罗斯公司理财名词解释习题答案

发布时间：2024-11-28

罗斯公司理财名词解释习题答案

CONCEPT QUESTIONS - CHAPTER 1

1.1 What are the three basic questions of corporate finance?

a. Investment decision (capital budgeting): What long-term investment strategy

should a firm adopt?

b. Financing decision (capital structure): How much cash must be raised for the required investments?

c. Short-term finance decision (working capital): How much short-term cash

flow does company need to pay its bills.

Describe capital structure.

Capital structure is the mix of different securities used to finance a firm's

investments.

List three reasons why value creation is difficult.

Value creation is difficult because it is not easy to observe cash flows directly.

The reasons are:

a. Cash flows are sometimes difficult to identify.

b. The timing of cash flows is difficult to determine.

c. Cash flows are uncertain and therefore risky.

1.2 What is a contingent claim?

A contingent claim is a claim whose payoffs are dependent on the value of the

firm at the end of the year. In more general terms, contingent claims depend on

the value of an underlying asset.

Describe equity and debt as contingent claims.

Both debt and equity depend on the value of the firm. If the value of the firm is

greater than the amount owed to debt holders, they will get what the firm owes

them, while stockholders will get the difference. But if the value of the firm is

less than equity, bondholders will get the value of the firm and equity holders

nothing.

1.3 Define a proprietorship, a partnership and a corporation.

A proprietorship is a business owned by a single individual with unlimited

liability. A partnership is a business owned by two or more individuals with

unlimited liability. A corporation is a business which is a "legal person" with

many limited liability owners.

What are the advantages of the corporate form of business organization? Limited liability, east of ownership transfer and perpetual succession.

1.4 What are the two types of agency costs?

Monitoring costs of the shareholders and the incentive fees paid to the managers.

How are managers bonded to shareholders?

Answers to Concept Questions A-1

罗斯公司理财名词解释习题答案

a. Shareholders determine the membership to the board of directors, which

selects management.

b. Management contracts and incentives are build into compensation

arrangements.

c. If a firm is taken over because the firm's price dropped, managers could lose

their jobs.

d. Competition in the managerial labor market makes managers perform in the

best interest of stockholders.

Can you recall some managerial goals?

Maximization of corporate wealth, growth and company size.

What is the set-of-contracts perspective?

The view of the corporation as a set of contracting relationships among

individuals who have conflicting objectives.

1.5 Distinguish between money markets and capital markets.

Money markets are markets for debt securities that pay off in less than one year,

while capital markets are markets for long-term debt and equity shares.

What is listing?

Listing refers to the procedures by which a company applies and qualifies so that its stock can be traded on the New York Stock Exchange.

What is the difference between a primary market and a secondary market?

The primary market is the market where issuers of securities sell them for the first time to investors, while a secondary market is a market for securities previously

issued.

CONCEPT QUESTIONS - CHAPTER 2

2.1 What is the balance-sheet equation?

Assets = Liabilities + Stockholders' equity

What three things should be kept in mind when looking at a balance sheet? Accounting liquidity, debt vs. equity, and value vs. cost.

2.2 What is the income statement equation?

Revenue - expenses = Income

What are the three things to keep in mind when looking at an income

statement?

Generally Accepted Accounting Principles (GAAP), noncash items, and time and costs.

A- Answers to Concept Questions 2

罗斯公司理财名词解释习题答案

What are noncash expenses?

Noncash expenses are items included as expenses but which do not directly affect cash flow. The most important one is depreciation.

2.3 What is net working capital?

It is the difference between current assets and current liabilities.

What is the change in net working capital?

To determine changes in net working capital you subtract uses of net working

capital from sources of net working capital.

2.4 How is cash flow different from changes in net working capital?

The difference between cash flow and changes in new working capital is that

some transactions affect cash flow and not net working capital. The acquisition of inventories with cash is a good example of a change in working capital

requirements.

What is the difference between operating cash flow and total cash flow of the firm?

The main difference between the two is capital spending and additions to working capital, that is, investment in fixed assets and "investment" in working capital.

CONCEPT QUESTIONS - CHAPTER 3

3.1 What is an interest rate?

It is the payment required by the lender of money for the use of it during a

determined period of time. It is expressed in percentage.

