Mini Case #2

Suppose you meet with some of your undergraduate classmates and inform them that you are taking a graduate course in corporate finance. After telling them that they show interest and ask you the following questions that you must clearly and in short answer.

1) What is the real interest rate (risk free)? What is the nominal interest rate (risk free)? In what sense they differ and how these two are measured?

2) Briefly explain the concepts of total risk and market risk

3) Does the expected rate of return on a portfolio of shares depend on the percentage of portfolio invested in each share? What about the riskiness of the entire portfolio?

4) What is the Capital Asset Pricing Model (CAPM)? What are the assumptions underlying the model?

5) Financial Mgrs are more concerned with investment decisions relating to real assets, such as PP&E than with investment in financial assets, such as securities. Do you consider being any difference? How this statement does relates to real asset investment decisions especially corporate budgeting decisions?

6) Why are discounted cash flow (time value of money) concepts so important to corporate financial analysis?

7) What are the four steps in a DCF analysis? 8) How is the value of an asset determined? (hint: assume value is related on expected

future cash flows) 9) What is the opportunity cost concept?

10) What s a perfect capital market? How is the concept of perfect capital markets used in finance theory?

4|Page

11) What are the key features of a bond?

12) What is the Efficient Markets Hypothesis (EMH) and what are its three forms?

13) What are the key features of a common share or stock and how differ from preferred stocks?

14) What is meant by the term project s NPV? What is the rationale behind the NPV method? According to NPV which projects should be accepted if they qualify as independent? Mutually exclusive?

15) What is capital budgeting and what does the term Risk mean in the context of capital budgeting process?

16) What are the three types of risk relevant to capital budgeting and how is each of these risk types measured and related to each other?

17) Are there subjective risk factors that should be considered before the final decision is made?

I need you to answer for me those questions briefly..