# University of Mount Olive Financial Markets and Corporate Strategy Worksheet: Algebra Answers 2021

University of Mount Olive Financial Markets and Corporate Strategy Worksheet: Algebra Answers 2021

## University of Mount Olive Financial Markets and Corporate Strategy Worksheet: Algebra Answers 2021

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University of Mount Olive Financial Markets and Corporate Strategy Worksheet

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Assignment 4b: Financial Markets and Corporate Strategy (assignment template) – 1 of 2
Insights/Instructions: Use this template to complete the assignment. Please do not delete these
insights/instructions or inquiries provided herein; rather, save the template, type your response
below then, after saving your work, upload the document to the assignment’s drop-box provided
in Moodle.
1. Time Value of Money. Access the online Corporate Finance resource and read the section on
Time Value of Money (pages 33 thru 69). (File is located in your Moodle Shell)
1. The “Time Value of Money” chapter offered several concepts and practical examples.
Which concept and example did you find most interesting? Explain/elaborate.
Response:
2. Manhattan Island (an example offered within the chapter):
a. Explain how \$24 invested in a savings account offering a compound interest rate,
r, of 8% in 1626, would have been worth \$75.979 trillion in the year 2000 (374
years).
Response:
b. Explain how \$24 invested in a savings account offering a compound interest rate,
r, of 3.5% in 1626, would have been worth \$9,287,569 (or approximately 9.3
million) in the year 2000.
Response:
c. What accounts for the significant difference in the value of the account in the year
2000?
Response:
3. * Present Values. Compute the present value of a \$100 cash flow for the following
combinations of discount rates and times. Include the formula used to make the
calculations. Note: See page 50 and 51 of the online resource; the general formula is:
Present Value = Future Value after t periods / (1 + r)t
a. r = 12%; t = 10 years
b. r = 12%; t = 20 years
c. r = 7 percent; t = 10 years
d. r = 7 percent; t = 20 years
4. * Present Values. Would you rather receive \$1,000 a year for 10 years or \$800 a year for
15 years if:
a. The interest rate is 7 percent?
Response and rationale:
b. The interest rate is 22 percent?
Response and rationale:
c. Provide a rational as to why do your answers to “(a)” and “(b”) differ?
Response:
5. * Future Values. Compute the future value of a \$100 cash flow for the following
combinations of discount rates and times. Include the formula used to make the
calculations. The general formula is:
Future Value = Present Value * (1 + r)t
a. r = 12%; t = 10 years
b. r = 12%; t = 20 years
c. r = 7 percent; t = 10 years
d. r = 7 percent; t = 20 years
6. * Calculating Interest Rate. Showing/explaining all of your work, find the interest rate
implied by the following combinations of present and future values:
Scenario
A
B
C
Years
10
3
6
Present Value
\$400
\$187
\$260
Future Value
\$684
\$249
\$300
A. For scenario A, the interest rate is:
B. For scenario B, the interest rate is:
C. For scenario C, the interest rate is:
Selected material from
Fundamentals of Corporate Finance
Third Edition
Richard A. Brealey
Bank of England and London Business School
Stewart C. Myers
Sloan School of Management
Massachusetts Institute of Technology
Alan J. Marcus
Wallace E. Carroll School of Management
Boston College
Fundamentals of Corporate Finance, Alternate Fifth Edition
Essentials of Corporate Finance, Second Edition
Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
UNIVERSITY OF PHOENIX
Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis
Bangkok Bogotá Caracas Lisbon London Madrid
Mexico City Milan New Delhi Seoul Singapore Sydney Taipei Toronto
Selected material from
FUNDAMENTALS OF CORPORATE FINANCE, Third Edition
FUNDAMENTALS OF CORPORATE FINANCE, Alternate Fifth Edition
ESSENTIALS OF CORPORATE FINANCE, Second Edition
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data base retrieval system, without prior written permission of the publisher.
This book contains select material from:
Fundamentals of Corporate Finance, Third Edition by Richard A. Brealey, Stewart C. Myers, and Alan J. Marcus. Copyright
© 2001, 1999, 1995, by The McGraw-Hill Companies, Inc.