What are institutions that match borrowers and lenders called?

They are called financial institutions.

What do we mean when we say a market clears? What is an equilibrium

rate of interest?

A market clears if the amount of money borrowers want to borrow is equal to the amount lenders wish to lend. An equilibrium rate of interest is the interest rate at which markets clear.

3.2 How does an individual change his consumption across periods through

borrowing and lending.

By borrowing and lending different amounts the person can achieve any of all

consumption possibilities available.

How do interest rate changes affect one's degree of impatience?

A person's level of patience depends upon the interest rate he or she faces in the

market. A person eager to borrow money at a low interest rate will become less

Answers to Concept Questions A-3

罗斯公司理财名词解释习题答案

eager if that interest rate is raised and may prefer to lend money to take advantage of higher interest rates.

3.3 What is the most important feature of a competitive financial market?

No investor, individual or corporation can have a significant effect on total

lending or on interest rates. Therefore, investors are price takers.

What conditions are likely to lead to this?

a. Trading is costless.

b. Information about borrowing and lending opportunities is available

c. There are many traders.

3.4 Describe the basic financial principle of investment decision-making?

An investment project is worth undertaking only if it is mores desirable than what is available in the financial markets.

3.5 Describe how the financial markets can be used to evaluate investment

alternatives?

The financial markets can be used as a benchmark. If the proposed investment

provides a better alternative than the financial markets, it should be undertaken.

What is the separation theorem? Why is it important?

The separation theorem says that the decision as to whether to undertake a project (compared to the financial markets) is independent of the consumption

preferences of the individual. It is important because we can make investment

decisions based on objective data, disregarding personal preferences.

3.6 Give the definitions of net present value, future value and present value?

New present value is the difference in present value terms between cash inflows

and cash outflows. Given the financial market, the future value is an amount

equivalent to the amount currently held, and present value is the amount

equivalent now to an amount to be received or given in the future.

What information does a person need to compute an investment's net present

value?

Cash inflows, cash outflows and an interest or discount rate.

3.7 In terms of the net-present-value rule, what is the essential difference

between the individual and the corporation.

The main difference is that firms have no consumption endowment.

CONCEPT QUESTIONS - CHAPTER 4

4.1 Define future value and present value.

A- Answers to Concept Questions 4

罗斯公司理财名词解释习题答案

Future value is the value of a sum after investing over one or more periods.

Present value is the value today of cash flows to be received in the future.

How does one use net present value when making an investment decision?

One determines the present value of future cash flows and then subtracts the cost of the investment. If this value is positive, the investment should be undertaken. If the NPV is negative, then the investment should be rejected.

4.2 What is the difference between simple interest and compound interest?

With simple interest, the interest on the original investment is not reinvested.

With compound interest, each interest payment is reinvested and one earns

interest on interest.

What is the formula for the net present value of a project? T

NPV = -C0 + Ct /(1+I)t

t=1

4.3 What is a stated annual interest rate?

The stated annual interest rate is the annual interest rate without consideration of compounding.

What is an effective annual interest rate?

An effective annual interest rate is a rate that takes compounding into account.

What is the relationship between the stated annual interest rate and the

effective annual interest rate?

Effective annual interest rate = (1 + (r/m) )m - 1.

Define continuous compounding.

Continuous compounding compounds investments every instant.

4.4 What are the formulas for perpetuity, growing-perpetuity, annuity, and

growing annuity?

Perpetuity: PV = C/r

Growing Perpetuity: PV = C/(r-g)

Annuity: PV = (C/r) [1-1/(1+r)T]

Growing Annuity: PV = [C/(r-g)] [1-((1+g) / (1+r))T ]

What are three important points concerning the growing perpetuity formula?

1. The numerator.

2. The interest rate and the growth rate.

3. The timing assumption.

What are four tricks concerning annuities?

1. A delayed annuity.

Answers to Concept Questions A-5

罗斯公司理财名词解释习题答案

2. An annuity in advance

3. An infrequent annuity

4. The equating of present values of two annuities.

CONCEPT QUESTIONS - CHAPTER 5

5.2 Define pure discount bonds, level-coupon bonds, and consols.

A pure discount bond is one that makes no intervening interest payments. One

receives a single lump sum payment at maturity. A level-coupon bond is a

combination of an annuity and a lump sum at maturity. A consol is a bond that

makes interest payments forever.

