Q1. The major role played by earnings announcements in the valuation of a business (or project) is that earnings announcements are used to revise or refine your forecast of future cash flows.
Q2. The difference between the yield to maturity and the yield to call is that yield to maturity is the presumed yield an investor will earn if they hold a bond until it is called. Yield to call is the presumed yield an investor will earn if they buy the bond at the current price and assume that it will be held to maturity.
Q3. The reinvestment rate assumption is important to interpreting the IRR percentage.
Q4. Ordinary annuities are common with leases and premiums paid to insurance companies because these cash flows usually occur at the beginning of the period.
Q5. When companies have daily cash flows that occur over the year rather than at any single point in time, the analyst should use midyear cash flow discounting to approximate the daily cash flows.
Q6. Assuming the same risk, the present value of $100 per year forever is greater than the present value of $100 the first year and growing a 4% forever thereafter.
Q7. Internal rate of return is the preferred method to adjust for unequal lives.
Q8. The net present value measures an investment's total contribution to shareholder wealth while the profitability index measures wealth creation per dollar invested.
Q9. The investment with the highest equivalent annuity will have the highest net present value of total cash flows if all competing investments are repeated to infinity or to a comparable time horizon at which the lives of all competing investments end.
Q10. XYZ Company is comparing a 10 year project with a 20 year project. When calculating an equivalent annuity for the project with a 10 year life, XYZ should calculate the present value of the project and divide this NPV by the annuity factor (PVIF) for 20 years.
Q11. Failure to recognize potential increases in indirect costs will lead to an under-estimation of the projects profitability.
Q12. All single amount problems involve finding either-- the present value, the future value, the rate of return, or the number of periods.
Q13. Annuity dues are constant and consistent payments that occur at the beginning of the investment period.
Q14. Businesses in highly competitive markets typically have a positive accounting profit and but not a positive economic profit.
Q15. Competitive advantage is the elimination of some of the conditions for perfect competition so that economic profit is possible.
Q16. Capital budgeting much like strategic planning begins with the establishing of goals.
Q17. To continue delivering their missions, many non-profit organizations (while working for social causes) seek to maintain or increase wealth as if they were profit seeking businesses.
Q18. It is uncommon for different stages of the value chain (from the purchase of raw materials, producing the product, to selling the product) to be performed in different part of the world.