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Explain how to calculate the value of a bond

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Reference no: EM132176356

FINANCE ASSIGNMENT -

NOTE: YOUR ANSWERS SHOULD BE BRIEF.

1. Explain why cash flows occurring at different times must be adjusted to reflect their value as of a common date before they can be compared and be able to calculate the present value and future value of multiple cash flows.

2. If the EAR on a savings account is given to be 3.84%, then the monthly rate is 0.32%. Is this statement correct or incorrect? Explain your answer.

3. Explain how to calculate the value of a bond and why bond prices vary negatively with interest rate movement.

4. Diversification over a large number of assets completely eliminates risk , true or false? Explain

5. What is the NPV rule? How is the NPV rule related to the goal of maximizing shareholders' wealth?

6. Under what conditions will the IRR rule and the NPV rule give the same accept/reject decision?

7. Why do we use cash flows instead of accounting profits in estimating the NPV of a project?

8. Using an example of each, explain sunk cost and opportunity costs. Which of these costs should be included in incremental cash flows and which should be excluded?

9. Explain when companies should discount projects using the cost of debt. When should they use WACC (weighted average cost of capital) instead? when should they use neither?

10. Argue how having debt in capital structure might be a mitigating factor for agency costs.

11. What are the main predictions of the pecking-order theory of capital structure?

12. How do Modigliani and Miller arrive at their conclusion that dividend policy is irrelevant in a world of perfect and frictionless capital market?

Reference no: EM132176356

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