Contrast the state interest rate and the effective annual interest rate for

bonds paying semi-annual interest.

Effective annual interest rate on a bond takes into account two periods of

compounding per year received on the coupon payments. The state rate does not take this into account.

5.3 What is the relationship between interest rates and bond prices?

There is an inverse relationship. When one goes up, the other goes down.

How does one calculate the yield to maturity on a bond?

One finds the discount rate that equates the promised future cash flows with the

price of the bond.

5.8 What are the three factors determining a firm's P/E ratio?

1. Today's expectations of future growth opportunities.

2. The discount rte.

3. The accounting method.

5.9 What is the closing price of General Data?

The closing price of General Data is 6 3/16.

What is the PE of General House?

The PE of General House is 29.

What is the annual dividend of General Host?

The annual dividend of General Host is zero.

CONCEPT QUESTIONS - Appendix to Chapter 5

What is the difference between a spot interest rate and the yield to maturity?

The yield to maturity is the geometric average of the spot rates during the life of

the bond.

A- Answers to Concept Questions 6

罗斯公司理财名词解释习题答案

Define the forward rate.

Given a one-year bond and a two-year bond, one knows the spot rates for both.

The forward rate is the rate of return implicit on a one-year bond purchased in the second year that would equate the terminal wealth of purchasing the one-year

bond today and another in one year with that of the two-year bond.

What is the relationship between the one-year spot rate, the two-year spot rate and the forward rate over the second year?

The forward rate f2 = [(1+r2)2 /(1+r1 )] - 1

What is the expectation hypothesis?

Investors set interest rates such that the forward rate over a given period equals

the spot rate for that period.

What is the liquidity-preference hypothesis?

This hypothesis maintains that investors require a risk premium for holding

longer-term bonds (i.e. they prefer to be liquid or short-term investors). This

implies that the market sets the forward rate for a given period above the expected spot rate for that period.

CONCEPT QUESTIONS - CHAPTER 6

6.2 List the problems of the payback period rule.

1. It does not take into account the time value of money.

2. It ignores payments after the payback period.

3. The cutoff period is arbitrary.

What are some advantages?

1. It is simple to implement.

2. It may help in controlling and evaluating managers.

6.4 What are the three steps in calculating AAR?

1. Determine average net income.

2. Determine average investment

3. Divide average net income by average investment.

What are some flaws with the AAR approach?

1. It uses accounting figures.

2. It takes no account of timing.

3. The cutoff period is arbitrary.

6.5 How does one calculate the IRR of a project?

Using either trial-and-error or a financial calculator, one finds the discount rate

that produces an NPV of zero.

Answers to Concept Questions A-7

罗斯公司理财名词解释习题答案

6.6 What is the difference between independent projects and mutually exclusive projects?

An independent project is one whose acceptance does not affect the acceptance of another. A mutually exclusive project, on the other hand is one whose acceptance precludes the acceptance of another.

What are two problems with the IRR approach that apply to both

independent and mutually exclusive projects?

1. The decision rule depends on whether one is investing of financing.

2. Multiple rates of return are possible.

What are two additional problems applying only to mutually exclusive

projects?

1. The IRR approach ignores issues of scale.

2. The IRR approach does not accommodate the timing of the cash flows

properly.

6.7 How does one calculate a project's profitability index?

Divide the present value of the cash flows subsequent to the initial investment by the initial investment.

How is the profitability index applied to independent projects, mutually

exclusive projects, and situations of capital rationing?

1. With independent projects, accept the project if the PI is greater than 1.0 and

reject if less than 1.0.

2. With mutually exclusive projects, use incremental analysis, subtracting the

cash flows of project 2 from project 1. Find the PI. If the PI is greater than

1.0, accept project 1. If less than 1.0, accept project 2.

3. In capital rationing, the firm should simply rank the projects according to their respective PIs and accept the projects with the highest PIs, subject to the

budget constrain.

CONCEPT QUESTIONS - CHAPTER 7

7.1 What are the three difficulties in determining incremental cash flows?

1. Sunk costs.

2. Opportunity costs

3. Side effects.

Define sunk costs, opportunity costs, and side effects.