Fundamentals of Corporate Finance, Alternate Fifth Edition by Stephen A. Ross, Randolph W. Westerfield, and Bradford D.
Jordan. Copyright © 2000, 1998, 1995, 1993, 1991 by The McGraw-Hill Companies, Inc.
Essentials of Corporate Finance, Second Edition by Stephen A. Ross, Randolph W. Westerfield, and Bradford D. Jordan.
Copyright © 1999 by The McGraw-Hill Companies, Inc. Previous edition © 1996 by Richard D. Irwin, a Times Mirror
Higher Education Group, Inc. company.
All reprinted with permission of the publisher.
ISBN 0-07-553109-7
Production Editor: Nina Meyer
Contents
1
SECTION 1
How to Value Perpetuities 50
How to Value Annuities 51
Annuities Due 54
Future Value of an Annuity 57
The Firm and the Financial
Manager 3
Sole Proprietorships 4
Partnerships 5
Corporations 5
6
The Role of the Financial Manager
7
The Capital Budgeting Decision
The Financing Decision 9
Inflation and the Time Value of Money
8
Effective Annual Interest Rates
Financial Institutions and Markets
Summary
10
Careers in Finance
13
15
Goals of the Corporation
Financial Planning
17
Shareholders Want Managers to Maximize
Market Value 17
Ethics and Management Objectives 19
Do Managers Really Maximize Firm Value?
Snippets of History 25
Summary
21
Financial Planning Models
Planners Beware
87
93
Pitfalls in Model Design 93
The Assumption in Percentage of Sales Models
The Role of Financial Planning Models 95
33
34
External Financing and Growth
38
Multiple Cash Flows
86
Components of a Financial Planning Model
An Example of a Planning Model 88
An Improved Model 89
Future Values and Compound Interest
Finding the Interest Rate
82
Financial Planning Focuses on the Big Picture 83
Financial Planning Is Not Just Forecasting 84
Three Requirements for Effective Planning 84
28
Key Terms 28
Quiz
28
Practice Problems
29
Solutions to Self-Test Questions 31
Present Values
77
81
What Is Financial Planning?
25
The Time Value of Money
67
69
Key Terms 70
Quiz 70
Practice Problems 72
Challenge Problems 75
Solutions to Self-Test Questions
Minicase 79
Financial Institutions 10
Financial Markets 11
Other Functions of Financial Markets and
Institutions 12
Who Is the Financial Manager?
61
Real versus Nominal Cash Flows 61
Inflation and Interest Rates 63
Valuing Real Cash Payments 65
Real or Nominal? 67
Summary
44
46
Future Value of Multiple Cash Flows 46
Present Value of Multiple Cash Flows 49
Level Cash Flows: Perpetuities and Annuities
50
94
96
100
Key Terms 101
Quiz 101
Practice Problems 102
Challenge Problems 106
Solutions to Self-Test Questions
106
iii
IV
CONTENTS
109
APPENDIX A
Accounting and Finance
The Balance Sheet
Financial Ratios
The Income Statement
117
Profits versus Cash Flow
118
115
The Statement of Cash Flows
Accounting for Differences
119
121
134
The Du Pont System
145
Other Financial Ratios
146
Using Financial Ratios
147
Choosing a Benchmark 147
123
Corporate Tax 123
Personal Tax 125
Summary
133
Leverage Ratios 138
Liquidity Ratios 139
Efficiency Ratios 141
Profitability Ratios 143
112
Book Values and Market Values
Taxes
Financial Statement Analysis
111
Measuring Company Performance
The Role of Financial Ratios
126
Key Terms 127
Quiz 127
Practice Problems 128
Challenge Problem 131
Solutions to Self-Test Questions
Summary
Bank Loans 185
Commercial Paper 186
Secured Loans 186
Working Capital Management and
Short-Term Planning 165
167
The Components of Working Capital 167
Working Capital and the Cash Conversion Cycle
The Cost of Bank Loans
168
Financing 172
Tracing Changes in Cash and Working Capital 175
Cash Budgeting
159
163
SECTION 2
Working Capital
151
153
Key Terms 155
Quiz 155
Practice Problems 157
Challenge Problem 158
Solutions to Self-Test Questions
Minicase 160
131
150
177
Forecast Sources of Cash 177
Forecast Uses of Cash 179
The Cash Balance 179
A Short-Term Financing Plan
180
Options for Short-Term Financing
Evaluating the Plan 184
180
