Discuss the probability versus risk trade-offs associated with alternative combinations of short-term and long-term debt used in financing a company’s assets.
> Describe some of the measures used by companies to discourage unfriendly takeover attempts.
> Under what circumstances should a firm use more debt in its capital structure than is used by the average firm in the industry? When should it use less debt than the average firm?
> In practice, how can a firm determine whether it is operating at (or near) its optimal capital structure?
> What are the major limitations of EBIT-EPS analysis as a technique to determine the optimal capital structure?
> Is it possible for a firm to have a high degree of combined leverage and a low level of total risk? Explain.
> Is it possible for a firm to have a high degree of operating leverage and a low level of business risk? Explain.
> How is a firm’s degree of combined leverage (DCL) related to its degrees of operating and financial leverage?
> Define the following: a. Operating leverage b. Financial leverage
> Define and give examples of the following: a. Fixed costs b. Variable costs
> Define leverage as it is used in finance.
> What issues of business ethics may be involved in the establishment of a firm’s dividend payment amounts?
> In connection with reorganization plans, what do fairness and feasibility mean?
> You are the holder of common stock in the G. Lewis Apartment Renovation Company. Historically, the firm has paid generous cash dividends. The firm has recently announced that it would replace its cash dividend with a 20 percent annual stock dividend. Is
> What effect do share repurchases (undertaken as part of the firm’s dividend decision) have on the value of the firm?
> What are the tax limitations on the practice of share repurchases as a regular dividend policy?
> Why do many firms choose to issue stock dividends? What is the value of a stock dividend to a shareholder?
> What is a dividend reinvestment plan? Explain the advantages of a dividend reinvestment plan to the firm and to shareholders.
> Some people have suggested that it is irrational for a firm to pay dividends and sell new stock in the same year because the cost of newly issued equity is greater than the cost of retained earnings. Do you agree? Why or why not?
> Under what circumstances would it make sense for a firm to borrow money to make its dividend payments?
> Why do many managers prefer a stable dollar dividend policy to a policy of paying out a constant percentage of each year’s earnings as dividends?
> How can the passive residual view of dividend policy be reconciled with the tendency of most firms to maintain a constant or steadily growing dividend payment record?
> What role do most practitioners think dividend policy plays in determining share values?
> What are the differences between Chapter 7 and Chapter 11 of the Bankruptcy Reform Act?
> In the theoretical world of Miller and Modigliani, what role does dividend policy play in the determination of share values?
> Explain what is meant by the signaling effects of dividend policy.
> Explain what is meant by the informational content of dividend policy.
> Explain what is meant by the clientele effect.
> What other “external” factors limit a firm’s ability to pay cash dividends?
> What aspects of U.S. tax laws tend to (a) encourage and (b) discourage large dividend payments by corporations? Explain how.
> What legal constraints limit the amount of cash dividends that may be paid by a firm?
> Under what condition or conditions, if any, might a firm find it desirable to borrow funds from a bank or other lending institution in order to take a cash discount?
> Determine the effect of each of the following conditions on the annual financing cost for a line of credit arrangement (assuming that all other factors remain constant): a. The bank raises the prime rate. b. The bank lowers its compensating balance req
> What savings are realized when accounts receivable are factored rather than pledged?
> Explain why an informal settlement may be preferable to declaring bankruptcy for both the failing firm and its creditors.
> Explain why banks normally include a “cleanup” provision in a line of credit agreement.
> Explain why the annual financing cost of secured credit is frequently higher than that of unsecured credit.
> Explain the difference between a floating lien and a trust receipts arrangement.
> Explain the differences between pledging and factoring receivables.
> What are some of the disadvantages of relying too heavily on commercial paper as a source of short-term credit?
> Explain the differences between a line of credit and a revolving credit agreement
> Define the following: a. Accrued expenses b. Deferred income c. Prime rate d. Compensating balance e. Discounted loan f. Commitment fee
> Under what condition or conditions is trade credit not a “cost-free” source of funds to the firm?
