What is the difference between a discount rate and a discount factor? (Page 15)
How can risk be incorporated into PVs and NPVs? (Page 16)
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 17)
Explain why the discount rate equals the opportunity cost of capital. (Page 15)
Respond to the following comments: (Pages 17-23)
"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 18-20)
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 21)
Why is maximizing NPV a sensible objective for a corporation when there are many periods and investors have different time and risk preferences? (Pages 21-22)
Why is a reputation for honesty and fair business practice important to the financial value of the corporation? (Pages 24-25)
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)
