Define the idea of capital structure and capital components. Why is capital structure important to the cost of capital concept? In many capital structure discussions, preferred stock is lumped in with either debt or common equity. With respect to the cost of capital, however, it's treated separately. Why?
> Explain the difference between pledging and factoring receivables. Which is likely to be more a more expensive source of financing? Is factoring the same kind of financing as pledging?
> What's the difference between a promissory note, a line of credit, and a revolving credit agreement? Are they mutually exclusive? That is, might one be part of the other?
> What are the advantages and disadvantages of stretching payables? If you owned your own business, would you do it? Why or why not?
> You work in the finance department of HiTech Inc. The firm's owner and CEO, Charlie Dollars, is very profit oriented. He understands that short-term interest rates are quite low at the moment, and has suggested that the firm finance all of its working c
> Explain the different circumstances under which firms should use short-term or long-term financing.
> How does a firm's operating cycle differ from its cash conversion cycle? Explain fully.
> Support or challenge each of the following statements individually: a. Because accounts receivables aren't purchased like inventory or fixed assets, they don't require financing. b. Cash represents a pool of available money, so it actually reduces fina
> Working capital is generally defined as the difference between current assets and current liabilities. Is this definition precisely correct? Why?
> The Medco Supply Co. operates out of Waco, Texas, and has a number of customers around Portland, Maine. It seems to take a particularly long time for the Portland customers' payment checks to reach Medco. What can the company do to speed things up? Ex
> Describe the maturity matching principle. What are the risks of not matching maturities? How would you characterize a firm that ignores the principle? Can you think of situations in which it would be advisable for an otherwise prudent firm to deviate
> Describe generally how leverage affects stock prices. What forces are at work, driven by what effects?
> How do repurchases help firms manage the signaling effect of dividends.
> Explain how the two methods of cash distribution work, and describe their impact on shareholders. Does everyone always receive cash? If not, are some stockholders left out?
> You're a financial analyst for a large mutual fund. You're doing an analysis of the Truebright Apparel Company, which makes stylish cotton clothes for teenagers. The company has recently been under attack by foreign competition, and seems to have lost
> You're an investment advisor, and have several well-off older people among your clients. One of these individuals, Charlie Haverty, steadfastly refuses to invest in companies that pay significant dividends. A successful investment counselor advised him
> There is said to be a controversy over dividends. What is it and why is it important?
> Fully explain the choices implied by the dividend decision. Are the results of the choices known or uncertain?
> Leveraged leases offer tax advantages to unprofitable companies. a. Why are they called leveraged? b. Briefly, how do they work?
> Leasing is generally more expensive than borrowing to buy, and FASB 13 has reduced the availability of off-balance sheet financing. Why then is leasing popular?
> Outline the reasons for holding cash and the big cost associated with it. How do these lead to the objective of cash management? How do marketable securities help or hinder achievement of the objective?
> Explain in words how the tax system favors debt financing.
> Briefly summarize the operating income argument that was supported by the original MM result.
> Briefly describe the result of MM's original restrictive model. Why was it important in spite of its serious restrictions?
> Explain the idea of bankruptcy costs. Why are they important to investors? When do investors start to worry about them?
> The Braithwaite Tool Co. is considering a major modernization and automation of its plant using borrowed funds. Fully discuss a serious financial negative that could result from the project.
> Show that the profitability index (PI), the initial outlay (C0), and the net present value (NPV) of a project are related by the following equation: NPV = C0 (1 PI) (Hint: State both the NPV and the PI in terms of C0 and the sum of all other cash flows
> Why is the profitability index more appropriately described as a variation on the NPV technique than on the IRR technique?
> Why do labor-intensive processes involve less operating leverage than automated processes? What fixed costs are associated with automation? Why can't those costs be eliminated by just selling the machinery?
> Explain the difference between a fixed and a variable cost. How do these concepts change as the time horizon lengthens? In other words, are the same things fixed over a 5-year planning period that are fixed in a typical 1-year period? What about a 10-
> Dividends are said to be the basis for the value of stocks. If that's true, how do we explain the fact that companies that pay no dividends often have substantial market value? (Such companies are usually relatively young and in high growth fields.) F
> What is the biggest problem associated with financing secured by inventory? How is it addressed in practice?
> Retained earnings are generated by the firm's internal operations and are immediately reinvested to earn more money for the company and its shareholders. Therefore, such funds have zero cost to the company. Is that statement true or false? Explain.
> Explain in words the ROCE test for the advisability of adding leverage. That is, what is the test really telling us? When will it indicate a company is doing the wrong thing?
> Briefly explain the pros and cons of financial leverage. In other words, what are its benefits, and what are the costs that come along with those benefits?
