Chapter 4: Q1DQ (page 360)
Question:Why do we use the overall cost of capital for investment decisions even when only one source of capital will be used (e.g., debt)? (LO11-1)
Answer
The overall cost of capital is used for investment decisions as debt is a much riskier option of raising funds.
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Question:BioScience Inc. will pay a common stock dividend of $3.20 at the end of the year (D1). The required return on common stock (Ke) is 14 percent. The firm has a constant growth rate (g) of 9 percent. Compute the current price of the stock (P0).
Does inflation have anything to do with making a dollar today worth more than a dollar tomorrow?
If your uncle borrows $60,000 from the bank at 10 percent interest over the seven-year life of the loan, what equal annual payments must be made to discharge the loan, plus pay the bank its required rate of interest (round to the nearest dollar)? How much of his first payment will be applied to interest? To principal? How much of his second payment will be applied to each?
If inflationary expectations increase, what is likely to happen to the yield to maturity on bonds in the marketplace? What is also likely to happen to the price of bonds?
Question: As stated in the chapter, annuity payments are assumed to come at the end of each payment period (termed an ordinary annuity). However, an exception occurs when the annuity payments come at the beginning of each period (termed an annuity due). To find the present value of an annuity due, the annuity formula must be adjusted as to the following: PVAD 5 A 3 ( 12 1 ________ (11i) n 21 ___________ i 11) The Capital Budgeting Process blo7716x_ch09_255-294.indd 284. Likewise, the formula for the future value of an annuity due requires a modification: FVAD 5 A 3 ( (11i) n11 21 ___________ i 21). What is the future value of a 15-year annuity of $1,800 per period where payments come at the beginning of each period? The interest rate is 12 percent.
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