Question: Discuss risk from the perspective of the

> Marblehead Manufacturing, Inc., has two departments, Mixing and Blending. When goods are completed in Mixing, they are transferred to Blending and then to the finished goods storeroom. There was no beginning or ending work in process in either department

> Last year, Tri-Rivers Corporation adopted a standard cost system. Labor standards were set on the basis of time studies and prevailing wage rates. Materials standards were determined from materials specifications and the prices then in effect. On June 30

> Assume that during the month of April the production report of Austin Adhesives, Inc., in E8-10 revealed the following information: Units produced during the month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000 Direct labor hours for

> Handyman Helper, Inc., manufactures household products such as windows, light fixtures, ladders, and work tables. During the year it produced 10,000 Model 10X windows but only sold 5,000 units at $40 each. The remaining units cannot be sold through norma

> The normal capacity of Austin Adhesives, Inc., is 40,000 direct labor hours and 20,000 units per month. A finished unit requires 6 pounds of materials at an estimated cost of $2 per pound. The estimated cost of labor is $10.00 per hour. The plant estimat

> Janitorial Products, Inc., manufactures two products, brooms and mops, which are sold in two territories designated by the company as East Territory and West Territory. The following income statement prepared for the company shows the product line segmen

> Briefly define the terms proprietorship, partnership, and corporation.

> Under what circumstance the U.S. dollar and the Canadian dollar would be said to have achieved purchasing power parity?

> Banks like to make short-term, self-liquidating loans to businesses. Why?

> What are the pros and cons of commercial paper relative to bank loans for a company seeking shorter financing?

> What are compensating balances and why do banks require them from some customers? Under what circumstances would banks be most likely to impose compensating balances?

> Can a company have a default rate on its accounts receivable that is too low? Explain.

> Describe how society's interests can influence financial managers.

> What is the matching principle of working capital financing? What are the benefits of following this principle?

> What is the effect of stock (not cash) dividends and stock splits on the market price of common stock? Why do corporations declare stock splits and stock dividends?

> Do you believe an increased common stock cash dividend can send a signal to the common stockholders? If so, what signal might it send?

> Define the following terms that relate to a convertible bond: conversion ratio, conversion value, and straight bond value.

> What is the financial leverage effect and what causes it? What are the potential benefits and negative consequences of high financial leverage?

> What is the operating leverage effect and what causes it? What are the potential benefits and negative consequences of high operating leverage?

> If an optimal capital structure exists, what are the reasons why too little debt is as undesirable as is too much debt?

> What is an LBO? What are the risks for the equity investors and what are the potential rewards?

> Give two examples of types of companies that would be best able to handle high debt levels.

> Compare and contrast the book value and liquidation value per share for common stock. Is one method more reliable? Explain.

> How are financial trades made on an organized exchange?

> What is the relationship between a bond's market price and its promised yield to maturity? Explain.

> Explain the difference between the discounted free cash flow models as it is applied to the valuation of common equity and as it is applied to the valuation of complete businesses.

> Answer the following questions about the discounted free cash flow model illustrated in Figure 12-4: a. What are “free cash flows?” b. Explain the terminal value calculation at the end of the forecast period. Why is it necessary? c. Explain the term “pre

> How do opportunity costs affect the capital budgeting decision-making process?

> How and why does working capital affect the incremental cash flow estimation for a proposed large capital budgeting project? Explain.

> What are the advantages and disadvantages of the internal rate of return method?

> How do we calculate the payback period for a proposed capital budgeting project? What are the main criticisms of the payback method?

> Explain how using a risk-adjusted discount rate improves capital budgeting decision making compared to using a single discount rate for all projects?

> Why is the coefficient of variation a better risk measure to use than the standard deviation when evaluating the risk of capital budgeting projects?

> Explain how to resolve a “ranking conflict” between the net present value and the internal rate of return. Why should the conflict be resolved as you explained?

> Explain why accounting profits and cash flows are not the same thing.

> What is capital rationing? Should a firm practice capital rationing? Why?

> Provide three examples of mutually exclusive projects.

> What is a marginal cost of capital schedule (MCC)? Is the schedule always a horizontal line? Explain.

> What is the investment opportunity schedule (IOS)? How does it help financial managers make business decisions?

> If dividends paid to common stock holders are not legal obligations of a corporation, is the cost of equity zero? Explain your answer.

> Suppose you are planning to make regular contributions in equal payments to an investment fund for your retirement. Which formula would you use to figure out how much your investments will be worth at retirement time, given an assumed rate of return on y

> What is compound interest? Compare compound interest to discounting.

> Why does money have time value?

> Which formula would you use to solve for the payment required for a car loan if you know the interest rate, length of the loan, and the borrowed amount? Explain.

> If you are doing PVA and FVA problems, what difference does it make if the annuities are "ordinary annuities" or "annuities due"?

