What is the basic relationship between interest rates and, Ask an Expert

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1. What is the basic relationship between interest rates and bond prices, and why does the relationship exist?

2. Why is preferred stock considered to be a hybrid security? Explain.

3. A firm is considering two mutually exclusive investments, each with an initial outlay of $100,000 and an expected life of 3 years. Assume that the firm has a cost of capital of 10 percent for each project. The two investments are of equal risk and have the following cash flows:
Investment A Investment B
Cash Flow Cash Flow
Year 0 -$100,000 -$100,000
Year 1 $40,000 $55,000
Year 2 $50,000 $55,000
Year 3 $110,000 $55,000
Calculate the payback period and the net present value for each investment.

Based on the NPV and payback period calculations, which investment should the firm choose? Why?

4. In brief, what happens to the value of money if prices in general fall?

5.An investor expects the value of a $1,000 investment to double within 8 years. What is the expected annual rate of growth in the investment?

6. A firm has a total debt of $600,000 and equity of $400,000. What is the debt/net worth ratio and the debt-to-total assets ratio for the firm?

7. What is the future value of a $10,000 investment after 18 years, if the annual rate of interest is 8 percent?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9409414

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