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1. How does the basic net present value model of capital budgeting deal with the problem of project risk? What are the shortcomings of this approach?
2. How would you define risk as it is used in a capital budgeting analysis context?
3. Recalling the discussion in Chapter 8, when is the standard deviation of a project's cash flows an appropriate measure of project risk? When is the coefficient of variation an appropriate measure?
4. How does the basic net present value capital budgeting model deal with the phenomenon of increasing risk of project cash flows over time?
5. When should a firm consider the portfolio effects of a new project?
6. What are the primary advantages and disadvantages of applying simulation to capital budgeting risk analysis?
7. Computer simulation is used to generate a large number of possible outcomes for an investment project. Most firms invest in a particular project only once, however. How can a computer simulation model be helpful to the typical decision maker who is making a one-time-only investment decision?
Suppose the borrowing rate rB=10% compounded annually. However, the lending rate (or equivalently, the interest rate on deposits) is only 8% compounded annually. Compute the difference between the upper and lower bounds on the price of an perpetuity ..
If you deposit money today in an account that pays 12% annual interest, how long will it take to double your money? Round your answer to two decimal places.
Describe the concept of market efficiency. In what sense is the concept an important part of the shareholders wealth maximization objective.
Concerning Fannie Mae-sponsored Mortgage Backed Securities (MBS): Identify which of the following statements is correct. The coupon rate on pass-through MBS sold to investors is always higher than the average coupon on the individual mortgages making..
George bought a car for $26,500. He made a down-payment of $4,500 and financed the rest on a 5-year term with a monthly payment of $575. A) What is the interest rate per month for the loan? B) What is the nominal interest per year? C) What is the eff..
Ryan Inc is expected to have its growth rate drop from 20% to 10% in 5 years. The last dividend was $3 and the discount rate is based on beta of 3, T bond rate of 5% and return of the market of 10%. First, find the value of Ryan Inc. Second, compute ..
Several factors affect a firm’s need for external funds. Evaluate the effect of each following factor and place a check next to each factor that is likely to increase a firm’s need for external capital—that is, its AFN
q1. circle the right statementa. in the statement of cash flows a reduce in inventories is reported as a use of cash.
A Treasury bill has a bid yield of 3.66% and an ask yield of 3.6%. The bill matures in 129 days. Assume a face value of $1,000. What is the least you could pay to acquire a bill?
Builtrites common stock is currently selling for $48 a share and the firm just paid an annual dividend of $2.30 per share. Management believes that dividends and earnings should grow at 8% annually. Since new stock would need to be sold to finance an..
You are planning to make annual deposits of $6,330 into a retirement account that pays 10 percent interest compounded monthly. How large will your account balance be in 28 years?
Central Credit Union is offering 6.7 percent compounded daily on its savings accounts. If you deposit $5,100 today, how much will you have in the account in 5 years? In 10 years? In 20 years?
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