11 May WHY MIGHT THE MARKET DEBT RATIO BE PREFERABLE TO THE CONVENTIONAL DEBT RATIO?
Explain
why the volatility (i.e., instability) of a firms input and operating costs
over time might be a critical factor in drawing conclusions about the adequacy
of their debt coverage ratios.
2. How
do the price/earnings (P/E) ratio and the market/book (M/B) ratio provide a
feel for the firms riskiness as perceived by the investors who trade the
firms stock?
3. Two
firms have the same ROA of 10%. Using
the DuPont version of the ROA equation explain a critical difference in
how these two identical ROAs might have been produced.
4.
Using the same income
statement for a given year, how could
one reconcile a firm having a high gross profit margin and at the same time a
low net profit margin.
5.
Explain
the significance of the equity multiplier.
6.
Why
might the market debt ratio be preferable to the conventional debt ratio?
7. If,
at the beginning of 1925, you had invested $10,000 in a portfolio of
small-company stocks and rolled over your investment every year until the end
of 2000, you would have had a portfolio value of $64,402.23. What would have been your annualized
compounded rate of return on your investment?
(Ignore taxes/inflation.)
8. In
a time value of money sense explain how a discount factor reflects opportunity
cost.
9. Tom
has the opportunity to purchase an investment that will pay $30,000 in five
years. The purchase price of the
investment today is $18,000. Should he
make the purchase if he can earn 10% on his investments? Explain your answer.
10. A retirement home at Deer Trail Estates now
costs $185,000. Inflation is expected to
cause this price to increase at 6% annually over the next 20 years. How large an equal, annual, end-of-year
deposit must be made each year into an account paying an annual interest rate
of 10% for the purchaser to have enough cash to purchase the home in 20 years? (Note that the rate of inflation
compounds just like any other rate.)
11.Clearly explain the logic of the following true
statement. On the same time line the
future value of a present sum is equivalent to (not equal to) the present
value of a future sum for the same interest rate and number of time periods.1. Explain
why the volatility (i.e., instability) of a firms input and operating costs
over time might be a critical factor in drawing conclusions about the adequacy
of their debt coverage ratios. 2. How
do the price/earnings (P/E) ratio and the market/book (M/B) ratio provide a
feel for the firms riskiness as perceived by the investors who trade the
firms stock?3. Two
firms have the same ROA of 10%. Using
the DuPont version of the ROA equation explain a critical difference in
how these two identical ROAs might have been produced.4.
Using the same income
statement for a given year, how could
one reconcile a firm having a high gross profit margin and at the same time a
low net profit margin.5.
Explain
the significance of the equity multiplier.6.
Why
might the market debt ratio be preferable to the conventional debt ratio?7. If,
at the beginning of 1925, you had invested $10,000 in a portfolio of
small-company stocks and rolled over your investment every year until the end
of 2000, you would have had a portfolio value of $64,402.23. What would have been your annualized
compounded rate of return on your investment?
(Ignore taxes/inflation.)8. In
a time value of money sense explain how a discount factor reflects opportunity
cost.9. Tom
has the opportunity to purchase an investment that will pay $30,000 in five
years. The purchase price of the
investment today is $18,000. Should he
make the purchase if he can earn 10% on his investments? Explain your answer.10. A retirement home at Deer Trail Estates now
costs $185,000. Inflation is expected to
cause this price to increase at 6% annually over the next 20 years. How large an equal, annual, end-of-year
deposit must be made each year into an account paying an annual interest rate
of 10% for the purchaser to have enough cash to purchase the home in 20 years? (Note that the rate of inflation
compounds just like any other rate.)11.Clearly explain the logic of the following true
statement. On the same time line the
future value of a present sum is equivalent to (not equal to) the present
value of a future sum for the same interest rate and number of time periods.
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