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Qct 7

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Questions for Critical Thinking 7

Chapter 13:

a. Discussion Questions: 13, 15, and 16.
b. Problems: 4* and 6(a).

* Remember the profit is 50% of sales. Use table 13-4 on p. 540 as an example to calculate the standard deviation for both projects, and then calculate the coefficient of variation to compare the risk of both projects, see pp. 542.

Chapter 14:

a. Discussion Questions: 2 and 11.
b. Problems: 8*, 10**, and 12.

* Remember the firm has a limited capital budget of $2.4 million for the coming year. In other words, the firm faces the capital rationing, see pp. 589-592. Use the profitability index as it s investment criterion.
** Please use the dividend valuation model, pp. 594-595. “A share of the common stock of the company currently sells for eight times current dividends.” Chapter 13

Discussion Questions
#13 – Why does an importer usually face a foreign-exchange risk? How can the importer hedge the foreign-exchange risk by purchasing the foreign-currency today to have it by the time the foreign-currency payment is due? Why does hedging usually take place with forward contract?
Investing in foreign securities gives rise to a foreign-exchange risk because the foreign currency can depreciate or decrease in value during the time of the investment (Salvatore, 2007, p. 562). Hedging refers to the covering of a foreign-exchange risk through a forward contract (Salvatore, 2007, p. 562). Salvatore (2007) describes forward contracting as “an agreement to purchase or sell a specific amount of a foreign currency at a rate specified today for delivery at a specific date (p. 562). Hedging is necessary to avoid foreign-exchange risk.
#15 – How does the adverse selection problem arise in the credit-card market? How do credit-card companies reduce the adverse selection problem that they face? To what complaint does...

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