Risk Management and Capital Budgeting 3

Question 1

A decrease in taxes

Answer 1

Would result in changes that would result in the highest present value

Question 2

What derivative instruments is recommended for hedging interest rate risk

Answer 2

swap agreement

this allows the company to exchange variable interest-rate debt cash flows for fixed-rate debt cash flows.

Question 3

An effective portfolio

Answer 3

is one in which the investments are negatively correlated.

Thus, when the return on some investments is declining the return on others is increasing.

Question 4

proceeds from the sale of a bond will be equal to

Answer 4

present value of the principal amount due at the end of the life of the bond plus the present value of the interest payments made during the life of the bond,

each are discounted at the prevailing market rate of interest

Question 5

What is the difference between the stated rate and the effective rate

Answer 5

Frequency of compounding

Question 6

Depreciation is used in regards to NPV for what reason

Answer 6

increases cash flow by reducing income taxes

Question 7

the discount rate at which the net present value of the project equals zero.

Answer 7

is the internal rate of return on a project

Question 8

The zero-coupon method is used

Answer 8

to determine the fair value of interest rate swaps.

Question 9

(Dividends + change in price) divided by beginning price

Answer 9

formulas to calculate the economic rate of return on common stock