Examine the concepts of risk and expected return on investments.
Critical Thinking Assignment
Measurement of Risk and Return in Investing
Measurement of Risk and Return in Investing
Q- Complete the following problems:
Problem 6-1: Rate of return and standard deviation
Problem 6-2: Holding-Period Return
Problem 6-3: Holding-Period Gain SAR and Return
Problem 6-4: Capital Asset Pricing Model
Problem 6-5: Security Market Line
Problem 6-6: Required Rate of Return CAPM
Problem 6-7: Expected Return, Standard Deviation
Following the data provided on the attached Excel (named as FIN500_Module 06_problems) complete the problems in an Excel spreadsheet. Be sure to show all your work on the Excel spreadsheet to receive credit; no hard keys.
Learning Outcomes
Examine the concepts of risk and expected return on investments.
Examine the Capital Asset Pricing Model (CAPM).
Readings
Required:
Chapter 6: The Meaning and Measurement of Risk and Return in Foundations of Finance
Alabbad, A., Anantharaman, D., & Govindaraj, S. (2021). Depositor characteristics and the performance of Islamic banks. Journal of Accounting, Auditing & Finance, 36(3), 643–666.
Recommended:
Chapter 6 PowerPoint Slides
Ascarya, A. Suharto, U., & Husman, J. A. (2022). Proposed model of integrated Islamic commercial and social finance for Islamic bank in Indonesia. Eurasian Economic Review, 12(1), 115–138.
Requirements: answer all the requirements
QT Rubric_100_7q7 problems, 100 points Levels of AchievementCriteriaExceeds ExpectationMeets ExpectationSome ExpectationsUnsatifactoryProblem1 14 to 14 pointsAll components are correct,with no errors or omissions. Allwork is shown.12 to 13 pointsSome signicant but notmajor errors exist. Somework is shown.10 to 11 pointsSome major errors oromissions exist. Limitedwork is shown.0 to 9 pointsFails to demonstrateadequate comprehensionof the concept.Problem2 14 to 14 pointsAll components are correct,with no errors or omissions. Allwork is shown.12 to 13 pointsSome signicant but notmajor errors exist. Somework is shown.10 to 11 pointsSome major errors oromissions exist. Limitedwork is shown.0 to 9 pointsFails to demonstrateadequate comprehensionof the concept.Problem3 14 to 14 pointsAll components are correct,with no errors or omissions. Allwork is shown.12 to 13 pointsSome signicant but notmajor errors exist. Somework is shown.10 to 11 pointsSome major errors oromissions exist. Limitedwork is shown.0 to 9 pointsFails to demonstrateadequate comprehensionof the concept.Problem4 14 to 14 pointsAll components are correct,with no errors or omissions. Allwork is shown.12 to 13 pointsSome signicant but notmajor errors exist. Somework is shown.10 to 11 pointsSome major errors oromissions exist. Limitedwork is shown.0 to 9 pointsFails to demonstrateadequate comprehensionof the concept.Problem5 14 to 14 pointsAll components are correct,with no errors or omissions. Allwork is shown.12 to 13 pointsSome signicant but notmajor errors exist. Somework is shown.10 to 11 pointsSome major errors oromissions exist. Limitedwork is shown.0 to 9 pointsFails to demonstrateadequate comprehensionof the concept.Problem6 14 to 15 pointsAll components are correct,with no errors or omissions. Allwork is shown.12 to 13 pointsSome signicant but notmajor errors exist. Somework is shown.10 to 11 pointsSome major errors oromissions exist. Limitedwork is shown.0 to 9 pointsFails to demonstrateadequate comprehensionof the concept.Problem7 14 to 15 pointsAll components are correct,with no errors or omissions. Allwork is shown.12 to 13 pointsSome signicant but notmajor errors exist. Somework is shown.10 to 11 pointsSome major errors oromissions exist. Limitedwork is shown.0 to 9 pointsFails to demonstrateadequate comprehensionof the concept. NameDescriptionRubric DetailView Associated ItemsPrintClose Window
Critical Thinking Assignment
Measurement of Risk and Return in Investing
Measurement of Risk and Return in Investing
Q- Complete the following problems:
Problem 6-1: Rate of return and standard deviation
Problem 6-2: Holding-Period Return
Problem 6-3: Holding-Period Gain SAR and Return
Problem 6-4: Capital Asset Pricing Model
Problem 6-5: Security Market Line
Problem 6-6: Required Rate of Return CAPM
Problem 6-7: Expected Return, Standard Deviation
Following the data provided on the attached Excel (named as FIN500_Module 06_problems) complete the problems in an Excel spreadsheet. Be sure to show all your work on the Excel spreadsheet to receive credit; no hard keys.
