Process & Project Management, Globalization, Financial Risk Management, Decisions, & Valuation

Question 1

Common Stock

Answer 1

• Equity security that conveys ownership.
• It does not require any payment, it does not mature and because it increases equity while having no effect on debt, it decreases the debt equity ratio & increases the credit-worthiness of the firm.

Question 2

Floating-rate

Answer 2

Floating-rate bonds would automatically adjust the return on a financial instrument to produce a constant market value for that instrument.

Question 3

What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt?

Answer 3

To reduce the coupon rate on the bonds being sold.

Question 4

Debt Security

Answer 4

• Debt holders DO NOT have ownership interest.

- debt obligations require a periodic interest payment.

Question 5

Equity Security

Answer 5

• They have ownership interest.
• Equity securities only pay income to their holders when dividends are declared at the discretion of the Board of Directors.

Question 6

Short-term vs. long-term financing options

Answer 6

ST = result in lower interest rates but higher interest rate risks b/c rates will fluctuate more dramatically for ST issues than LT.
LT= credit risk will decrease b/c the company will seek refinancing less frequently & thereby have less credit risk/opportunity that the rates associated with debt will be changed unfavorably/financing will be denied together.

Question 7

Formula for Price:

Answer 7

Price = Dividend/rate of return

Question 8

PEG ratio

Answer 8

PEG = (Po/Eo) / (G x 100)

Question 9

Compute dividend in subsequent year:

Answer 9

Step 1: Pt = D(t+1)/(R-G)

Question 10

Projected Stock price formula:

Answer 10

Po = PEG x E1 x G

Question 11

Economic rate of return on common stock - formula

Answer 11

(dividends + change in price) divided by beginning price.