Question: How do the constant-growth valuation model

> What is the general relationship among operating leverage, financial leverage, and the total leverage of the firm? Do these types of leverage complement one another? Why or why not?

> What is financial leverage? What causes it? How do you measure the degree of financial leverage (DFL)?

> What is operating leverage? What causes it? How do you measure the degree of operating leverage (DOL)?

> What is the operating breakeven point? How do changes in fixed operating costs, the sale price per unit, and the variable operating cost per unit affect it?

> How do the cost of debt, the cost of equity, and the weighted average cost of capital (WACC) behave as the firm’s financial leverage increases from zero? Where is the optimal capital structure? What is its relationship to the firm’s value at that point?

> How does asymmetric information affect the firm’s capital structure decisions? How do the firm’s financing actions give investors signals that reflect management’s view of stock value?

> Gabrielle just won $2.5 million in the state lottery. She is given the option of receiving a lump sum of $1.3 million now, or she can elect to receive $100,000 at the end of each of the next 25 years. If Gabrielle can earn 5% annually on her investments,

> Briefly describe the agency problem that exists between owners and lenders. How do lenders cause firms to incur agency costs to resolve this problem?

> What does the term leverage mean? How are operating leverage, financial leverage, and total leverage related to the income statement?

> Explain why a mere comparison of the NPVs of unequal-lived, ongoing, mutually exclusive projects is inappropriate. Describe the annualized net present value (ANPV) approach for comparing unequal-lived, mutually exclusive projects.

> How are risk classes often used to apply RADRs?

> Explain why a firm whose stock is actively traded in the securities markets need not concern itself with diversification. Despite this reason, how is the risk of capital budgeting projects frequently measured? Why?

> Describe the basic procedures involved in using risk-adjusted discount rates (RADRs). How is this approach related to the capital asset pricing model (CAPM)?

> Briefly explain how the following items affect the capital budgeting decisions of multinational companies: (a) exchange rate risk; (b) political risk; (c) tax law differences; (d) transfer pricing; and (e) a strategic, rather than a strictly financial, v

> How can firms mitigate currency risk and political risk when investing in a foreign country?

> Describe how each of the following behavioral approaches can be used to deal with project risk: (a) scenario analysis and (b) simulation.

> Define risk in terms of the cash flows from a capital budgeting project. How can determination of the breakeven cash inflow be used to gauge project risk?

> If Bob and Judy combine their savings of $1,260 and $975, respectively, and deposit this amount into an account that pays 2% annual interest, compounded monthly, what will the account balance be after 4 years?

> If Like A Lot Corp. borrows yen at a nominal annual interest rate of 2% and during the year the yen appreciates by 10%, what will the effective annual interest rate be for the loan?

> Describe the logic underlying the use of target weights to calculate the WACC, and compare and contrast this approach with the use of historical weights. What is the preferred weighting scheme?

> What is the relationship between the firm’s target capital structure and the weighted average cost of capital (WACC)?

> Compare and contrast the internal rate of return approach and the net present value approach to capital rationing. Which is better? Why?

> What is capital rationing? In theory, should capital rationing exist? Why does it frequently occur in practice?

> What is the difference between the strategic NPV and the traditional NPV? Do they always result in the same accept–reject decisions?

> What are real options? What are some major types of real options?

> Are most mutually exclusive capital budgeting projects equally risky? If you think about a firm as a portfolio of many different kinds of investments, how can the acceptance of a project change a firm’s overall risk?

> How does depreciation enter into the calculation of operating cash flows? How does the income statement format in Table 11.6 relate to Equation 4.3 for finding operating cash flow (OCF)? Table 11.6: Revenue - Expenses (excluding depreciation and in

> Referring to the basic format for calculating an initial investment, explain how a firm would determine the depreciable value of the new asset.

> What three tax situations may result from the sale of an asset that is being replaced?

> Assume that a firm makes a $2,500 deposit into a short-term investment account. If this account is currently paying 0.7% (yes, that’s right, less than 1%!), what will the account balance be after 1 year?

> How do you calculate the book value of an asset?

> Explain how to use each of the following inputs to calculate the initial investment: (a) cost of the new asset, (b) installation costs, (c) proceeds from the sale of the old asset, (d) tax on the sale of the old asset, and (e) change in net working capit

> What effect do sunk costs and opportunity costs have on a project’s net cash flows?

> What three types of net cash flows may exist for a given project? How can expansion decisions be treated as replacement decisions? Explain

> Does the assumption concerning the reinvestment of intermediate cash inflow tend to favor NPV or IRR? In practice, which technique is preferred and why?

> Diagram and describe the three types of net cash flows for a capital budgeting project.

> Explain how the terminal cash flow is calculated for replacement projects.

> How are the net operating cash flows that are associated with a replacement decision calculated?

> Why is it important to evaluate capital budgeting projects on the basis of incremental cash flows?

> What is the decision rule that managers follow when they use the IRR method to accept or reject investment proposals? How is that decision rule related to the firm’s market value?

> Your broker calls to offer you the investment opportunity of a lifetime, the chance to invest in mortgage-backed securities. The broker explains that these securities are entitled to the principal and interest payments received from a pool of residential

> What is the internal rate of return (IRR) on an investment? How is it determined?

> How is the before-tax cost of debt converted into the after-tax cost?

> Explain the similarities and differences between NPV, PI, and EVA.

> What decision rule do managers follow when they use NPV to accept or reject investment ideas? How is an investment’s NPV related to the firm’s market value?

> How is the net present value (NPV) calculated for a project with a conventional cash flow pattern?

> What weaknesses are commonly associated with the use of the payback period to evaluate a proposed investment?

> What is the payback period? How is it calculated?

> How is a net present value profile used to compare projects? What causes conflicts in the ranking of projects via net present value and internal rate of return?

