Question: What is the capital market? What are

> What is the difference between future value and present value? Which approach is generally preferred by financial managers?

> Define and differentiate between a firm’s operating cash flow (OCF) and its free cash flow (FCF).

> Why do we exclude interest expense from operating cash flow?

> Describe the general format of the statement of cash flows. How are cash inflows differentiated from cash outflows on this statement?

> Why is depreciation (as well as amortization and depletion) considered a noncash charge?

> Explain why a decrease in cash is classified as a cash inflow (source) and why an increase in cash is classified as a cash outflow (use) in preparing the statement of cash flows.

> Describe the overall cash flow through the firm in terms of cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities.

> Briefly describe the first four modified accelerated cost recovery system (MACRS) property classes and recovery periods. Explain how the depreciation percentages are determined by using the MACRS recovery periods.

> Explain why the income statement can also be called a “profit-and-loss statement.” What exactly does the word balance mean in the title of the balance sheet? Why do we balance the two halves?

> What are the main types of decisions that financial managers make?

> Is maximizing shareholder wealth inconsistent with having concern for the welfare of a firm’s other stakeholders?

> What is risk? Why must financial managers consider risk as well as return when they evaluate a decision alternative or action?

> How can the firm structure management compensation to minimize agency problems?

> Define agency problems, and describe how they give rise to agency costs. Explain how a firm’s corporate governance structure can help avoid agency problems.

> What does it mean to say that corporations face a double taxation problem?

> What is the financial manager’s objective in evaluating pro forma statements?

> Which three statements result as part of the short-term (operating) financial planning process?

> What is the significance of the “plug” figure, external financing required? Differentiate between strategies associated with positive values and with negative values for external financing required.

> How is the percent-of-sales method used to prepare pro forma income statements?

> You are a summer intern at the office of a local tax preparer. To test your basic knowledge of financial statements, your manager gives you the following list of accounts and asks you to prepare a simple income statement using those accounts. a. Arrang

> What is the purpose of pro forma statements? What inputs are required for preparing them using the simplified approaches?

> How can the two “bottom lines” of the cash budget be used to determine the firm’s short-term borrowing and investment requirements?

> Briefly describe the basic format of the cash budget.

> What is the purpose of the cash budget? What role does the sales forecast play in its preparation?

> What is the financial planning process? Contrast long-term (strategic) financial plans with short-term (operating) financial plans.

> Under what circumstances would the current ratio be the preferred measure of overall firm liquidity? Under what circumstances would the quick ratio be preferred?

> Why is it preferable to compare ratios calculated using financial statements that are dated at the same point in time during the year?

> When performing cross-sectional ratio analysis, the analyst should pay primary attention to what types of deviations from the norm? Why?

> What is the difference between cross-sectional and time-series ratio analysis? What is benchmarking?

> With regard to financial ratio analysis, how do the viewpoints held by the firm’s present and prospective shareholders, creditors, and management differ?

> Angina Inc. has 5 million shares outstanding. The firm is considering issuing an additional 1 million shares. After selling these shares at their $20 per share offering price and netting 95% of the sale proceeds, the firm is obligated by an earlier agree

> How is the current rate (translation) method used to consolidate a firm’s foreign and domestic financial statements?

> Why are the notes to the financial statements important to professional securities analysts?

> What three areas of analysis are combined in the modified DuPont formula? Explain how the manager uses the DuPont system of analysis to dissect the firm’s results and isolate their causes.

> Describe the purpose of each of the four major financial statements.

> Describe how you would use a large number of ratios to perform a complete ratio analysis of the firm.

> Financial ratio analysis is often divided into five areas: liquidity, activity, debt, profitability, and market ratios. Differentiate each of these areas of analysis from the others. Which is of greatest concern to creditors?

> What do the price/earnings (P/E) ratio and the market/book (M/B) ratio reveal about how investors assess a firm’s performance? What caveats must investors keep in mind when evaluating these ratios?

> A firm’s ROE is typically not equal to its ROA. Why? When would a firm’s ROA equal its ROE?

> What would explain a firm having a high gross profit margin and a low net profit margin?

> What three ratios of profitability appear on a common-size income statement?

> Over the past 100 years, the level of government regulation of financial institutions and markets has ebbed and flowed or, as some economists might argue, has ebbed and flooded. Although the laws and regulatory agencies created by the government have var

> What ratio measures the firm’s degree of indebtedness? What ratios assess the firm’s ability to service debts?

> What is financial leverage?

> To assess the firm’s average collection period and average payment period ratios, what additional information is needed, and why?

> In most of the specific firms listed have current ratios that fall below the industry average. Why? One exception to this general pattern is Whole Foods Market, which competes at the very high end of the retail grocery market. Why might Whole Foods Marke

> What roles do GAAP, the FASB, and the PCAOB play in the financial reporting activities of public companies?

> Why do you think that so many pieces of important legislation related to financial markets and institutions were passed during the Great Depression?

> Describe the role of capital markets from the firm’s and investors’ perspectives. What is the efficient market hypothesis?

> What is the money market? What is the Eurocurrency market?

> What is a private placement versus a public offering?

> For what kinds of needs do you think a firm would issue securities in the money market versus the capital market?