1. Sunk costs are costs that have already been incurred and that will not be

affected by the decision whether to undertake the investment.

2. Opportunity costs are costs incurred by the firm because, if it decides to

undertake a project, it will forego other opportunities for using the assets.

A- Answers to Concept Questions 8

罗斯公司理财名词解释习题答案

3. Side effects appear when a project negatively affects cash flows from other

parts of the firm.

7.2 What are the items leading to cash flow in any year?

Cash flow from operations (revenue-operating costs-taxes) plus cash flow of

investment (cost of new machines + changes in net working capital + opportunity costs).

Why did we determine income when NPV Analysis discounts cash flows, not

income?

Because we need to determine how much is paid out in taxes.

Why is working capital viewed as a cash outflow?

Because increases in working capital must be funded by cash generated elsewhere in the firm.

7.3 What is the difference between the nominal and the real interest rate? The nominal interest rate is the real interest rate with a premium for inflation.

What is the difference between nominal and real cash flows?

Real cash flows are nominal cash flows adjusted for inflation.

7.4 What is the equivalent annual cost method of capital budgeting?

The decision as to which of various mutually exclusive machines to buy is based on the equivalent annual cost. The EAC is determined by dividing the net present value of costs by an annuity factor that has the same life as the machines. The

machine with the lowest EAC should be acquired.

Can you list the assumptions that we must to use EAC?

1. All machines do the same job.

2. They have different operating costs and lives

3. The machine will be indefinitely replaced.

CONCEPT QUESTIONS - CHAPTER 8

8.1 What are the ways a firm can create positive NPV.

1. Be first to introduce a new product.

2. Further develop a core competency to product goods or services at lower costs than competitors.

3. Create a barrier that makes it difficult for the other firms to compete

effectively.

4. Introduce variation on existing products to take advantage of unsatisfied

demand

5. Create product differentiation by aggressive advertising and marketing

networks.

Answers to Concept Questions A-9

罗斯公司理财名词解释习题答案

6. Use innovation in organizational processes to do all of the above.

How can managers use the market to help them screen out negative NPV

projects?

8.2 What is a decision tree?

It is a method to help capital budgeting decision-makers evaluating projects

involving sequential decisions. At every point in the tree, there are different

alternatives that should be analyzed.

What are potential problems in using a decision tree?

Potential problems 1) that a different discount rate should be used for different

branches in the tree and 2) it is difficult for decision trees to capture managerial

options.

8.3 What is a sensitivity analysis?

It is a technique used to determine how the result of a decision changes when

some of the parameters or assumptions change.

Why is it important to perform a sensitivity analysis?

Because it provides an analysis of the consequences of possible prediction or

assumption errors.

What is a break-even analysis?

It is a technique used to determine the volume of production necessary to break

even, that is, to cover not only variable costs but fixed costs as well.

Describe how sensitivity analysis interacts with break-even analysis.

Sensitivity analysis can determine how the financial break-even point changes

when some factors (such as fixed costs, variable costs, or revenue) change.

CONCEPT QUESTIONS - CHAPTER 9

9.1 What are the two parts of total return?

Dividend income and capital gain (or loss)

Why are unrealized capital gains or losses included in the calculation of

returns?

Because it is as much a part of returns as dividends, even if the investor decides to hold onto the stock and not to realize the capital gain.

What is the difference between a dollar return and a percentage return?

A dollar return is the amount of money the original investment provided, while

percentage return is the percentage of the original investment represented by the

total return.

A- Answers to Concept Questions 10

罗斯公司理财名词解释习题答案

9.2 What is the largest one-period return in the 63-year history of common

stocks we have displayed, and when did it occur? What is the smallest return, and when did it occur?

Largest common stock return: 53.99% in 1933. Smallest common stock return: -43.34% in 1931.

In how many years did the common stock return exceed 30 percent, and in how many years was it below 20 percent?

It exceeded 30% in 16 years. It was below 20% in 39 years.

For common stocks, what is the longest period of time without a single losing year? What is the longest streak of losing years?

There are 6 consecutive years of positive returns. The longest losing streak was 4 years.