Sources of Short-Term Financing
187
Simple Interest 187
Discount Interest 188
Interest with Compensating Balances
Summary
189
190
Key Terms 191
Quiz 191
Practice Problems 192
Challenge Problem 194
Solutions to Self-Test Questions
Minicase 197
195
Cash and Inventory Management
Cash Collection, Disbursement, and Float
185
Float 203
Valuing Float
204
201
202
CONTENTS
Managing Float
205
Credit Analysis
Speeding Up Collections 206
Controlling Disbursements 209
Electronic Funds Transfer 210
Inventories and Cash Balances
211
Managing Inventories 212
Managing Inventories of Cash 215
Uncertain Cash Flows 216
Cash Management in the Largest Corporations
Investing Idle Cash: The Money Market 218
Summary
The Credit Decision
217
Bankruptcy
224
231
SECTION 3
Valuing Bonds
240
227
244
Key Terms 245
Quiz 245
Practice Problems 246
Challenge Problems 248
Solutions to Self-Test Questions 249
Minicase 250
Book Values, Liquidation Values, and Market
Values 283
256
Valuing Common Stocks
257
Bond Prices and Yields 259
How Bond Prices Vary with Interest Rates 260
Yield to Maturity versus Current Yield 261
Rate of Return 265
Interest Rate Risk 267
The Yield Curve 268
Nominal and Real Rates of Interest 268
Default Risk 270
Valuations in Corporate Bonds 273
Summary 273
Key Terms 274
Quiz 274
Practice Problems 275
Challenge Problems 277
Solutions to Self-Test Questions
Valuing Stocks
239
253
255
Bond Characteristics
Collection Policy
Summary
229
Credit Agreements
236
Bankruptcy Procedures 241
The Choice between Liquidation and
Reorganization 242
Credit Management and Collection
Terms of Sale
234
Credit Decisions with Repeat Orders 237
Some General Principles 238
219
Key Terms 220
Quiz 220
Practice Problems 221
Challenge Problem 224
Solutions to Self-Test Questions
232
Financial Ratio Analysis 233
Numerical Credit Scoring 233
When to Stop Looking for Clues
Simplifying the Dividend Discount Model
279
Stocks and the Stock Market
280
281
291
The Dividend Discount Model with No Growth 291
The Constant-Growth Dividend Discount Model 292
Estimating Expected Rates of Return 293
Nonconstant Growth 295
Growth Stocks and Income Stocks
The Price-Earnings Ratio 298
What Do Earnings Mean? 298
Summary
277
287
Today’s Price and Tomorrow’s Price 287
The Dividend Discount Model 288
301
Key Terms 302
Quiz 302
Practice Problems 303
Challenge Problems 306
Solutions to Self-Test Questions
307
296
V
VI
CONTENTS
Introduction to Risk, Return, and the
Opportunity Cost of Capital 311
Rates of Return: A Review 312
Market Indexes 314
The Historical Record 314
Using Historical Evidence to Estimate Today’s Cost of
Capital 317
318
Variance and Standard Deviation 318
A Note on Calculating Variance 322
Measuring the Variation in Stock Returns
322
Net Present Value and Other Investment
Criteria 341
343
A Comment on Risk and Present Value
Valuing Long-Lived Projects 345
Other Investment Criteria
344
349
Internal Rate of Return 349
A Closer Look at the Rate of Return Rule 350
Calculating the Rate of Return for Long-Lived
Projects 351
A Word of Caution 352
Payback 352
Book Rate of Return 355
Investment Criteria When Projects Interact
Mutually Exclusive Projects 356
Investment Timing 357
Long- versus Short-Lived Equipment 359
Replacing an Old Machine 361
Mutually Exclusive Projects and the IRR Rule
Other Pitfalls of the IRR Rule 363
Capital Rationing
365
Soft Rationing 365
Hard Rationing 366
Pitfalls of the Profitability Index
Summary
331
Message 1: Some Risks Look Big and Dangerous but
Really Are Diversifiable 331
Message 2: Market Risks Are Macro Risks 332
Message 3: Risk Can Be Measured 333
Summary
334
Key Terms 334
Quiz 335
Practice Problems 336
Solutions to Self-Test Questions
338
Challenge Problems 373
Solutions to Self-Test Questions
373
339
SECTION 4
Net Present Value
324
Diversification 324
Asset versus Portfolio Risk 325
Market Risk versus Unique Risk 330
Seventy-Three Years of Capital Market
