What is the difference between a discount rate and a discount factor? (page 16 of the book)
How can risk be incorporated into PVs and NPVs? (page 17 of the book)
Write down the formulas for an investment's NPV and rate of return. Prove that NPV is positive only if the rate of return exceeds the opportunity cost of capital. (page 18 of the book)
Explain why the discount rate equals the opportunity cost of capital. (page 16 of the book)
Respond to the following comments: (pages 19-25 of the book)
"My company's cost of capital is the rate we pay to the bank when we borrow money."
"Net present value is just theory. It has no practical relevance. We maximize profits. That's what shareholders really want."
"It's no good just telling me to maximize my stock price. I can easily take a short view and maximize today's price. What I would prefer is to keep it on a gently rising trend."
Why do capital markets ensure that all shareholders unanimously agree that NPV is a sensible criterion for evaluating projects? (pages 20-22 of the book)
We said that maximizing value makes sense only if we assume well-functioning capital markets. What does "well-functioning" mean? Can you think of circumstances in which maximizing value would not be in all shareholders' interests? (page 23 of the book)
Why is maximizing NPV a sensible objective for a corporation when there are many periods and investors have different time and risk preferences? (pages 23-24 of the book)
Why is a reputation for honesty and fair business practice important to the financial value of the corporation? (pages 26-27 of the book)
How do countries differ in terms of the perceived objective function of corporations? To what extent do these differences lead to different outcomes? (pages 27-28 of the book)