What is the longest period of time such that if you have invested at the

beginning of the period, you would still not have had a positive return on

your common-stock investment by the end?

The longest period of time was 14 years (from 1929 to 1942).

9.4 What is the major observation about capital markets that we will seek to explain?

That the return on risky assets has been higher on average than the return on risk-free assets.

What does the observation tell us about investors for the period from 1926 through 1994.

An investor in this period was rewarded for investment in the stock market with

an extra or excess return over what would have achieved by simply investing in

T-bills.

9.5 What is the definition of sample estimates of variance and standard

deviation?

Variance is given by Var (R) = (1 / (T-1) ) t (Rt - R)2 where T is the number of

periods, Rt is the period return and R is the sample mean. Standard deviation is

given by SD = Var 1/2. For large T, (T-1) may be approximated by T.

How does the normal distribution help us interpret standard deviation?

For a normal distribution, the probability of having a return that is above or below the men by a certain amount only depends on the standard deviation.

9.6 How can financial managers use the history of capital markets to estimate

the required rate of return on nonfinancial investments with the same risk as the average common stock?

Answers to Concept Questions A-11

罗斯公司理财名词解释习题答案

They can determine the historical risk premium and add this amount to the current risk-free rate to determine the required return on investments of that risk.

CONCEPT QUESTIONS - CHAPTER 10

10.3

What are the formulas for the expected return, variance, and standard deviation of a portfolio of two assets? E{Rp } = Xi Ri + Xj Rj Varp = (Xi2 (Ri - Ri )2 + Xj2 (Rj - Rj )2 + 2Xi Xj (Ri - Ri ) (Rj - Rj ) SDp = Varp 1/2 What is the diversification effect?

As long as the correlation coefficient between two securities is less than one, the

standard deviation of a portfolio of two securities is less than the weighted

average of the standard deviations of the individual securities.

What are the highest and lowest possible values for the correlation coefficient? +1 and -1.

10.4 What is the relationship between the shape of the efficient set for two assets

and the correlation between the two assets?

The less correlation there is between two assets the more the efficient set bends in toward the y-axis.

10.5 What is the formula for the variance of a portfolio for many assets? N N

Varp = [XiXj(Ri – Ri)(Rj –Rj)] I=1 j=1

How can the formula be expressed in terms of a box or matrix?

The terms on the diagonal of the matrix represent the variances of each term and

the off-diagonal elements represent the covariances.

10.6 What are the two components of the total risk of a security?

Portfolio risk and diversifiable risk.

Why doesn't diversification eliminate all risk?

Because the variances of the portfolio asymptotically approaches the portfolio risk. This risk is the covariance of each pair of securities, which always remains.

10.7 What is the formula for the standard deviation of a portfolio composed of

one riskless and one risky asset?

A- Answers to Concept Questions 12

罗斯公司理财名词解释习题答案

SDP =(XA2VarA)1/2 = XASDA where A is the risky asset How does one determine the optimal portfolio among the efficient set of risky

assets?

This portfolio lies at the point at which a line drawn from the risk-free rate is

tangent to the efficient set.

10.8 If all investors have homogeneous expectations, what portfolio of risky assets

do they hold?

The market portfolio.

What is the formula for beta?

Bi = COV(RiRm)/Var(Rm)

Why is the beta the appropriate measure of risk for a single security in a

large portfolio?

Because beta measures the contribution of that single security to the variance of

the portfolio.

10.9 Why is the SML a straight line?

Because investors could form homemade portfolios that dominate portfolios that don't lie on a straight line. Buying and selling of these portfolios would then

drive any outliers back to the line.

What is the Capital-Asset-Pricing model?

The CAPM is a linear model that relates the expected return on an asset to its

systematic risk (beta).

What are the differences between the capital market line and the security

market line?

The SML relates expected return to beta, while the CML relates expected return

to the standard deviation. The SML holds both for all individual securities and

for all possible portfolios, whereas the CML holds only for efficient portfolios.

CONCEPT QUESTIONS - CHAPTER 11

11.1 What are the two basic parts of a return?

1. The expected part

2. The surprise part

Under what conditions will some news have no effect on common stock prices?

If there is no surprise in the news, there will not be any effect on prices. That is,

the news was fully expected.