> Both business risk and financial risk would exist with or without either type of leverage. Leverage just makes them more significant. Are these statements true or false? Explain.
> Why are ROE and EPS such important measures of performance to investors?
> Relate business and financial risk as defined in this chapter to the risks described in Chapter 9.
> The user of leverage might be thought of as taking advantage of the provider. Between stockholders and bondholders, who is the user and who is the provider? Give a word explanation or illustration that might support this view. What does the used party
> Define the marginal cost of capital (MCC) and explain in words why it predictably undergoes a step function increase (breaks) as more capital is raised during a budget period.
> Establishing the cost of equity is the most arbitrary and difficult part of developing a firm's cost of capital. Outline the reasons behind this problem and the approaches available to making the best of it.
> A number of investment projects are under consideration at your company. You've calculated the cost of capital based on market values and rates, and analyzed the projects using IRR and NPV. Several projects are marginally acceptable. While watching th
> Describe the concept of beta. Include what it measures and how it's developed.
> There's an issue of historical versus market value with respect to both the cost of capital components and the amounts of those components used in developing weights. We're willing to accept an approximation for the weights, but not for the cost/returns
> The investor's return and the company's cost are opposite sides of the same coin—almost, but not quite. Explain.
> You are a new financial analyst working for a company that's more than 100 years old. The CFO has asked you and a young member of the accounting staff to work together in reviewing the firm's capital structure for the purpose of recalculating its cost o
> Why did credit default swaps make the crisis worse?
> Why are residuals important in negotiations between lessees and lessors?
> You are developing next year’s financial plan for Ajax Inc., a medium sized manufacturing company that’s currently operating at 80% of factory’s capacity. The firm is launching a sales promotion that’s expected to generate a sudden 20% increase in reven
> Just what is placed on the balance sheet in a financing lease?
> Is the CAPM a true and accurate representation of the securities world?
> The CAPM purports to explain how management decisions about risk can influence the well-being of stockholders. Describe in words the mechanism through which this works.
> Explain the concepts of sovereign debt and a sovereign debt crisis. Why is such a crisis different for a Eurozone country than for a country with a unique currency.
> How is risk aversion reflected in the SML?
> How does the SML determine the price of a security?
> Describe the SML in words. What is it saying about how investors form required rates of return? Thoroughly evaluate the implications of the SML's message.
> Why is it appropriate to define the WACC as the highest step on the MCC under the IOS? Is anything lost by using this definition?
> After the break in the MCC caused by using up retained earnings, the schedule can be expected to remain flat indefinitely. Is this statement right or wrong? If wrong, explain what can be expected to happen to the MCC and why.
> Compare the cost of capital concept with the idea of the required return on a stock investment made by an individual. Relate both ideas to the risk of the investment. How would a very risky investment/ project be handled in the capital budgeting/cost o
> What is it about the cash flows associated with business projects that makes the NPV profile slope downward to the right? Would the NPV profile of any randomly selected set of positive and negative flows necessarily slope one way or the other? Why?
> Think about the cash flows associated with putting $100,000 in the bank for five years, assuming you draw out the interest each year and then close the account. Now think about a set of hypothetical cash flows associated with putting the same money in a
> Suppose the present value of cash ins and outs is very close to balance for a project to build a new $50M factory, so that the NPV is +$25,000. The same company is thinking about buying a new trailer truck for $150,000. The NPV of projected cash flows
> Projects A and B have approximately the same NPV. Their initial outlays are similar in size. Project A has early positive cash flows, and little or nothing is expected to come in later on. Project B has much larger positive cash flows than A, but they
> China refuses to allow its currency, the yuan, to float on international currency exchanges. Why is that a problem for the United States?
> Rationalize the appropriateness of using the cost of capital to analyze normally risky projects and higher rates for those with more risk.
> Give a verbal definition of risk that's consistent with the way we use the word in everyday life. Discuss the weaknesses of that definition for financial theory.
> One of the problems of using simulation to incorporate risk into capital budgeting is related to the idea that the probability distributions of successive cash flows usually are not independent. If the first period's cash flow is at the high end of its
> A random variable is defined as the outcome of one or more chance processes. Imagine that you're forecasting the cash flows associated with a new business venture. List some of the things that come together to produce cash flows in future periods. Descri
> Under what conditions will the IRR and NPV methods give conflicting results for mutually exclusive decisions? Will they ever give conflicting results for stand-alone decisions? Why?