> What role do financial markets play in our economy? What are primary and secondary markets? What relationship exists between financial institutions and financial markets?

> Describe the role of commercial banks, investment banks, and the shadow banking system within the financial market environment.

> Which legal form of business organization is most common? Which form do the largest businesses typically take and why?

> Who are the key customers of financial institutions? Who are net suppliers, and who are net demanders of funds?

> Why does a crisis in the financial sector spill over into other industries?

> Why do falling home prices create an incentive for homeowners to default on their mortgages even if they can afford to make the monthly payments?

> How do rising home prices contribute to low mortgage delinquencies?

> What is a mortgage-backed security? What basic risk is associated with mortgage-backed securities?

> What is securitization, and how does it facilitate investment in real estate assets?

> What role does an investment bank play in a public offering? Describe an underwriting syndicate.

> You are the chief financial officer (CFO) of Gaga Enterprises, an edgy fashion design firm. Your firm needs $10 million to expand production. How do you think the process of raising this money will vary if you raise it with the help of a financial instit

> What general procedures must a private firm follow to go public via an initial public offering (IPO)?

> What four ways do VCs use to organize their businesses? How do they structure and price their deals?

> Describe the roles of, and the relationships among, the major parties in a corporation: stockholders, board of directors, and managers. How are corporate owners rewarded for the risks they take?

> What different aspects of financial markets do the Securities Act of 1933 and the Securities Exchange Act of 1934 regulate?

> What are financial institutions? Describe the role they play within the financial market environment.

> If managers do not act in the best interests of shareholders, what role might incentives play in explaining that behavior?

> What are the major differences between accounting and finance with respect to emphasis on cash flows and decision making?

> What is the primary economic principle used in managerial finance?

> Why is it important that managers recognize that a tradeoff exists between risk and return? Why does that tradeoff exist?

> How can you determine the unknown number of periods when you know the present and future values—single amount or annuity—and the applicable rate of interest?

> What does it mean when we say that individuals as a group are net suppliers of funds for financial institutions? What do you think the consequences might be for financial markets if individuals consumed more of their incomes and thereby reduced the suppl

> Describe the procedure used to amortize a loan into a series of equal periodic payments.

> How can you determine the size of the equal, end-of-year deposits necessary to accumulate a certain future sum at the end of a specified future period at a given annual interest rate?

> For what three main reasons is profit maximization potentially inconsistent with wealth maximization?

> How do market forces—both shareholder activism and the threat of takeover—prevent or minimize the agency problem? What role do institutional investors play in shareholder activism?

> You are responsible for managing your company’s short-term investments and you know that the compounding frequency of investment opportunities is quite important. Using the information provided at MyLab Finance, calculate the future value of an investmen

> Differentiate between a nominal annual rate and an effective annual rate (EAR). Define annual percentage rate (APR) and annual percentage yield (APY).

> What two characteristics make a security marketable? Why are the yields on nongovernment marketable securities generally higher than the yields on government issues with similar maturities?

> What are three mechanisms of cash concentration? What is the objective of using a zero-balance account (ZBA) in a cash concentration system?

> What are the three main advantages of cash concentration?

> What are the firm’s objectives with regard to collection float and to payment float?

> Ross Company, a manufacturer of pharmaceuticals, has pretax ordinary income of $500,000 and has just sold for $150,000 an asset purchased 2 years ago for $125,000. Using Table 1.2, calculate the tax liability for the company this year. Table

> What is float, and what are its three components?

> What are some of the major reasons for the rapid expansion in international mergers and joint ventures of firms?

> Outline the changes to be undertaken in intra-MNC accounts if a subsidiary’s currency is expected to depreciate in value relative to the currency of the parent MNC.

> Discuss the steps to be followed in adjusting a subsidiary’s accounts relative to third parties when that subsidiary’s local currency is expected to appreciate in value in relation to the currency of the parent MNC.

> What is the Eurocurrency market? What are the main factors determining foreign exchange rates in that market? Differentiate between the nominal interest rate and the effective interest rate in this market.

> What are the long-run advantages of having more local debt and less MNC-based equity in the capital structure of a foreign subsidiary?

> Describe the difference between foreign bonds and Eurobonds. Explain how each is sold, and discuss the determinant(s) of their interest rates.

> Briefly discuss some of the international factors that cause the capital structures of MNCs to differ from those of purely domestic firms.

> Indicate how NPV can differ depending on whether it is measured from the parent MNC’s point of view or from that of the foreign subsidiary, when cash flows may be blocked by local authorities.

> Discuss macro and micro political risk. What is the emerging third path to political risk? Describe some techniques for dealing with political risk.

> Recently, some branches of Donut Shop, Inc., have dropped the practice of allowing employees to accept tips. Customers who once said, “Keep the change,” now have to get used to waiting for their nickels. Management even instituted a policy of requiring t

> Explain how differing inflation rates between two countries affect their exchange rate over the long term.

> Define spot exchange rate and forward exchange rate. Define and compare accounting exposures and economic exposures to exchange rate fluctuations.

> Under FASB No. 52, what are the translation rules for financial statement accounts? How does the temporal method differ from these rules?

> Discuss the major reasons for the growth of the Euro market. What is an offshore center? Name the major participants in the Euro market.