11.2 Describe the difference between systematic risk and unsystematic risk.

Answers to Concept Questions A-13

罗斯公司理财名词解释习题答案

A systematic risk is any risk that affects a large number of assets, each to a greater or lesser degree. An unsystematic risk is a risk that specifically affects a single

asset or a small group of assets.

Why is unsystematic risk sometimes referred to as idiosyncratic risk?

Because information such as the announcement of a labor strike, may affect only some companies.

11.3 What is an inflation beta? A GNP beta? An interest-rate beta?

An inflation beta is a measure of the sensitivity of a stock's return to changes in

the expected inflation rate. A GNP beta measures the sensitivity of a stock's

return to changes in the expected GNP. An interest rate beta reflects the

sensitivity of a stock's return to changes in the market interest rate.

What is the difference between a k-factor model and the market model?

The main difference is that the market model assumes that only one factor,

usually a stock market aggregate, is enough to explain stock returns, while a k-

factor model relies on k factors to explain returns.

Define the beta coefficient.

The beta coefficient is a measure of the sensitivity of stock's return to unexpected changes in one factor.

11.4 How can the return on a portfolio be expressed in terms of a factor model?

It is the weighted average of expected returns plus the weighted average of each

security's beta times a factor F plus the weighted average of the unsystematic risks of the individual securities.

What risk is diversified away in a large portfolio?

The unsystematic risk.

11.5 What is the relationship between the one-factor model and CAPM?

Assuming the market portfolio is properly scaled, it can be shown that the one-

factor model is identical to the CAPM.

11.7 Empirical models are sometimes called factor models. What is the difference

between a factor as we have used it previously in this chapter and an

attribute as we use it in this section?

A factor is generally a market wide or industry wide factor proxying the

systematic risk. An attribute is related with the returns of the stocks.

What is data mining and why might it overstate the relation between some

stock attribute and returns?

Choosing parameters because they have been shown to be related to returns is

data mining. The relation found between some attribute and returns can be

accidental, thus overstated.

A- Answers to Concept Questions 14

罗斯公司理财名词解释习题答案

What is wrong with measuring the performance of a U.S. growth stock

manager against a benchmark composed of English stocks?

Using a benchmark composed of English stocks is wrong because the stocks

included are not of the same style as those in a U.S. growth stock fund.

CONCEPT QUESTIONS - CHAPTER 12

12.1 What is the disadvantage of using too few observations when estimating beta? Small samples can lead to inaccurate estimations.

What is the disadvantage of using too many observations when estimating

beta?

Firms may change their industries over time making observations from the distant past out-of-date.

What is the disadvantage of using the industry beta as the estimate of the

beta of an individual firm?

The operations of a particular firm may not be similar to the industry average.

12.2 What are the determinants of equity betas?

1. The responsiveness of a firm's revenues to economy wide movements.

2. The degree of a firm's operating leverage.

3. The degree of a firm's financial leverage.

What is the difference between an asset beta and an equity beta?

Financial leverage.

12.6 What is liquidity?

Liquidity in this context means the cost of buying and selling stocks. Those stocks that are expensive to trade are considered less liquid.

What is the relation between liquidity and expected return? There is a high expected return for illiquid stocks with high trading costs.

What is adverse selection? Adverse selection occurs when individuals have ignorance about traits, trends, or other information hidden in a population. For instance, a trader may suffer from

adverse selection if certain market knowledge is hidden from him but is available to some investors.

Answers to Concept Questions A-15

罗斯公司理财名词解释习题答案

What can a corporation do to lower its cost of capital? A corporation can be proactive in taking actions that will lower trading costs, thereby lowering its cost of capital.

CONCEPT QUESTIONS - CHAPTER 13

13.1 List the three ways financing decisions can create value.

1. Fool investors

2. Reduce costs or increase subsidies

3. Create a new security

13.2 Can you define an efficient market?

It is a market where current prices reflect all available information.

13.3 Can you describe the three forms of the efficient-market hypotheses?

1. Weak-from EMH postulates that prices reflect all information contained in the past history of prices.

2. Semistrong form EMH says that prices not only reflect the history of prices but all publicly available information.

3. Strong form EMH contends that prices reflect all available information, public and private (or "inside").

What kinds of things could make markets inefficient?