Learning Outcomes
Examine the concepts of risk and expected return on investments.
Examine the Capital Asset Pricing Model (CAPM).
Readings
Required:
Chapter 6: The Meaning and Measurement of Risk and Return in Foundations of Finance
Alabbad, A., Anantharaman, D., & Govindaraj, S. (2021). Journal of Accounting, Auditing & Finance, 36(3), 643–666.
Recommended:
Chapter 6 PowerPoint Slides
Ascarya, A. Suharto, U., & Husman, J. A. (2022). Eurasian Economic Review, 12(1), 115–138.
This is a special edition of an established title widely used by colleges and universities throughout the world. Pearson published this exclusive edition for the benefit of students outside the United States and Canada. If you purchased this book within the United States or Canada, you should be aware that it has been imported without the approval of the Publisher or Author.Pearson Global EditionGlobAl edITIonFor these Global editions, the editorial team at Pearson has collaborated with educators across the world to address a wide range of subjects and requirements, equipping students with the best possible learning tools. This Global edition preserves the cutting-edge approach and pedagogy of the original, but also features alterations, customization, and adaptation from the north American version.GlobAl edITIonGlobAl edITIonKeown • Martin • PettyFoundations of FinancenInTh edITIonArthur J. Keown • John D. Martin • J. William PettyFoundations of Finance nInTh edITIonKeown_09_1292155132_Final.indd 129/04/16 7:45 AM
Prepare, Apply, and Confirm with MyFinanceLab™Prepare, Apply, and Confirm with MyFinanceLab™• Pearson eText —The Pearson eText gives students access to their textbook anytime, anywhere. In addition to notetaking, highlighting, and bookmarking, the Pearson eText offers interactive and sharing features. Students actively read and learn, through embedded and auto-graded practice, animations, author videos, and more. Instructors can share comments or highlights, and students can add their own, for a tight community of learners in any class.• Dynamic Study Modules—Work by continuously assessing student performance and activity, then using data and analytics to provide personalized content in real time to reinforce concepts that target each student’s particular strengths and weaknesses.• Learning Catalytics—Generates classroom discussion, guides lecture, and promotes peer-to-peer learning with real-time analytics. Now, students can use any device to interact in the classroom.• Hallmark Features—Personalized Learning Aids, like Help Me Solve This, View an Example, and instant feedback are available for further practice and mastery when students need the help most!• Adaptive Study Plan—Assists students in monitoring their own progress by offering them a customized study plan powered by Knewton, based on Homework, Quiz, and Test results.Includes regenerated exercises with unlimited practice and the opportunity to prove mastery through quizzes on recommended learning objectives.• Worked Solutions—Provide step-by-step explanations on how to solve select problems using the exact numbers and data that were presented in the problem. Instructors will have access to the Worked Solutions in preview and review mode.• Algorithmic Test Bank—Instructors have the ability to create multiple versions of a test or extra practice for students.123• Mobile Ready—Students and instructors can access multimedia resources and complete assessments right • Financial Calculator—The Financial Calculator is available as a smartphone application, as well as on a computer, and value, and internal rate of return. Fifteen helpful tutorial videos show the many ways to use the Financial Calculator in MyFinanceLab.• LMS Integration—Link from any LMS platform to access assignments, rosters, and resources, and synchronize MyLab grades with your LMS gradebook. For students, new direct, single sign-on provides access to all the personalized learning MyLab resources • Reporting Dashboard—View, analyze, and report learning outcomes clearly and easily. Available via the Gradebook and fully mobile-ready, the Reporting Dashboard presents student performance data at the class, section, and program levels in an accessible, visual manner.Keown_09_1292155132_ifc_ibc_Final.indd 129/04/16 7:51 AM