> Do the net present value (NPV) and internal rate of return (IRR) agree with respect to accept–reject decisions? With respect to ranking decisions? Explain.

> Rimier Corp. forecasts sales of $650,000 for 2020. Assume that the firm has fixed costs of $250,000 and variable costs amounting to 35% of sales. Operating expenses are estimated to include fixed costs of $28,000 and a variable portion equal to 7.5% of s

> What is the financial manager’s goal in selecting investment projects for the firm? Define the capital budgeting process, and explain how it helps managers achieve their goal.

> How would you calculate the cost of preferred stock?

> What is an efficient portfolio? How can the return and standard deviation of a portfolio be determined?

> What methods can be used to find the before-tax cost of debt?

> What are the net proceeds from the sale of a bond? What are flotation costs, and how do they affect a bond’s net proceeds?

> What are the typical sources of long-term capital available to the firm?

> What does the firm’s capital structure represent?

> What role does the cost of capital play in the firm’s long-term investment decisions? How does it relate to the firm’s ability to maximize shareholder wealth?

> What is the weighted average cost of capital (WACC), and how is it calculated?

> Why is the cost of financing a project with retained earnings less than the cost of financing it with a new issue of common stock?

> During the year, Xero Inc. experienced an increase in net fixed assets of $300,000 and had depreciation of $200,000. It also experienced an increase in current assets of $150,000 and an increase in accounts payable and accruals of $75,000. If operating c

> What premise about share value underlies the constant-growth valuation (Gordon growth) model that we use to measure the cost of common stock equity, rs?

> What is risk in the context of financial decision making?

> Why is the correlation between asset returns important? How does diversification allow risky assets to be combined so that the risk of the portfolio is less than the risk of the individual assets in it?

> What does the coefficient of variation reveal about an investment’s risk that the standard deviation does not?

> What relationship exists between the size of the standard deviation and the degree of asset risk?

> What does a plot of the probability distribution of outcomes show a decision maker about an asset’s risk?

> Explain how the range is used in scenario analysis.

> Compare the following risk preferences: (a) risk averse, (b) risk neutral, and (c) risk seeking. Which risk preference is most common among financial managers? What is the difference between risk aversion and risk tolerance?

> Define return, and describe how to find the total rate of return on an investment.

> Define and specify the general equation for the value of any asset, V0.

> Determine the operating cash flow (OCF) for Kleczka Inc., based on the following data. (All values are in thousands of dollars.) During the year the firm had sales of $2,500, cost of goods sold totaled $1,800, operating expenses totaled $300, and depreci

> What impact would the following changes have on the security market line and therefore on the required return for a given level of risk? (a) An increase in inflationary expectations. (b) Investors become less risk averse.

> Explain the meaning of each variable in the capital asset pricing model (CAPM) equation. What is the security market line (SML)?

> What risk does beta measure? How can you find the beta of a portfolio?

> How are total risk, non diversifiable risk, and diversifiable risk related? Why is non diversifiable risk the only relevant risk?

> How does international diversification enhance risk reduction? When might international diversification result in subpar returns? What are political risks, and how do they affect international diversification?

> What does the efficient-market hypothesis (EMH) say about (a) securities prices, (b) their reaction to new information, and (c) investor opportunities to profit? What is the behavioral finance challenge to this hypothesis?

> Describe the events that occur in an efficient market in response to new information that cause the expected return to exceed the required return. What happens to the market value?

> Explain the cumulative feature of preferred stock. What is the purpose of a call feature in a preferred stock issue?

> What claims do preferred stockholders have with respect to distribution of earnings (dividends) and assets?

> What are the advantages to both U.S.-based and foreign corporations of issuing stock outside their home markets? What are American depositary receipts (ADRs)? What are American depositary shares (ADSs)?

> Classify the following changes in each of the accounts as either an inflow or an outflow of cash. During the year (a) marketable securities increased, (b) land and buildings decreased, (c) accounts payable increased, (d) vehicles decreased, (e) accounts

> Explain the relationships among authorized shares, outstanding shares, treasury stock, and issued shares.

> How does a rights offering protect a firm’s stockholders against the dilution of ownership?

> What risks do common stockholders take that other suppliers of capital do not?

> Assuming that all other variables remain unchanged, what effect would each of the following have on stock price? (a) The firm’s risk premium increases. (b) The firm’s required return decreases. (c) The dividend expected next year decreases. (d) The growt

> Explain the linkages among financial decisions, return, risk, and stock value.

> Explain each of the three other approaches to common stock valuation: (a) book value, (b) liquidation value, and (c) P/E multiples. Which of them is considered the best?

> Describe the free cash flow valuation model, and explain how it differs from the dividend valuation models. What is the appeal of this model?

> Describe, compare, and contrast the following common stock dividend valuation models: (a) zero-growth, (b) constant-growth, and (c) variable-growth.

> What are the key differences between debt and equity?

> What is a conversion feature? A call feature? What are stock purchase warrants?

> The installed cost of a new computerized controller was $65,000. Calculate the depreciation schedule by year assuming a recovery period of 5 years and using the appropriate MACRS depreciation percentages .

> How is the cost of bond financing typically related to the cost of short term borrowing? In addition to the maturity of a bond, what other major factors affect its cost to the issuer?

> Differentiate between standard debt provisions and restrictive covenants included in a bond indenture. What are the consequences if a bond issuer violates any of these covenants?

> What are typical maturities, denominations, and interest payments of a corporate bond? What mechanisms protect bondholders?

> List and briefly describe the potential issuer- and issue-related risk components that are embodied in the risk premium. Which are the purely debt-specific risks?

> Briefly describe the following theories of the general shape of the yield curve: (a) expectations theory, (b) liquidity preference theory, and (c) market segmentation theory.