1. In chapter two we discussed the source of value creation. How it begins with a competitive advantage, implemented with a strategy and appropriate capital budgeting. How does the rarity or difficulty of duplication of the competitive advantage influence the sustainability and ultimately the value of the competitive advantage?
2. Why is the arbitrage pricing principle important to finance?
3. An interest-bearing bond would have a stream of cash flows and an additional cash flow – what are these two cash flows called?
4. To value a bond, you need to bring the future interest payments and the maturity value back to the present. When you bring these future cash flows back to the present do you use the coupon rate or the market yield as the discounting rate? Pick one.
5. Which bond should change more in value with a 1% change in market interest rates: a 20-year 8% bond or a five-year 8% bond?
6. Does NPV measure wealth created given a risk exposure or risk exposure given an investment outlay?
7. What is the relationship between economic profit and net present value?
8. Per the book, what role do earnings announcements (not investment announcements) play in the valuation of a business (or project)?
9. Please give an example of a smoke and mirror change that may look like it could change value – but in reality, would not change the value of the firm.
10. From the text, whose responsibility is it to keep the market accurately and well informed?