The Logic and Practice of Financial ManagementNinth EditionGlobal EditionBoston Columbus Indianapolis New York San FranciscoAmsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal TorontoDelhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei TokyoFoundations of FinanceArthur J. KeownVirginia Polytechnic Institute and State UniversityR. B. Pamplin Professor of FinanceJohn D. MartinBaylor UniversityProfessor of FinanceCarr P. Collins Chair in FinanceJ. William PettyBaylor UniversityProfessor of FinanceW. W. Caruth Chair in EntrepreneurshipA01_KEOW5135_09_GE_FM.indd 106/05/16 6:46 PM
The Pearson Series in FinanceBerk/DeMarzoCorporate Finance*Corporate Finance: The Core*Berk/DeMarzo/HarfordFundamentals of Corporate Finance*BrooksFinancial Management: Core Concepts*Copeland/Weston/ShastriFinancial Theory and Corporate PolicyDorfman/CatherIntroduction to Risk Management and InsuranceEakins/McNallyCorporate Finance Online*Eiteman/Stonehill/MoffettMultinational Business Finance*FabozziBond Markets: Analysis and StrategiesFoersterFinancial Management: Concepts and Applications*FrascaPersonal FinanceGitman/ZutterPrinciples of Managerial Finance*Principles of Managerial Finance—Brief Edition*HaugenThe Inefficient Stock Market: What Pays Off and WhyModern Investment TheoryHoldenExcel Modeling in Corporate FinanceExcel Modeling in InvestmentsHughes/MacDonaldInternational Banking: Text and CasesHullFundamentals of Futures and Options MarketsOptions, Futures, and Other DerivativesKeownPersonal Finance: Turning Money into Wealth*Keown/Martin/PettyFoundations of Finance: The Logic and Practice of Financial Management*MaduraPersonal Finance*MarthinsenRisk Takers: Uses and Abuses of Financial DerivativesMcDonaldDerivatives MarketsFundamentals of Derivatives MarketsMishkin/EakinsFinancial Markets and InstitutionsMoffett/Stonehill/EitemanFundamentals of Multinational FinanceNofsingerPsychology of InvestingPennacchiTheory of Asset PricingRejda/McNamaraPrinciples of Risk Management and InsuranceSmart/Gitman/JoehnkFundamentals of Investing*Solnik/McLeaveyGlobal InvestmentsTitman/Keown/MartinFinancial Management: Principles and Applications*Titman/MartinValuation: The Art and Science of Corporate Investment DecisionsWeston/Mitchel/MulherinTakeovers, Restructuring, and Corporate Governance*Denotes MyFinanceLab titles. Log onto www.myfinancelab.com to learn more.A01_KEOW5135_09_GE_FM.indd 206/05/16 6:46 PM
To my parents, from whom I learned the most.Arthur J. KeownTo the Martin women—wife Sally and daughter-in-law Mel, the Martin men —sons Dave and Jess, and the Martin boys—grandsons Luke and Burke.John D. MartinTo Jack Griggs, who has been a most loyal and dedicated friend for over 55 years, always placing my interests above his own, and made life’s journey a lot of fun along the way.J. William PettyA01_KEOW5135_09_GE_FM.indd 306/05/16 6:46 PM
Vice President, Business Publishing: Donna BattistaEditor-in-Chief: Adrienne D’AmbrosioAcquisitions Editor: Kate FernandesEditorial Assistant: Kathryn BrightneyAssociate Acquisitions Editor, Global Edition: Ananya SrivastavaAssociate Project Editor, Global Edition: Paromita BanerjeeVice President, Product Marketing: Maggie MoylanDirector of Marketing, Digital Services, and Products: Jeanette KoskinasSenior Product Marketing Manager: Alison HaskinsExecutive Marketing Manager: Adam GoldsteinTeam Lead, Program Management: Ashley SantoraProgram Manager: Kathryn DinovoProgram Manager, Global Edition: Sudipto RoyTeam Lead, Project Management: Jeff HolcombProject Manager: Meredith GertzSenior