> Explain the difference between spontaneous and negotiated sources of short-term credit.
> How is the annual financing cost for a short-term financing source calculated? How does the annual financing cost differ from the true annual percentage rate?
> In a debt reorganization, explain the difference between a composition and an extension.
> Define and discuss the function of collateral in short-term credit arrangements.
> a. Which of the following working capital financing policies subjects the firm to a greater risk? i. Financing permanent current assets with short-term debt ii. Financing fluctuating current assets with long-term debt b. Which policy will produce the
> Why is no single working capital investment and financing policy necessarily optimal for all firms? What additional factors need to be considered in establishing a working capital policy?
> As the difference between the costs of short- and long-term debt becomes smaller, which financing plan, aggressive or conservative, becomes more attractive?
> Describe the matching approach for meeting the financing needs of a company. What is the primary difficulty in implementing this approach?
> Why is it possible for the effective cost of long-term debt to exceed the cost of shortterm debt, even when short-term interest rates are higher than long-term rates?
> Describe the difference between permanent current assets and fluctuating current assets.
> Discuss the probability versus risk trade-offs associated with alternative levels of working capital investment.
> Define and describe the difference between the operating cycle and cash conversion cycle for a typical manufacturing company.
> Basically, what determines whether a bankrupt company is reorganized or liquidated?
> Why does the typical firm need to make investments in working capital?
> What measures can the board of directors of a corporation take to discourage unethical (and illegal) behavior, such as the mail and wire fraud by E. F. Hutton managers described in the chapter?
> What is multilateral netting? Give an example of how this would work for a multinational firm.
> What types of marketable securities are most suitable for inclusion in a firm’s portfolio? What characteristics of these securities make them desirable investments for temporarily idle cash balances?
> What are the primary criteria in selecting marketable securities for inclusion in a firm’s portfolio?
> What factors should the firm consider in deciding whether to establish a lockbox collection system?
> Explain the trade-offs involved in determining the number of collection centers that a firm should use.
> Describe the techniques available to a firm for slowing disbursements.
> Describe the methods available to a firm for expediting the collection of cash.
> Describe the primary services a bank provides to a firm. How is the bank compensated for these services?
> What alternatives are available to the failing firm?
> Define float and describe the difference between disbursement float and deposit float.
> Describe the cost trade-offs associated with maintaining the following: a. Excessive liquid asset balances b. Inadequate liquid asset balances
> What are the primary reasons a firm holds a liquid asset balance?
> Define the following terms: a. Demand deposits b. Compensating balance c. Disbursement float d. Deposit float e. Lockbox f. Wire transfer g. Depository transfer check h. Zero-balance system i. Draft j. Automated clearinghouse
> Books, etc., a nationwide chain of bookstores, anticipates that annual demand for the paperback version of a best-selling novel will be 150,000 copies. The books cost the firm $2 each. Books, etc. has determined that the optimal order quantity (EOQ) is 3
> General Cereal Company purchases various grains (for example, wheat and corn) that it processes into ready-to-eat cereals. Its annual demand for wheat is 250,000 bushels. Assume that demand is uniform throughout the year. The average price of wheat is $3
> Arizona Instruments uses integrated circuits (ICs) in its business calculators. Its annual demand for ICs is 120,000 units. The ICs cost Arizona Instruments $10 each. The company has determined that the EOQ is 20,000 units. It takes 18 days between when
> Southeast Publishing Company employs a high-speed printing press in its operations. A typical production run of 5,000 to 50,000 copies of a textbook can be produced in less than one day. The manager of the business textbook division is attempting to dete
> Quick-Copy Duplicating Company uses 110,000 reams of standard-size paper a year at its various duplicating centers. Its current paper supplier charges $2.00 per ream. Annual inventory carrying costs are 15 percent of inventory value. The costs of placing
