Page 498 - Introduction to Business

472 PART 5 Finance

more sensitive to the needs of shareholders in the the bond issue? When will the bond issue mature?
future? What is the interest rate?
3. Recent news reports make the argument that the 2. Go to the corporate website for McDonald’s and
high inflation rate in the last few years is increas- find the most recent reports on global results.
ing the yields on bonds. Bond prices have fallen to What are the highlights noted at the beginning of
five-year lows and have become attractive to the report? Did McDonald’s economic value
investors. Not only are coupon payments high, but increase lately?
if interest rates decline in the future, bondholders 3. Go to the DaimlerChrysler website and find the
would stand to gain healthy capital gains. Do you most recent consolidated balance sheet, which can
think it is a good time to buy bonds? be found in the annual report. Go to the section of
4. The two candidates for president of the United the balance sheet entitled “Liabilities and stock-
States have different proposals for tax reform. One holders’ equity.” Using the U.S. dollar figures
candidate wants higher corporate income taxes (quoted there in millions of dollars), what is the
and higher capital gains taxes. The other candidate amount of stockholders’ equity and liabilities?
proposes lower corporate income taxes and lower How much of stockholders’ equity is retained earn-
capital gains taxes. How would these different tax ings? How much of liabilities is financial liabilities,
proposals affect firms’ usage of debt and equity to or debt? What does this information tell you about
finance their capital budgeting projects? how DaimlerChrysler finances its operations?
5. Recent data indicate that few investors in the 4. Go to a Web browser and search on the key words
United States invest in bonds and stocks in differ- “one-year interest rates” and “U.S. government
ent countries. This “home bias,” or lack of interna- debt.” Now draw a graph with rate of return on the
tional investment, by U.S. investors could lower Y axis and risk on the X axis. Use the one-year
their diversification and increase their risk. Why do interest rate as the riskless interest rate on the Y
people tend to prefer buying bonds and stocks of axis. Assume that the average rate of return on the
companies that are in their home country? stock market is 10 percent. Plot this market portfo-
lio in return-risk space. Finally, draw the capital
market line connecting the riskless rate and the
Web Assignments market portfolio. Given your risk preference, where
on the capital line would you be? (Hint: A very
1. Use a Web browser to search on the key words conservative investor would be at the riskless rate,
Sony and bond issue. Pick one bond issue and while a high-risk investor would prefer to be at the
describe what capital budgeting projects are being market portfolio.)
financed with the debt funds. What is the size of

Portfolio Projects

Exploring Your Own Case in Point gain yield on the stock over the past year? What
In this chapter, you learned how firms evaluate their was the dividend per share paid by the firm over
investment projects as well as how investors evaluate the past year? Use the stock price per share and
firms in this regard. To better understand the finan- dividend per share information to compute the
cial management of your firm, answer the following rate of return on the stock over the past year.
questions.
Starting Your Own Business
1. What are some recent capital budgeting projects in
the news about your company? After reading this chapter, you should be able to update
your business plan with financial information regard-
2. After reviewing the consolidated balance sheet for
ing your capital budgeting plans for initial production.
the firm, give a short description of how your firm
finances its operations. Using a recent income 1. What is the initial long-term investment cost of
statement, how much of net income after taxes did production (i.e., expenses for equipment, property,
your firm pay out in dividends to shareholders? and other fixed assets)?
3. Use the Internet to find the stock price per share 2. Give annual estimates over the next five years for:
for your firm over time. What has been the capital a. Revenues

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