- What is the time value of money and why is it so important in finance?
- If you won the lottery for $10 million and you had the choice to take a lump sum or payments over 20 years,
- which option would you choose? Why?
- What questions do you need answered before you decide?
- What situations may change your decision?
- Banks and other lenders are required to disclose a rate called the APR.
- What is this rate?
- Why did Congress require that it be disclosed?
- Is it the same as the effective annual rate?
- If you were comparing loans could you use their APRs to determine the loan with the lowest effective interest rate?
- How are bond prices determined in the market? What is the relationship between interest rates and bond prices? Have you ever purchased a bond? If so, what was your experience with the purchase price and the value of the bond over time?
- Explain the different type of risk that a bond investor and issuer face. How does a bond’s term and collateral changed to affect its interest rate?
- If you bought a share of common stock, you would probably expect to receive dividends plus an eventual capital gain. Would the distribution between the dividend yield and the capital gains yield be influenced by the firm’s decision to pay more dividends rather than to retain and reinvest more of its earnings? Explain.
- Suppose a firm estimates its WACC to be 10%. Should the WACC be used to evaluate all of its potential projects, even if they vary in risk? If not, what might be “reasonable” costs of capital for average-, high-, and low-risk projects?
- Chapter 11 discusses the importance of the time value of money. Yet, one of the methods to evaluate projects is the payback method, which does not take the time value of money into consideration. So why would anyone use this method?
- This chapter also reinforces the importance of improving the collection of receivables. How can management practices speed receivables collection? Which practices slow this collection?
