Question: How does asymmetric information affect the firm’

> What is the important difference between international and domestic transactions? How is a letter of credit used in financing international trade transactions? How is “netting” used in transactions between subsidiaries?

> What are the two major sources of spontaneous short-term financing for a firm? How do their balances behave relative to the firm’s sales?

> Briefly describe the following techniques for managing inventory: (1) ABC system, economic order quantity (EOQ) model, (2) just-in time (JIT) system, and (3) three computerized systems for resource control, MRP, MRP II, and ERP.

> What are likely to be the viewpoints of each of the following managers about the levels of the various types of inventory: finance, marketing, manufacturing, and purchasing? Why is inventory an investment?

> Why is it important for a firm to minimize the length of its cash conversion cycle?

> Why is it helpful to divide the funding needs of a seasonal business into its permanent and seasonal funding requirements when developing a funding strategy?

> Ann and Jack have been partners for several years. Their firm, A & J Tax Preparation, has been very successful, as the pair agree on most business-related questions. One disagreement, however, concerns the legal form of their business. For the past 2 yea

> What is the difference between the firm’s operating cycle and its cash conversion cycle?

> Why does an increase in the ratio of current assets to total assets decrease both profits and risk as measured by net working capital? How do changes in the ratio of current liabilities to total assets affect profitability and risk?

> What is the relationship between the predictability of a firm’s cash inflows and its required level of net working capital? How are net working capital, liquidity, and risk of insolvency related?

> Why are the risks involved in international credit management more complex than those associated with purely domestic credit sales?

> What are the basic tradeoffs in a tightening of credit standards?

> Explain why credit scoring is typically applied to consumer credit decisions rather than to mercantile credit decisions.

> What is the role of the five C’s of credit in the credit selection activity?

> What factors make managing inventory more difficult for exporters and multinational companies?

> Why is working capital management one of the most important and time-consuming activities of the financial manager? What is net working capital?

> What five factors do firms consider in establishing dividend policy? Briefly describe each of them.

> Jack and Jill have just had their first child. If they expect that college will cost $150,000 per year in 18 years, how much should the couple begin depositing annually at the end of each of the next 18 years to accumulate enough funds to pay 1 year of t

> Contrast the basic arguments about dividend policy advanced by Miller and Modigliani and by Gordon and Lintner.

> Does following the residual theory of dividends lead to a stable dividend? Is this approach consistent with dividend relevance?

> What benefit is available to participants in a dividend reinvestment plan? How might the firm benefit from such a plan?

> What effect did the Jobs and Growth Tax Relief Reconciliation Act of 2003 have on the taxation of corporate dividends? On corporate dividend payouts?

> Who are holders of record? When does a stock sell ex dividend?

> The dividend payout ratio equals dividends paid divided by earnings. How would you expect this ratio to behave during a recession? What about during an economic boom?

> How does the future value of a deposit subject to continuous compounding compare to the value obtained by annual compounding?

> What is a bond’s yield to maturity (YTM)? Briefly describe the use of a financial calculator and the use of an Excel spreadsheet for finding YTM. Why is the YTM a good measure of the required return on a bond?

> Why do rapidly growing firms generally pay no dividends?

> As a risk-averse investor, would you prefer bonds with short or long periods until maturity? Why?

> Joseph is a friend of yours. He has plenty of money but little financial sense. He received a gift of $12,000 for his recent graduation and is looking for a bank in which to deposit the funds. Partners’ Savings Bank offers an account with an annual inter

> If the required return on a bond differs from its coupon rate, describe the behavior of the bond price over time as the bond moves toward maturity.

> What relationship between the required return and the coupon rate will cause a bond to sell at a discount? At a premium? At its par value?

> What procedure is used to value a bond that pays annual interest? Semiannual interest?

> What important factors in addition to quantitative factors should a firm consider when it is making a capital structure decision?

> Why do maximizing EPS and maximizing value not necessarily lead to the same conclusion about the optimal capital structure?

> Explain the EBIT–EPS approach to capital structure. Include in your explanation a graph indicating the financial breakeven point; label the axes. Is this approach consistent with maximization of the owners’ wealth?

> Compare a stock split with a stock dividend.

> Why do firms issue stock dividends? Comment on the following statement: “I have a stock that promises to pay a 20% stock dividend every year, and therefore it guarantees that I will break even in 5 years.”

> Describe a constant-payout-ratio dividend policy, a regular dividend policy, and a low-regular-and-extra dividend policy. What are the effects of these policies?

> What two ways can firms distribute cash to shareholders?

> Your firm has the option of making an investment in new software that will cost $130,000 today but will save the company money over several years. You estimate that the software will provide the savings shown in the following table over its 5-year life.

> What are business risk and financial risk? How does each influence the firm’s capital structure decisions?

> What is the major benefit of debt financing? How does it affect the firm’s cost of debt?

> In what ways are the capital structures of U.S. firms and non–U.S. firms different? How are they similar?

> What is a firm’s capital structure? What ratios assess the degree of financial leverage in a firm’s capital structure?

> 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?

> 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?

> How do the constant-growth valuation model and capital asset pricing model methods for finding the cost of common stock differ?

> 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?