History 313
Measuring Risk
Risk and Diversification
367
Key Terms 368
Quiz 368
Practice Problems 369
3667
Using Discounted Cash-Flow Analysis to
Make Investment Decisions 377
Discount Cash Flows, Not Profits
379
Discount Incremental Cash Flows
381
Include All Indirect Effects 381
Forget Sunk Costs 382
Include Opportunity Costs 382
Recognize the Investment in Working Capital
Beware of Allocated Overhead Costs 384
356
383
Discount Nominal Cash Flows by the Nominal Cost
of Capital 385
Separate Investment and Financing Decisions
Calculating Cash Flow 387
361
Capital Investment 387
Investment in Working Capital 387
Cash Flow from Operations 388
Example: Blooper Industries
390
Calculating Blooper’s Project Cash Flows 391
Calculating the NPV of Blooper’s Project 392
Further Notes and Wrinkles Arising from Blooper’s
Project 393
Summary
397
Key Terms 398
Quiz 398
398
386
CONTENTS
Practice Problems 200
Challenge Problems 402
Solutions to Self-Test Questions 404
Minicase 405
403
Risk, Return, and Capital Budgeting
Measuring Market Risk
408
Measuring Beta 409
Betas for MCI WorldCom and Exxon
Portfolio Betas 412
Risk and Return
Big Oil’s Weighted-Average Cost of Capital
420
The Cost of Capital
435
Geothermal’s Cost of Capital
436
450
When You Can and Can’t Use WACC 451
Some Common Mistakes 452
How Changing Capital Structure Affects Expected
Returns 452
What Happens When the Corporate Tax Rate Is Not
Zero 453
424
Flotation Costs and the Cost of Capital
Summary
454
Key Terms 455
Quiz 455
Practice Problems 456
Challenge Problems 458
Solutions to Self-Test Questions
Minicase 459
Calculating the Weighted-Average Cost of
Capital 438
458
463
SECTION 5
Project Analysis
Real Oil Company WACCs
465
How Firms Organize the Investment Process
Stage 1: The Capital Budget 467
Stage 2: Project Authorizations 467
Problems and Some Solutions 468
Some “What-If ” Questions
469
Sensitivity Analysis 469
Scenario Analysis 472
Break-Even Analysis
473
Accounting Break-Even Analysis
474
450
Interpreting the Weighted-Average Cost of
Capital 451
425
432
447
The Expected Return on Bonds 448
The Expected Return on Common Stock 448
The Expected Return on Preferred Stock 449
422
Company versus Project Risk 422
Determinants of Project Risk 423
Don’t Add Fudge Factors to Discount Rates
Key Terms 426
Quiz 426
Practice Problems 427
Challenge Problem 432
Solutions to Self-Test Questions
446
Calculating Required Rates of Return
414
Capital Budgeting and Project Risk
Calculating Company Cost of Capital as a Weighted
Average 440
Market versus Book Weights 441
Taxes and the Weighted-Average Cost of Capital 442
What If There Are Three (or More) Sources of
Financing? 443
Wrapping Up Geothermal 444
Checking Our Logic 445
Measuring Capital Structure
411
Why the CAPM Works 416
The Security Market Line 417
How Well Does the CAPM Work? 419
Using the CAPM to Estimate Expected Returns
Summary
407
VII
466
NPV Break-Even Analysis 475
Operating Leverage 478
Flexibility in Capital Budgeting
Decision Trees 481
The Option to Expand 482
Abandonment Options 483
Flexible Production Facilities 484
Investment Timing Options 484
Summary 485
Key Terms 485
485
481
454
VIII
CONTENTS
Quiz 512
Practice Problems 513
Solutions to Self-Test Questions
Quiz 485
Practice Problems 486
Challenge Problems 489
Solutions to Self-Test Questions
Minicase 491
489
How Corporations Issue Securities
Venture Capital
An Overview of Corporate
Financing 493
Common Stock
Arranging a Public Issue
The Underwriters
Book Value versus Market Value 496
Dividends 497
Stockholders’ Rights 497
Voting Procedures 497
Classes of Stock 498
Corporate Governance in the United States and
Elsewhere 498
499
Corporate Debt
500
General Cash Offers and Shelf Registration
Costs of the General Cash Offer 529
Market Reaction to Stock Issues 530
507
Patterns of Corporate Financing
508
Do Firms Rely Too Heavily on Internal Funds?