Manufacturing Controller, Global Edition: Jerry KatariaOperations Specialist: Carol MelvilleCreative Director: Blair BrownArt Director: Jon BoylanVice President, Director of Digital Strategy and Assessment: Paul GentileManager of Learning Applications: Paul DeLucaDigital Editor: Brian HylandDirector, Digital Studio: Sacha LaustsenDigital Studio Manager: Diane LombardoExecutive Media Producer: Melissa HonigDigital Studio Project Manager: Andra SkaalrudSenior Digital Product Manager: Robert St. LaurentDigital Content Team Lead: Noel LotzDigital Content Project Lead: Miguel LeonarteMedia Production Manager, Global Edition: Vikram KumarMedia Editor, Global Edition: Gargi BanerjeeAssistant Media Producer, Global Edition: Pallavi PanditProject Management, Composition, Art Creation, and Text Design: Cenveo® Publisher ServicesCover Art: © abirvalg/123RFPearson Education LimitedEdinburgh GateHarlowEssex CM20 2JEEnglandand Associated Companies throughout the worldVisit us on the World Wide Web at: www.pearsonglobaleditions.com© Pearson Education Limited 2017The rights of Arthur J. Keown, John D. Martin and J. William Petty to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988.Authorized adaptation from the United States edition, entitled Foundations of Finance: The Logic and Practice of Financial Management, 9th Edition, ISBN 978-0-13-408328-5 by Arthur J. Keown, John D. Martin and J. William Petty, published by Pearson Education © 2017.All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS.All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners.ISBN 10: 1-292-15513-2ISBN 13: 978-1-292-15513-5British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the British Library10 9 8 7 6 5 4 3 2 1Typeset in Times NRMT Pro by Cenveo® Publisher ServicesPrinted and bound by Vivar in MalaysiaMicrosoft and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published as part of the services for any purpose. All such documents and related graphics are provided “as is” without warranty of any kind. Microsoft and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this informa-tion, including all warranties and conditions of merchantability, whether express, implied or statutory, fitness for a particular purpose, title and non-infringement. In no event shall Microsoft and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from the services.The documents and related graphics contained herein could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Microsoft and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time. Partial screen shots may be viewed in full within the software version specified.Microsoft® and Windows® are registered trademarks of the Microsoft CorporationA01_KEOW5135_09_GE_FM.indd 409/05/16 5:21 PM
5Arthur J. Keown is the Department Head and R. B. Pamplin Professor of Finance at Virginia Polytechnic Institute and State University. He received his bachelor’s degree from Ohio Wesleyan University, his M.B.A. from the University of Michigan, and his doctorate from Indiana University. An award-winning teacher, he is a member of the Academy of Teaching Excellence; has received five Certificates of Teaching Excellence at Virginia Tech, the W. E. Wine Award for Teaching Excellence, and the Alumni Teaching Excellence Award; and in 1999 received the Outstanding Faculty Award from the State of Virginia. Professor Keown is widely published in academic journals. His work has appeared in the Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Journal of Financial Research, Journal of Banking and Finance, Financial Management, Journal of Portfolio Management, and many others. In addition to Foundations of Finance, two others of his books are widely used in college finance classes all over the country—Basic Financial Management and Personal Finance: Turning Money into Wealth. Professor Keown is a Fellow of the Decision Sciences Institute, was a member of the Board of