> Allstar Shoe Company produces a wide variety of athletic-type shoes for tennis, basketball, and running. Although sales are somewhat seasonal, production is uniform throughout the year. Allstar’s production and sales average 1.92 million pairs of shoes p
> Explain the differences among the following terms related to financial failure: a. Technical insolvency b. Legal insolvency c. Bankruptcy
> The Blawnox Company is concerned about its bad-debt losses and the length of time required to collect receivables. Current sales are $43.8 million per year. Baddebt losses are currently 3.5 percent of sales, and the average collection period is 68 days (
> Saccomanno Industries Inc. is considering whether to discontinue offering credit to customers who are more than 10 days overdue on repaying the credit extended to them. Current annual credit sales are $10 million on credit terms of “net 30.” Such a chang
> Allied Apparel Company received a large order from Websters Department Stores, which operates a chain of approximately 300 popular-priced department stores located primarily in the New England–Middle Atlantic states. Allied is consideri
> The Bimbo Corporation has been experiencing a decline in sales relative to its major competitors. Because Bimbo is confident about the quality of its products, it suspects that this sales loss may reflect its relatively stringent credit standards and ter
> Jenkins Supply Corporation sells $120 million of its products to wholesalers on terms of “net 50.” Currently, the firm’s average collection period is 65 days. In order to speed up the collection of receivables, Jenkins is considering offering a 1 percent
> Creole Industries Inc. estimates that if it spent an additional $20,000 to hire another collection agent in its credit department, it could lower its bad-debt loss ratio to 3.5 percent fromacurrentrateof4percentandalsoreduceitsaveragecollectionperiodfrom
> Swenson Electric Company sells on terms of “net 30.” Given the following information on its receivables, construct an aging of accounts schedule as of September 1, showing the percentage of accounts that are current, 1
> Michigan Pharmaceuticals Inc. a wholesale distributor of ethical drugs to local pharmacies, has been experiencing a relatively long average collection period because many of its customers face liquidity problems and delay their payments well beyond the d
> The North Carolina Furniture Company (NCFC) manufactures upholstered furniture, which it sells to various small retailers in the Northeast and Midwest on credit terms of “2/10, net 60.” The company currently does not grant credit to retailers with a 3 (f
> In an effort to speed up the collection of receivables, Hill Publishing Company is considering increasing the size of its cash discount by changing its credit terms from “1/10, net 30” to “2/10, net 30.” Currently, the company’s collection period average
> Explain the difference between the economic and financial definitions of business failure.
> Epstein Company, a wholesale distributor of jewelry, sells to retail jewelry stores on terms of “net 120.” Its average collection period is 150 days. The company is considering the introduction of a 4 percent cash discount if customers pay within 30 days
> Once again, consider the Bassett Furniture Industries example (Tables 18.1 and 18.2). Assume that rising labor and interest costs have increased Bassett’s variable cost ratio from 0.75 to 0.80 and its required pretax rate of return on r
> Looking back at Tables 18.1 and 18.2, evaluate the impact on Bassett’s pretax profits of extending full credit to the customers in Credit Risk Group 5. Assume that Bassett’s pretax required rate of return on inventory
> Drake Paper Company sells on terms of “net 30.” The firm’s variable cost ratio is 0.80. a. If annual credit sales are $20 million and its accounts receivable average 15 days overdue, what is Drake’s investment in receivables? b. Suppose that, as the re
> Miranda Tool Company sells to retail hardware stores on credit terms of “net 30.” Annual credit sales are $18 million and are spread evenly throughout the year. The company’s variable cost ratio is 0.70, and its accounts receivable average $1.9 million.
> Define the following terms: a. Stockout b. Deterministic inventory control models c. Probabilistic inventory control models d. Safety stock e. Lead time
> What are just-in-time inventory models?
> How does the firm’s required rate of return on investment enter into inventory decisions?
> In general terms, describe how to deal with each of the following conditions when determining the optimal inventory level: a. Constant (nonzero) replenishment lead time known with certainty b. Demand and replenishment lead time subject to uncertainty
> Describe the assumptions underlying the basic EOQ model.
> What is a tax-free merger?
> What is ABC inventory classification? How can this method be useful to a business?