> The following set of cash flows changes sign twice and has two IRR solutions. Identify the sign changes. Demonstrate mathematically that 25% and 400% are both solutions to the IRR equation. On the basis of this example, why would you expect multiple s
> In 1983 the Bell Telephone System, which operated as AT&T, was broken up resulting in the creation of seven regional telephone companies. AT&T stockholders received shares of the new companies and the continuing AT&T, which handled long distance service
> Explain the rationale behind the NPV method in your own words. Why is a higher NPV conceptually better than a lower one?
> Define and discuss (words only, no equations) the concepts of expected return and required return.
> Compare and contrast the nature of cash flows stemming from an investment in stock with those coming from bonds.
> Broadly define and describe globalization and its implications.
> The typical cash flow pattern for business projects involves cash outflows first, then inflows. However, it's possible to imagine a project in which the pattern is reversed. For example, we might receive inflows now in return for guarantying to make pa
> Define mutual exclusivity and describe ways in which projects can be mutually exclusive.
> Analyze the shape of the probability distribution for a high-risk stock versus that of a low risk stock. (Hint: Think in terms of where the area under the curve lies.)
> In everyday language, risk means the probability of something bad happening. Risk in finance, however, is defined as the variance of the probability distribution of returns. a. Why do these definitions seem contradictory? b. Reconcile the two ideas.
> Why does it make sense to think of the return on a stock investment as a random variable? Does it make sense to think of the return on a bond investment that way? How about an investment in a savings account?
> The following definition applies to both investing and gambling: Putting money at risk in the hope of earning more money. In spite of this similarity, society has very different moral views of the two activities. a. Develop an argument reconciling the d
> Define risk aversion in words without reference to probability distributions. If people are risk averse, why are lotteries so popular? Why are trips to Las Vegas popular? (Hint: Think in terms of the size of the amount risked and entertainment value.)
> Discuss lowering portfolio risk through diversification. Consider a. Unsystematic (business-specific) risk. b. Systematic (market) risk.
> Describe the goal of a portfolio owner in terms of risk and return. How does he or she evaluate the risk characteristics of stocks being considered for addition to the portfolio?
> Define and discuss the idea of separating risk into two parts. Describe each part carefully.
> A British importer has to pay for American goods, but the exchange rate is temporarily very unfavorable from the British perspective. Describe the Eurodollar market and tell how it might help the importer.
> Describe the ways in which international business has changed over the last 60 years. Include the concepts of an MNC and the different types of foreign investment.
> Who published "Introduction to Human Services: Policy and Practice, An (8th Edition) by Mandell and Schram?
> 4. What does the communication strategy "tap into residual social skills" mean? Residual means skills that have not diminished like getting dressed and reading a newspaper Many people still know how to be a mannerly host or make small talk for a short
> Locate the centroid of the plane area shown. PROBLEM 5.8 Locate the centroid of the plane area shown. r= 38 in. 16 in. 20 in. ForcesCe Centers of Ga Problem 5.7 Locate the centroid of the plane area shown. 20 in. r= 15 in. 30 in. 30 in.
> 1. Report the Error Degrees of Freedom for this example: Assume you have 150 observations: You create a model with 2 numerical explanatory variables both with a linear relationship to the response and 1 categorical explanatory variable. The categorical v
> When we conduct a linear regression analysis, what types of response and explanatory variables do we have? Quantitative response variable and qualitative explanatory variable Quantitative response variable and quantitative explanatory variable Qualitativ
> 3 examples of: one explanatory variable and one response variable that are both quantitative, that also can measure at least 4 levels of the explanatory variable
> In multiple linear regression, which of the following statements is true regarding what should be done first? Check the correlation between explanatory variables. If two explanatory variables are highly correlated, transform one of them. Check the correl
> In regression, we call Y the response or dependent variable, which is modeled in terms of one or more "independent" variables. The independent variables are further classified as explanatory/causal variables or as predictor variables. Discuss and elabora
> Define response and explanatory variable. Give an illustrative example.
> Which of the following statements is always true? O a-13 P(E;) <1 Ob. P(A) = 1 - P(A) %3D Od. EP21
> Let A and B be any two events. Which of the following statements is always true? a. ANB= ¢ o bA) = A C.ANO = A d.ANB = AUB
> Which of the following statements is always true? a.-1 S P(E¡) SI b. P(A) + P(B) = 1 C. P(A) = 1 - P(A©) d. P21
> I am in the process of developing a new scale. I have asked a sample of N=25 SMEs to provide insight into my items. Specifically, I have asked SMEs to rate whether each item is essential for assessing the construct by using a 3-point scale (0=not essenti
> Assume that the helium porosity of coal samples taken from any particular seam is normally distributed. a. Compute a 95% confidence interval for the true average porosity of certain scam if the average porosity for 20 specimens from the seam was 4.85 and