Directors of the Financial Management Association, and is the head of the finance department at Virginia Tech. In addition, he served as the co-editor of the Journal of Financial Research for 6½ years and as the co-editor of the Financial Management Association’s Survey and Synthesis series for 6 years. He lives with his wife in Blacksburg, Virginia, where he collects original art from Mad Magazine.John D. Martin holds the Carr P. Collins Chair in Finance in the Hankamer School of Business at Baylor University, where he was selected as the outstanding professor in the EMBA program multiple times. Professor Martin joined the Baylor faculty in 1998 after spending 17 years on the faculty of the University of Texas at Austin. Over his career he has published over 50 articles in the leading finance jour-nals, including papers in the Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Journal of Monetary Economics, and Management Science. His recent research has spanned issues related to the economics of uncon-ventional energy sources, the hidden cost of venture capital, and the valuation of firms filing Chapter 11. He is also co-author of several books, including Financial Management: Principles and Practice (13th ed., Prentice Hall), Foundations of Finance (9th ed., Prentice Hall), Theory of Finance (Dryden Press), Financial Analysis (3rd ed., McGraw-Hill), Valuation: The Art and Science of Corporate Investment Decisions (3rd ed., Prentice Hall), and Value Based Management with Social Responsibility (2nd ed., Oxford University Press).About the AuthorsA01_KEOW5135_09_GE_FM.indd 506/05/16 6:46 PM
6 Part 4 • Managing Your InvestmentsJ. William Petty, PhD, Baylor University, is Professor of Finance and W. W. Caruth Chair of Entrepreneurship. Dr. Petty teaches entrepreneurial finance at both the undergraduate and graduate levels. He is a University Master Teacher. In 2008, the Acton Foundation for Entrepreneurship Excellence selected him as the National Entrepreneurship Teacher of the Year. His research interests include the financing of entrepreneurial firms and shareholder value-based management. He has served as the co-editor for the Journal of Financial Research and the editor of the Journal of Entrepreneurial Finance. He has published articles in various academic and professional journals, including Journal of Financial and Quantitative Analysis, Financial Management, Journal of Portfolio Management, Journal of Applied Corporate Finance, and Accounting Review. Dr. Petty is co-author of a leading textbook in small business and entrepreneurship, Small Business Management: Launching and Growing Entrepreneurial Ventures. He also co-authored Value-Based Management: Corporate America’s Response to the Shareholder Revolution (2010). He serves on the Board of Directors of a publicly traded oil and gas firm. Finally, he serves on the Board of the Baylor Angel Network, a network of private investors who provide capital to start-ups and early-stage companies.A01_KEOW5135_09_GE_FM.indd 606/05/16 6:46 PM
7Preface 16PArT 1 The Scope and Environment of Financial Management 26 1 An Introduction to the Foundations of Financial Management 26 2 The Financial Markets and Interest Rates 46 3 Understanding Financial Statements and Cash Flows 78 4 Evaluating a Firm’s Financial Performance 130PArT 2 The Valuation of Financial Assets 176 5 The Time Value of Money 176 6 The Meaning and Measurement of Risk and Return 220 7 The Valuation and Characteristics of Bonds 260 8 The Valuation and Characteristics of Stock 292 9 The Cost of Capital 318PArT 3 Investment in Long-Term Assets 350 10 Capital-Budgeting Techniques and Practice 350 11 Cash Flows and Other Topics in Capital Budgeting 392PArT 4 Capital Structure and Dividend Policy 430 12 Determining the Financing Mix 430 13 Dividend Policy and Internal Financing 468PArT 5 Working-Capital Management and International Business Finance 490 14 Short-Term Financial Planning 490 15 Working-Capital Management 510 16 International Business Finance 538 Web 17 Cash, Receivables, and Inventory Management Available online at www.myfinancelab.com Web Appendix A Using a Calculator Available online at www.myfinancelab.com Glossary 560 Indexes 569Brief ContentsA01_KEOW5135_09_GE_FM.indd 706/05/16 6:46 PM