> List and explain the three financial factors that influence the value of a business.

> How does continuous compounding benefit an investor?

> Explain the risk–return relationship.

> What is risk aversion? If common stockholders are risk averse, how do you explain the fact that they often invest in very risky companies?

> Given that risk-averse investors demand more return for taking on more risk when they invest, how much more return is appropriate for, say, a share of common stock, than is appropriate for a Treasury bill?

> What is non-diversifiable risk? How is it measured?

> What does it mean when we say that the correlation coefficient for two variables is -1? What does it mean if this value were zero? What does it mean if it were +1?

> Why does the riskiness of portfolios have to be looked at differently than the riskiness of individual assets?

> What is the difference between business risk and financial risk?

> Why is the coefficient of variation often a better risk measure when comparing different projects than the standard deviation?

> What is the basic goal of a business?

> What is the primary assumption behind the experience approach to forecasting?

> Why do businesses spend time, effort, and money to produce forecasts? Explain.

> What do financial managers look for when they analyze pro forma financial statements?

> Explain the significance of the term additional funds needed.

> Explain how management goals are incorporated into pro forma financial statements.

> Explain how the cash budget and the capital budget relate to pro forma financial statements.

> Why do analysts calculate financial ratios?

> What is a financial ratio?

> Why would an analyst use the Modified Du Pont system to calculate ROE when ROE may be calculated more simply? Explain.

> Under what circumstances would market to book value ratios be misleading? Explain.

> Describe the duties of the financial manager in a business firm.

> Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.

> What are the time dimensions of the income statement, the balance sheet, and the statement of cashflows? Hint: Are they videos or still pictures? Explain.

> Why do total assets equal the sum of total liabilities and equity? Explain.

> Indicate in which section the following balance items belong (current assets, fixed assets, currentliabilities, long-term liabilities, or equity).

> Why do financial managers calculate the marginal tax rate?

> What are retained earnings? Why are they important?

> Define depreciation expense as it appears on the income statement. How does depreciation affect cash flow?

> What can a financial institution often do for a deficit economic unit (DEU) that it would have difficulty doing for itself if the DEU were to deal directly with an SEU?

> What can a financial institution often do for a surplus economic unit that it would have difficulty doing for itself if the surplus economic unit (SEU) were to deal directly with a deficit economic unit (DEU)?

> Define intermediation.

> List and describe the three career opportunities in the field of finance.

> Compare and contrast a defined benefit and a defined contribution pension plan.

> Which type of insurance company generally takes on the greater risks: a life insurance company or a property and casualty insurance company?

> Who owns a credit union? Explain.

> Compare and contrast mutual and stockholder-owned savings and loan associations.

> What are a bank's primary reserves? When the Fed sets reserve requirements, what is its primary goal?

> What is a security?

> Would there be positive interest rates on bonds in a world with absolutely no risk (no default risk, maturity risk, and so on)? Why would a lender demand and a borrower be willing to pay, a positive interest rate in such a no-risk world?

> What is the role of a broker in security transactions? How are brokers compensated?

> How are financial trades made in an over-the-counter market? Discuss the role of a dealer in the OTC market.

> Compare and contrast the potential liability of owners of proprietorships, partnerships (general partners), and corporations.

> How is finance related to the disciplines of accounting and economics?

> Orlando Metals manufactures tin. During the process, a byproduct— scrap metal—is obtained and placed in stock. The estimated sales value of the scrap metal produced during the month of April is $2,000. Assume that the value of the by-product is treated a

> Seymour Brothers Products, Inc., manufactures a liquid product in one department. Due to the nature of the product and the process, units are regularly lost at the beginning of production. Materials and conversion costs are added evenly throughout the pr

> Materials often represent a substantial portion of a company’s assets; therefore, they should be controlled from the time orders are placed to the time finished goods are shipped to the customer. What are the control procedures used for safeguarding mate

> Clark Kent, Inc., buys crypton for $0.80 a gallon. At the end of processing in Dept. 1, crypton splits off into products A, B, and C. Product A is sold at the split-off point with no further processing. Products B and C require further processing before

> In P3-11, prepare the entries to distribute the weekly payroll and the costs and liabilities related to the bonus, vacation, and holiday pay, assuming that the fringe benefits of the direct laborers are charged to the individual jobs worked on during the

> What are the advantages and disadvantages of the scattergraph method as compared to the high-low method?

> What effect does a change in volume have on total variable, fixed, and semi variable costs?

> Bristol Manufacturing, Inc., uses the job order cost system of accounting. The following information was taken from the company’s books after all posting had been completed at the end of May: a. Prepare the journal entries to charge t

> When a product’s cost is composed of both fixed and variable costs, what effect does the increase or decrease in production has on per unit cost?

> What are the distinguishing characteristics of variable, fixed, and semi variable factory overhead costs?

> What are three categories of factory overhead expenses? Give examples of each.