External Sources of Capital 510
526
General Cash Offers by Public Companies
Debt Comes in Many Forms 501
Innovation in the Debt Market 504
Summary
526
The Private Placement
Convertible Securities
508
Key Terms 512
532
Key Terms 533
Quiz 534
Practice Problems 534
Challenge Problem 536
Solutions to Self-Test Questions
Minicase 537
537
512
545
APPENDIX B
Leasing 547
A Preliminary Analysis
555
555
548
555
Operating Leases
548
Three Potential Pitfalls
Financial Leases
549
NPV Analysis
Tax-Oriented Leases
Leveraged Leases
550
Sale and Leaseback Agreements
Accounting and Leasing
552
The Cash Flows from Leasing
The Incremental Cash Flows
554
550
556
Leverage and Capital Structure
559
The Capital Structure Question 560
550
Taxes, the IRS, and Leases
556
A Misconception
549
553
553
528
528
531
Appendix: Hotch Pot’s New Issue Prospectus
511
A Note on Taxes
520
521
Who Are the Underwriters?
Summary
517
519
The Initial Public Offering
494
Preferred Stock
514
The Effect of Financial Leverage 560
The Impact of Financial Leverage 560
Financial Leverage, EPS, and ROE:
An Example 561
EPS versus EBIT 561
539
CONTENTS
565
SECTION 6
Mergers, Acquisitions, and Corporate
Control 567
22.1 The Market for Corporate Control
569
Method 1: Proxy Contests 569
Method 2: Mergers and Acquisitions 570
Method 4: Divestitures and Spin-offs 571
22.2 Sensible Motives for Mergers
572
Economies of Scale 573
Economies of Vertical Integration 573
Combining Complementary Resources 574
Mergers as a Use for Surplus Funds 574
22.3 Dubious Reasons for Mergers
575
Diversification 575
The Bootstrap Game 575
22.4 Evaluating Mergers
577
587
588
Merger Waves 588
Do Mergers Generate Net Benefits?
22.8 Summary
Glossary
589
590
APPENDIX C
635
23.2 Some Basic Relationships
598
602
Exchange Rates and Inflation 602
Inflation and Interest Rates 606
Interest Rates and Exchange Rates 608
The Forward Rate and the Expected Spot Rate
Some Implications 610
23.5 Summary
585
22.7 Mergers and the Economy
23.1 Foreign Exchange Markets
625
617
Key Terms 618
Quiz 618
Practice Problems 619
Challenge Problem 621
Solutions to Self-Test Questions
Minicase 623
609
612
613
Net Present Value Analysis 613
The Cost of Capital for Foreign Investment
Avoiding Fudge Factors 616
584
Barbarians at the Gate?
International Financial
Management 597
23.4 International Capital Budgeting
582
Who Gets the Gains?
595
23.3 Hedging Exchange Rate Risk
Mergers Financed by Cash 577
Mergers Financed by Stock 579
A Warning 580
Another Warning 580
22.5 Merger Tactics
Key Terms 592
Quiz 592
Practice Problems 5…

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