flows
o 13.3.2: Estimating the Cost of Capital
o 13.3.3: Estimating the Present Value of Free Cash Flows
o 13.3.4: Estimating the Terminal Value
o 13.3.5: Estimating the Value of Equity
o 13.3.6: Pros and Cons of the Free Cash Flow to the Firm Approach
• 13.4: Measuring Value: Relative Valuations and Comparable Analysis
o 13.4.1: The Price-Earnings Method
• 13.4.1.1: Pros and Cons of the Price-Earnings Approach
o 13.4.2: The Enterprise Value-to-EBITDA Method
• 13.4.2.1: Pros and Cons of the EV/EBITDA Approach
• 13.5: Creating Value and Value-Based Management
• 13.6: Valuing Mergers and Acquisitions
o 13.6.1: Valuing Comparable M&A Transactions
• 13.7: Relevance for Managers
• 13.8: Summary
• 13.9: Additional Readings
• 13.10: End of Chapter Problems
14. Comprehensive Case Study: Wal-Mart Stores, Inc.
• 14.1: Sizing Up Wal-Mart
o 14.1.1: Analyzing the Economy
o 14.1.2: Analyzing the Industry
o 14.1.3: Analyzing Walmart’s Strengths and Weaknesses in Operations, Marketing, Management, and Strategy
• 14.1.3.1: Analyzing Walmart’s Operations
• 14.1.3.2: Analyzing Walmart’s Marketing
• 14.1.3.3: Analyzing Walmart’s Management and Strategy
o 14.1.4: Analyzing Walmart’s Financial Health
• 14.2: Projecting Walmart’s Future Performance
o 14.2.1: Projecting Walmart’s Income Statement
o 14.2.2: Projecting Walmart’s Balance Sheet
o 14.2.3: Examining Alternate Scenarios
• 14.3: Assessing Walmart’s Long-Term Investing and Financing
o 14.3.1: Assessing Walmart’s Investments
o 14.3.2: Assessing Walmart’s Capital Raising and the Cost of Capital
• 14.4: Valuing Walmart
o 14.4.1: Measuring Walmart’s Economic Value Added
o 14.4.2: Estimating Walmart’s Intrinsic Value: The DCF Approach
o 14.4.3: Estimating Walmart’s Intrinsic Value: Comparable Analysis
o 14.4.4: Creating Value and Overall Assessment of Walmart
• 14.5: Relevance for Managers and Final Comments
• 14.6: Additional Readings and Sources of Information
• 14.7: End of Chapter Problems
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Part 1: Introduction to Financial Management
Chapter 1: Getting Started - Principles of Finance
Chapter 2: Firms and the Financial Market
Chapter 3: Understanding Financial Statements, Taxes, and Cash Flows
Chapter 4: Financial Analysis - Sizing Up Firm Performance
Part 2: Valuation of Financial Assets
Chapter 5: Time Value of Money - The Basics
Chapter 6: The Time Value of Money - Annuities and Other Topics
Chapter 7: An Introduction to Risk and Return - History of Financial Market Returns
Chapter 8: Risk and Return - Capital Market Theory
Chapter 9: Debt Valuation and Interest Rates
Chapter 10: Stock Valuation
Part 3: Capital Budgeting
Chapter 11: Investment Decision Criteria
Chapter 12: Analyzing Project Cash Flows
Chapter 13: Risk Analysis and Project Evaluation
Chapter 14: The Cost of Capital
Part 4: Capital Structure & Dividend Policy
Chapter 15: Capital Structure Policy
Chapter 16: Dividend Policy
Part 5: Liquidity Management & Special Topics in Finance
Chapter 17: Financial Forecasting and Planning
Chapter 18: Working Capital Management
Chapter 19: International Business Finance
Chapter 20: Corporate Risk Management
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PART I: INTRODUCTION TO FOREIGN EXCHANGE MARKETS AND RISKS
Chapter 1: Globalization and the Multinational Corporation
Chapter 2: The Foreign Exchange Market
Chapter 3: Forward Markets and Transaction Exchange Risk
Chapter 4: The Balance of Payments
Chapter 5: Exchange Rate Systems
PART II: INTERNATIONAL PARITY CONDITIONS AND EXCHANGE RATE DETERMINATION
Chapter 6: Interest Rate Parity
Chapter 7: Speculation and Risk in the Foreign Exchange Market
Chapter 8: Purchasing Power Parity and Real Exchange Rates
Chapter 9: Measuring and Managing Real Exchange Risk
Chapter 10: Exchange Rate Determination and Forecasting
PART III: INTERNATIONAL CAPITAL MARKETS
Chapter 11: International Debt Financing
Chapter 12: International Equity Financing
Chapter 13: International Capital Market Equilibrium
Chapter 14: Political and Country Risk
PART IV: INTERNATIONAL CORPORATE FINANCE
Chapter 15: International Capital Budgeting
Chapter 16: Additional Topics in International Capital Budgeting
Chapter 17: Risk Management and the Foreign Currency Hedging Decision