8ContentsPreface 16PArT 1 The Scope and Environment of Financial Management 26 1 An Introduction to the Foundations of Financial Management 26The Goal of the Firm 27Five Principles That Form the Foundations of Finance 28Principle 1: Cash Flow Is What Matters 28Principle 2: Money Has a Time Value 29Principle 3: Risk Requires a Reward 29Principle 4: Market Prices Are Generally Right 30Principle 5: Conflicts of Interest Cause Agency Problems 32The Global Financial Crisis 33Avoiding Financial Crisis—Back to the Principles 34The Essential Elements of Ethics and Trust 35The Role of Finance in Business 36Why Study Finance? 36The Role of the Financial Manager 37The Legal Forms of Business Organization 38Sole Proprietorships 38Partnerships 38Corporations 39Organizational Form and Taxes: The Double Taxation on Dividends 39S-Corporations and Limited Liability Companies (LLCs) 40Which Organizational Form Should Be Chosen? 40Finance and the Multinational Firm: The New Role 41Chapter Summaries 42 • Review Questions 44 • Mini Case 45 2 The Financial Markets and Interest Rates 46Financing of Business: The Movement of Funds Through the Economy 48Public Offerings Versus Private Placements 49Primary Markets Versus Secondary Markets 50The Money Market Versus the Capital Market 51Spot Markets Versus Futures Markets 51Stock Exchanges: Organized Security Exchanges Versus Over-the-Counter Markets, a Blurring Difference 51Selling Securities to the Public 53Functions 53Distribution Methods 54Private Debt Placements 55Flotation Costs 57Regulation Aimed at Making the Goal of the Firm Work: The Sarbanes-Oxley Act 57Rates of Return in the Financial Markets 58Rates of Return over Long Periods 58Interest Rate Levels in Recent Periods 59A01_KEOW5135_09_GE_FM.indd 806/05/16 6:46 PM
Interest Rate Determinants in a Nutshell 62Estimating Specific Interest Rates Using Risk Premiums 62Real Risk-Free Interest Rate and the Risk-Free Interest Rate 63Real and Nominal Rates of Interest 63Inflation and Real Rates of Return: The Financial Analyst’s Approach 65The Term Structure of Interest Rates 67Shifts in the Term Structures of Interest Rates 67What Explains the Shape of the Term Structure? 69Chapter Summaries 71 • Review Questions 74 • Study Problems 74 • Mini Case 77 3 Understanding Financial Statements and Cash Flows 78The Income Statement 80Coca-Cola’s Income Statement 82Restating Coca-Cola’s Income Statement 83The Balance Sheet 85Types of Assets 85Types of Financing 87Coca-Cola’s Balance Sheet 89Working Capital 90Measuring Cash Flows 93Profits Versus Cash Flows 93The Beginning Point: Knowing When a Change in the Balance Sheet Is a Source or Use of Cash 95Statement of Cash Flows 95Concluding Suggestions for Computing Cash Flows 102What Have We Learned about Coca-Cola? 103GAAP and IFRS 103Income Taxes and Finance 104Computing Taxable Income 104Computing the Taxes Owed 105The Limitations of Financial Statements and Accounting Malpractice 107Chapter Summaries 109 • Review Questions 112 • Study Problems 113 • Mini Case 121 Appendix 3A: Free Cash Flows 124Computing Free Cash Flows 124Computing Financing Cash Flows 127Study Problems 128 4 Evaluating a Firm’s Financial Performance 130The Purpose of Financial Analysis 130Measuring Key Financial Relationships 134Question 1: How Liquid Is the Firm—Can It Pay Its Bills? 135Question 2: Are the Firm’s Managers Generating Adequate Operating Profits on the Company’s Assets? 140Managing Operations 142Managing Assets 143Question 3: How Is the Firm Financing Its Assets? 147Question 4: Are the Firm’s Managers Providing a Good Return on the Capital Provided by the Company’s Shareholders? 150Question 5: Are the Firm’s Managers Creating Shareholder Value? 155 Contents 9A01_KEOW5135_09_GE_FM.indd 906/05/16 6:46 PM
