Explain what is meant by the clientele effect.
> What is the theory of interest rate parity?
> Emco Products has a present capital structure consisting only of common stock (10 million shares). The company is planning a major expansion. At this time, the company is undecided between the following two financing plans (assume a 40 percent marginal t
> Kaufman Industries expects next year’s operating income (EBIT) to equal $4 million, with a standard deviation of $2 million. The coefficient of variation of operating income is equal to 0.50. Interest expenses will be $1 million, and preferred dividends
> Scherr Corporation’s current EPS is $5.00 at a sales level of $10 million. At this sales level, EBIT is $2 million. Scherr’s DCL has been estimated to be 2.0 at the current level of sales. Sales are forecast to have an expected value of $11 million next
> Walker’s Gunnery, a small arms manufacturer, has current sales of $10 million and operating income (EBIT) of $450,000. The degree of operating leverage for Walker is 2.5. Next year’s sales are expected to increase by 5 percent. Walker has found that, ove
> Earnings per share (EPS) for Valcor Inc. are $3 at a sales level of $2 million. If Valcor’s degree of operating leverage is 2.0 and its degree of combined leverage is 8.0, what will happen to EPS if operating income increases by 3 percent?
> McGonnigal Inc. has expected sales of $40 million. Fixed operating costs are $5 million, and the variable cost ratio is 65 percent. McGonnigal has outstanding a $10 million, 10 percent bank loan and $3 million in 12 percent coupon-rate bonds. McGonnigal
> Connely Inc. expects sales of silicon chips to be $30 million this year. Because this is a very capital-intensive business, fixed operating costs are $10 million. The variable cost ratio is 40 percent. The firm’s debt obligations consist of a $2 million,
> Cohen’s Bowling Emporium has a degree of financial leverage of 2.0 and a degree of combined leverage of 6.0. The breakeven sales level for Cohen’s has been estimated to be $500,000. Fixed costs total $250,000. What effect will a 15 percent increase in sa
> A firm has sales of $10 million, variable costs of $5 million, EBIT of $2 million, and a degree of combined leverage of 3.0. a. If the firm has no preferred stock, what are its annual interest charges? b. If the firm wishes to reduce its degree of comb
> Blums Inc. expects its operating income over the coming year to equal $1.5 million, with a standard deviation of $300,000. Its coefficient of variation is equal to 0.20. Blums must pay interest charges of $700,000 next year and preferred stock dividends
> Rank in order of priority (highest to lowest) the following claims on the proceeds from the liquidation of a bankrupt firm: • Taxes owed to federal, state, and local governments • Preferred stockholders • Common stockholders • Expenses of administeri
> A firm has earnings per share of $2.60 at a sales level of $5 million. If the firm has a degree of operating leverage of 3.0 and a degree of financial leverage of 5.5 (both at a sales level of $5 million), forecast earnings per share for a 2 percent sale
> McGee Corporation has fixed operating costs of $10 million and a variable cost ratio of 0.65. The firm has a $20 million, 10 percent bank loan and a $6 million, 12 percent bond issue outstanding. The firm has 1 million shares of $5 (dividend) preferred s
> Given the following information for Computech, compute the firm’s degree of combined leverage (dollars are in thousands except EPS): 2015 2016 Sales $ 500,000 $ 570,000 Fixed costs 120,000 120,000 Variable costs 300,000 342,000 Ear
> Albatross Airlines’ fixed operating costs are $5.8 million, and its variable cost ratio is 0.20. The firm has $2 million in bonds outstanding with a coupon interest rate of 8 percent. Albatross has 30,000 shares of preferred stock outstanding, which pays
> Show algebraically that Equation 14.2: is equivalent to Equation 14.1: Sales - Variable costs DOL at X = EBIT ДЕВІТ EBIT ASales DOL at X = Sales
> Gibson Company sales for the year 2016 were $3 million. The firm’s variable operating cost ratio was 0.50, and fixed costs (that is, overhead and depreciation) were $900,000. Its average (and marginal) income tax rate is 40 percent. Currently, the firm h
> The Alexander Company reported the following income statement for 2016: Sales…………………………………………………………………………………………..$15,000,000 Less: Operating expenses Wages, salaries, benefits……………………………………………………………….$ 6,000,000 Raw materials.………………………………………………………………
> The Hurricane Lamp Company forecasts that next year’s sales will be $6 million. Fixed operating costs are estimated to be $800,000, and the variable cost ratio (that is, variable costs as a fraction of sales) is estimated to be 0.75. Th
> What is cash insolvency analysis, and how can it help in the establishment of an optimal capital structure?
> Why do public utilities typically have capital structures with about 50 percent debt, whereas major oil companies average about 25 percent debt in their capital structures?
> Explain how a firm that has failed can be reorganized to operate successfully.
> 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.
> 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?
> 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 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
