1. What are the two pillars of finance? 2. What is Sharpe Ratio? How do we use S
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Question
1. What are the two pillars of finance? 2. What is Sharpe Ratio? How do we use Sharpe Ratio to make investment decisions? Given three mutually exclusive projects with different initial investment but same life span, which criteria do you use to make your choice? How do you calculate such index? (Please write down the formula) 3. 4. Given the same project, if the discount rate rises, what will happen to the value of NPV? 5. What are the five elements of TVM? 6. How do you calculate a company's net profit margin? 7. Your Company has an old machine to sell. It has a salvage value of $40,000 at this moment. You sold it for $60,000. The corporate tax rate is 35%, what is the cash flow you get from sale of the machine? Your credit card has a 19.99% APR. It is compounded daily. What is your EAR Effective Annual Rate)? You must show your work 8. 9. What are the three types of financial asset? 10. You purchased a AAA bond today at 97% of its par. It matures in 2030 and has a coupon rate of 6%, what is the Yield of Maturity of this bond?Explanation / Answer
1.
Debt and equity is twomain source of funding capital in company. So,Debt and equity is considered as two Pillars of finance. On debt capital the company has to pay regular interest and at maturity comapny pays the face value to settle the payment. Interest payment on debt is considered as expenses, so company can deduct interest expense from taxable income to minimize tax expenses.
Equity is considered as ownership in comapny. each shareholder is considered as proportionate owner of company. also each shareholder has voting right in company.
2.
Sharpe ratio is defined as a measure that shows relationship between adjusted expected rate of return and risk level (standard deviation) of the portfolio. Sharpe ratio measure the average excess return over risk free rate for unit level of risk.
Sharpe ratio is calculated using following formula:
Sharpe ratio = (Portfolio return - Risk Free rate) / Standard deviation
3.
Mutually exclusive project is type of project in which only one project at given time can be selected among more than one project. Capital Budgeting evaluation for mutually exclusive project best technique to use is NPV method .
Net present value is best measure of capital budgeting to evaluate mutually exclusive projects because of following reason.
1. Net present value consider the reinvestment of cash flow at discount rate while other method IRR consider reinvestment at IRR rate
2. Net present value consider time value of money and also consider whole period of cash flow which is not available with payback period and discounted payback period methods.
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