Question: Use two different methods to calculate ROI

> Discuss three reasons why firms issue preferred shares.

> 1. Which of the following does not appear in the share structure of a firm? a. Preferred shares b. Common shares c. Limited voting shares d. None of the above 2. Which of the following statements about preferred shares is false? a. Retractable preferred

> State the three basic rights of common shareholders.

> Relate the costs of various financing options to their equity-like characteristics.

> Define the following types of hybrids: income bonds, commodity bonds, real return bonds, original issue discount bonds, LYONs, ARCs, preferred securities, and COINS.

> Name and discuss the four criteria used by DBRS to classify a security as debt versus equity.

> Describe the four inventory management approaches.

> Explain the relationship among ROE, retention rates, and firm growth.

> Explain how we can use the constant growth DDM to estimate the cost of firms’ internal common equity, as well as the cost of new common share issues.

> A firm wishes to raise funds in the following proportions: 20‐percent debt, 20‐percent P/S, and 60‐percent CE (common equity). Assume the cost of internally generated funds is 15 percent. Annual after‐tax cost of debt is 5.86 percent. Cost of preferred e

> a. Kitchener Consumer Products plans to issue 25‐year bonds with an 7‐percent coupon rate, with coupons paid semi‐annually and a par value of $1,000. After tax flotation costs (issuing and underwriting costs) amount to 3.5 percent of par value. The firm’

> A company can issue new 20‐year bonds at par that pay 6‐percent annual coupons. The net proceeds to the firm (after taxes) will be 96 percent of par value. They estimate that new preferred shares providing a $2 annual dividend could be issued to investor

> A firm has the following balance sheet items: The before‐tax interest cost on new 15‐year debt would be 7 percent, and each $1,000 bond would net the firm $972 after issuing costs. Common shares could be sold to net th

> A firm has the following capital structure based on market values: equity 60 percent and debt 40 percent. The current yield on government T‐bills is 3 percent, the expected return on the market portfolio is 10 percent, and the firm’s beta is approximated

> Explain how to estimate the cost of debt and preferred equity for a firm.

> How do flotation costs affect the cost of capital sources for a firm?

> Describe the Fed model and how it may be used to estimate the required rate of return of the market as a whole.

> What are some of the disadvantages of carrying inventories?

> How can we relate the existence of multiple growth stages to four commonly used firm classifications?

> How are the ROE and Ke related to a firm’s growth opportunities and its M/B ratio?

> Why is the earnings yield not usually an adequate measure of the investor’s required return on equity?

> Suppose a firm uses a constant WACC to calculate the NPV of all of its capital budgeting projects, rather than adjusting for the risk of the individual projects. What errors will the firm make in its capital budgeting decisions?

> Montreal Brokers, a small brokerage firm and PEI tronics, a software development company, are both separately considering developing and marketing a new software package. Neither party is aware that the other is considering this project, and it is not at

> A firm is going to finance a new project 100 percent with debt, through a new bond issue. Since the firm is using only debt to finance the project, the NPV of the project should be calculated using the cost of debt as the discount rate. Is this statement

> What is Altman’s Z score and what does it measure?

> Explain how ratios may be used to assess a company’s ability to assume more debt.

> Explain the static trade-off theory.

> Why can the firm’s debt be viewed as the exercise price to the shareholders’ option to purchase the firm?

> What are some of the advantages of carrying inventories?

> Explain the impact of financial distress and agency costs on M&M’s conclusions regarding capital structure.

> Describe how we determine the ROE and EPS indifference points for a firm based on various financing alternatives, and explain why this analysis provides the firm with useful information.

> What are the three rules of leverage?

> How does financial leverage affect the relationship between ROI and ROE?

> Define business risk and financial risk.

> Your cousin has just started his MBA and is confused. He understands that without taxes, capital structure is irrelevant. He also understands that with taxes, firms should use 100‐percent debt. However, his professor is saying that with taxes, there are

> Gus Fitzgerald, a local shipping tycoon, is very confused. He has issued stock to finance a positive NPV investment. He expected the stock price to rise, as positive NPV projects are supposed to increase shareholder value. However, the stock price fell!

> Describe the relationship between the debt ratio and firm value when we consider the existence of bankruptcy costs. How do you view the agency costs when bankruptcy occurs?

> State the two possible ways bankruptcy can occur. What is the role of a monitor appointed by the court under the Companies’ Creditors Arrangement Act ( CCAA )? Compare the difference of recognizing firm bankruptcy under CCAA and the Business Insolvency A

> Describe the factors that can affect a firm ’ s capital structure in practice.

> What are captive finance companies?

> What important issues does the static trade‐off model ignore?

> In the M&M tax world, calculate the value of the unlevered firm (U) and the identical risk-levered firm (L). Corporate tax rate = 30%; perpetual EBIT for U and L = $3 million; cost of capital of U = 16%; L’s outstanding debt = $5 million; pre-tax cost of

> In the M&M tax world, what is the value of levered firm (V L ) in Practice Problem 25 if the tax rate is 30 percent? What is the cost of levered equity? What is the market risk premium (MRP) given U 1 2 . and RF 3%?

> With reference to the M&M irrelevance theorem, calculate the market value of an unlevered firm (U) and an identical risk‐levered firm (L). The expected EBIT of U $2.1 million, which will remain constant indefinitely. The cost of capital is 15 percent. If

> In the M&M no‐tax world, calculate the value of the levered firm (V L ). Cost of unlevered equity (KU) = 16%; cost of debt (KD) = 8%; debt (D) = $500,000; and NI = $480,000. What is the cost of levered equity?

> Calculate the EPS indifference EBIT* level given the following information. The corporate tax rate is 20 percent. Under a 75‐percent D/E ratio, the number of common shares outstanding is 30,000; pre‐tax cost of debt is 10 percent; and outstanding debt is

> Explain the elements of Altman’s Z score as used in Practice Problem 22. Problem 22. Calculate Altman’s Z score for Home Depot in fiscal year 2011 (as of January 29, 2012) and then compare it with Moody â€&#

> Calculate Altman’ s Z score for Home Depot in fiscal year 2011 (as of January 29, 2012) and then compare it with Moody ’ s rating chart. Is this company an IG or non‐ IG? All numbers are in millions.

> Calculate the fixed burden coverage and cashflow- to-debt ratio given the following: EBIT = $680,000; depreciation and amortization = $66,000; preferred dividend = $40,000; sinking fund payments = $15,000; tax rate = 30%; debt = $220,000. Why do analysts

> State four main motives firms have to hold cash.

> Identify the costs and benefits of holding inventory.

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