Chapter 18: Financing International Trade
Chapter 19: Managing Net Working Capital
PART V: FOREIGN CURRENCY DERIVATIVES
Chapter 20: Foreign Currency Futures and Options
Chapter 21: Interest Rate and Foreign Currency Swaps
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
PART 7: OPTIONS
20. Financial Options
21. Option Valuation
22. Real Options
PART 8: LONG-TERM FINANCING
23. Raising Equity Capital
24. Debt Financing
25. Leasing
PART 9: SHORT-TERM FINANCING
26. Working Capital Management
27. Short-Term Financial Planning
PART 10: SPECIAL TOPICS
28. Mergers and Acquisitions
29. Corporate Governance
30. Risk Management
31. International Corporate Finance
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
------
------
PART 1 INTRODUCTION
Chapter 1 Corporate Finance and the Financial Manager
Chapter 2 Introduction to Financial Statement Analysis
PART 2 INTEREST RATES AND VALUING CASH FLOWS
Chapter 3 Time Value of Money: An Introduction
Chapter 4 Time Value of Money: Valuing Cash Flow Streams
Chapter 5 Interest Rates
Chapter 6 Bonds
Chapter 7 Stock Valuation
PART 3 VALUATION AND THE FIRM
Chapter 8 Investment Decision Rules
Chapter 9 Fundamentals of Capital Budgeting
Chapter 10 Stock Valuation: A Second Look
PART 4 RISK AND RETURN
Chapter 11 Risk and Return in Capital Markets
Chapter 12 Systematic Risk and the Equity Risk Premium
Chapter 13 The Cost of Capital
PART 5 LONG-TERM FINANCING
Chapter 14 Raising Equity Capital
Chapter 15 Debt Financing
PART 6 CAPITAL STRUCTURE AND PAYOUT POLICY
Chapter 16 Capital Structure
Chapter 17 Payout Policy
PART 7 FINANCIAL PLANNING AND FORECASTING
Chapter 18 Financial Modeling and Pro Forma Analysis
Chapter 19 Working Capital Management
Chapter 20 Short-Term Financial Planning
PART 8 Special Topics
Chapter 21 Option Applications and Corporate Finance
Chapter 22 Mergers and Acquisitions
Chapter 23 International Corporate Finance
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FINANCIAL MANAGEMENT AND CORPORATE FINANCE - COLLECTION 2017 (FREE DOWNLOAD)
Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
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Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business
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International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick
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Free download - PPT 2 - Link
Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Free download - PPT 1 - Link
Free download - PPT 2 - Link
Free download - PPT 3 - Link
Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo,
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown
Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
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Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
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Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
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Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown,
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Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
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Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
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DOWNLOAD ALL TEST BANKs & CASE STUDY GUIDES - 2017
Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University - Test bank
Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business - Test bank
Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University - Test bank
International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick - Test bank
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown - Test bank
Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo - Test bank
Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017 - Test bank
Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016 - Test bank
Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University - Test bank
Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown - Test bank
Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin - Test bank
Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter - Test bank
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