The Limitations of Financial Ratio Analysis 162Chapter Summaries 163 • Review Questions 166 • Study Problems 166 • Mini Case 174PArT 2 The Valuation of Financial Assets 176 5 The Time Value of Money 176Compound Interest, Future Value, and Present Value 178Using Timelines to Visualize Cash Flows 178Techniques for Moving Money Through Time 181Two Additional Types of Time Value of Money Problems 186Applying Compounding to Things Other Than Money 187Present Value 188Annuities 192Compound Annuities 192The Present Value of an Annuity 194Annuities Due 196Amortized Loans 197Making Interest Rates Comparable 199Calculating the Interest Rate and Converting It to an EAR 201Finding Present and Future Values With Nonannual Periods 202Amortized Loans With Monthly Compounding 205The Present Value of an Uneven Stream and Perpetuities 206Perpetuities 207Chapter Summaries 208 • Review Questions 211 • Study Problems 211 • Mini Case 219 6 The Meaning and Measurement of Risk and Return 220Expected Return Defined and Measured 222Risk Defined and Measured 225Rates of Return: The Investor’s Experience 232Risk and Diversification 233Diversifying Away the Risk 234Measuring Market Risk 235Measuring a Portfolio’s Beta 242Risk and Diversification Demonstrated 243The Investor’s Required Rate of Return 246The Required Rate of Return Concept 246Measuring the Required Rate of Return 246Chapter Summaries 249 • Review Questions 253 • Study Problems 253 • Mini Case 258 7 The Valuation and Characteristics of Bonds 260Types of Bonds 261Debentures 261Subordinated Debentures 262Mortgage Bonds 262Eurobonds 262Convertible Bonds 26210 ContentsA01_KEOW5135_09_GE_FM.indd 1006/05/16 6:46 PM
Terminology and Characteristics of Bonds 263Claims on Assets and Income 263Par Value 263Coupon Interest Rate 264Maturity 264Call Provision 264Indenture 264Bond Ratings 265Defining Value 266What Determines Value? 268Valuation: The Basic Process 269Valuing Bonds 270Bond Yields 276Yield to Maturity 276Current Yield 278Bond Valuation: Three Important Relationships 279Chapter Summaries 284 • Review Questions 287 • Study Problems 288 • Mini Case 291 8 The Valuation and Characteristics of Stock 292Preferred Stock 293The Characteristics of Preferred Stock 294Valuing Preferred Stock 295Common Stock 299The Characteristics of Common Stock 299Valuing Common Stock 301The Expected Rate of Return of Stockholders 306The Expected Rate of Return of Preferred Stockholders 307The Expected Rate of Return of Common Stockholders 308Chapter Summaries 311 • Review Questions 314 • Study Problems 314 • Mini Case 317 9 The Cost of Capital 318The Cost of Capital: Key Definitions and Concepts 319Opportunity Costs, Required Rates of Return, and the Cost of Capital 319The Firm’s Financial Policy and the Cost of Capital 320Determining the Costs of the Individual Sources of Capital 321The Cost of Debt 321The Cost of Preferred Stock 323The Cost of Common Equity 325The Dividend Growth Model 326Issues in Implementing the Dividend Growth Model 327The Capital Asset Pricing Model 328Issues in Implementing the CAPM 329The Weighted Average Cost of Capital 331Capital Structure Weights 332Calculating the Weighted Average Cost of Capital 332 Contents 11A01_KEOW5135_09_GE_FM.indd 1106/05/16 6:46 PM
Calculating Divisional Costs of Capital 335Estimating Divisional Costs of Capital 335Using Pure Play Firms to Estimate Divisional WACCs 335Using a Firm’s Cost of Capital to Evaluate New Capital Investments 337Chapter Summaries 341 • Review Questions 343 • Study Problems 344 • Mini Cases 348PArT 3 Investment in Long-Term Assets 350 10 Capital-Budgeting Techniques and Practice 350Finding Profitable Projects 351Capital-Budgeting Decision Criteria 3
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