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.