13. Financial Managers. Explain the differences between the CFO’s responsibilities and the treasurer’s
and controller’s responsibilities. (LO1-4)
14. Goals of the Firm. Give an example of an action that might increase short-run profits but at the
same time reduce stock price and the market value of the firm. (LO1-5)
15. Cost of Capital. Why do financial managers refer to the opportunity cost of capital? How
would you find the opportunity cost of capital for a safe investment? (LO1-5)
chapter 2
17. Functions of Financial Markets. What kinds of useful information can a financial manager
obtain from financial markets? Give examples. (LO2-3)
18. Functions of Financial Markets. Look back at Section 2.3 and then answer the following questions:
(LO2-3)
a. The price of Yum! Brands stock has risen to $180. What is the market value of the firm’s
equity if the number of outstanding shares does not change?
b. The rating agency has revised Catalytic Concepts’ bond rating to A. What interest rate,
approximately, would the company now need to pay on its bonds?
c. A farmer and a meatpacker use the commodity markets to reduce their risk. One agrees to
buy live cattle in the future at a fixed price, and the other agrees to sell. Which one sells?
19. The Financial Crisis. True or false? (LO2-4)
a. The financial crisis was largely caused by banks taking large positions in the options and
futures markets.
b. The prime cause of the financial crisis was an expansion in bank lending for the overheated
commercial real estate market.
c. Many subprime mortgages were packaged together by banks for resale as mortgage-backed
securities (MBSs).
d. The crisis could have been much more serious if the government had not stepped in to rescue
Merrill Lynch and Lehman Brothers.
e. The crisis in the eurozone finally ended when other eurozone countries and the IMF provided
a massive bailout package to stop Greece from defaulting on its debts.
chapter 5
1. Compound Interest. Old Time Savings Bank pays 4% interest on its savings accounts. If you
deposit $1,000 in the bank and leave it there: (LO5-1)
a. How much interest will you earn in the first year?
b. How much interest will you earn in the second year?
c. How much interest will you earn in the 10th year?
2. Compound Interest. New Savings Bank pays 4% interest on its deposits. If you deposit $1,000
in the bank and leave it there, will it take more or less than 25 years for your money to double?
You should be able to answer this without a calculator or interest rate tables. (LO5-1)
3. Compound Interest. Suppose that the value of an investment in the stock market has increased
at an average compound rate of about 5% since 1900. It is now 2019. (LO5-1)
a. If your great-grandfather invested $1,000 in 1900, how much would that investment be
worth today?
b. If an investment in 1900 has grown to $1 million, how much was invested in 1900?
5. Future Values. You deposit $1,000 in your bank account. (LO5-1)
a. If the bank pays 4% simple interest, how much will you accumulate in your account after
10 years?
b. How much will you accumulate if the bank pays compound interest?
7. Future Values. In 1880 five aboriginal trackers were each promised the equivalent of
100 Australian dollars for helping to capture the notorious outlaw Ned Kelley. In 1993 the
granddaughters of two of the trackers claimed that this reward had not been paid. The
Victorian prime minister stated that if this was true, the government would be happy to pay
the $100. However, the granddaughters also claimed that they were entitled to compound
interest. (LO5-1)
a. How much was each granddaughter entitled to if the interest rate was 4%?
b. How much was each entitled to if the interest rate was 8%?
11. Present Values. You can buy property today for $3 million and sell it in 5 years for $4 million.
(You earn no rental income on the property.) (LO5-2)
a. If the interest rate is 8%, what is the present value of the sales price?
b. Is the property investment attractive to you?
c. Would your answer to part (b) change if you also could earn $200,000 per-year rent on the
property? The rent is paid at the end of each year.
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