What is the Modigliani and Miller theory of dividends? Explain.
> What is the first step in the accounting processing cycle? What role do source documents fulfill in this step?
> Under what circumstances should a loss contingency be accrued?
> Northwest Carburetor Company established a fund in 2015 to accumulate money for a new plant scheduled for construction in 2018. How should this special purpose fund be reported in Northwest’s balance sheet?
> Some financial instruments are called derivatives. Why?
> Superior Company owns 40% of the outstanding stock of Bernard Company. During 2018, Bernard paid a $100,000 cash dividend on its common shares. What effect did this dividend have on Superior’s 2018 financial statements?
> All investments in debt securities are classified for reporting purposes in one of three categories, and can be accounted for differently depending on the classification. What are these three categories?
> Refer to the situation described in BE 11–16. Assume that the fair value of SCC is $44 million instead of $40 million. What amount of impairment loss should WebHelper recognize? In BE 11–16 WebHelper Inc. acquired 100% of the outstanding stock of Silico
> Collison and Ryder Company (C&R) has been experiencing declining market conditions for its sportswear division. Management decided to test the assets of the division for possible impairment. The test revealed the following: book value of division’s asset
> Under U.S. GAAP, litigation costs to successfully defend an intangible right are capitalized and amortized over the remaining useful life of the related intangible. How are these costs typically accounted for under IFRS?
> Define depletion and compare it with depreciation.
> In February 2018, Culverson Company began developing a new software to be sold to customers. The software allows people to enter health information and track daily eating and exercise habits to track their health status. The project was completed in Nove
> What is meant by the phrase efficient allocation of resources? What mechanism fosters the efficient allocation of resources in the United States?
> Indicate whether each of the following assets and liabilities should be classified as current or long-term: (a) accounts receivable; (b) prepaid rent for the next six months; (c) note receivable due in two years; (d) note payable due in 90 days; (e)
> What are the three major sections of the statement of cash flows?
> What is GATT, and what is its goal?
> What are some of the primary advantages when a corporation has operations in countries other than its home country? What are some of the risks?
> What kinds of U.S. companies would benefit most from a stronger dollar in the foreign exchange market? Explain.
> What does it mean when the U.S. dollar weakens in the foreign exchange market?
> What are the pros and cons of commercial paper relative to bank loans for a company seeking short term financing?
> What are compensating balances and why do banks require them from some customers? Under what circumstances would banks be most likely to impose compensating balances?
> What is a Treasury bill? How risky is it?
> Banks like to make short-term, self-liquidating loans to businesses. Why?
> Trade credit is free credit. Do you agree or disagree with this statement? Explain.
> What is trustworthy collateral from the lenders’ perspective? Explain whether accounts receivable and inventory are trustworthy collateral.
> What happens when a bank charges discount interest on a loan?
> Companies with rapidly growing levels of sales do not need to worry about raising funds from outside the firm. Do you agree or disagree with this statement? Explain.
> What are the primary requirements for a successful JIT inventory control system?
> What are the benefits of the JIT inventory control system?
> What are the primary variables being balanced in the EOQ inventory model? Explain
> Inventory is sometimes thought of as a necessary evil. Explain.
> Accounts receivable are sometimes not collected. Why do companies extend trade credit when they could insist on cash for all sales?
> What is an agent? What are the responsibilities of an agent?
> How does accounts receivable factoring work? What are the benefits to the two parties involved? What are the risks?
> What are the benefits of “paying late” (but not too late) and how do companies attempt to do this?
> What are the benefits of “collecting early” and how do companies attempt to do this?
> What is the difference between pro forma financial statements and a cash budget? Explain why pro forma financial statements are not used to forecast cash needs.
> Explain the factors affecting the choice of a maximum cash balance amount.
> What are the negative consequences of a company holding too much cash?
> Explain the factors affecting the choice of a minimum cash balance amount.
> What are the primary reasons that companies hold cash?
> Can a corporation have too much working capital? Explain.
> What is the primary advantage to a corporation of investing some of its funds in working capital?
> What is accumulated depreciation?
> What is working capital?
> What is the most conservative type of working capital financing plan a company could implement? Explain.
> What are the advantages and disadvantages of the aggressive working capital financing approach?
> What are the risks associated with using a large amount of short-term financing for working capital?
> Explain how a firm determines the optimal level of current assets.
> Explain the bird in the hand theory of cash dividends.
> What are some of the factors that common stockholders consider when deciding how much, if any, cash dividends they desire from the corporation in which they have invested?
> Are there any legal factors that could restrict a corporation in its attempt to pay cash dividends to common stockholders? Explain.
> Explain the role of cash and of earnings when a corporation is deciding how much, if any, cash dividends to pay to common stockholders.
> Explain how earnings available to common stockholders and common stock dividends paid from the current income statement affect the balance sheet item retained earnings.
> Under what circumstances is a warrant’s value high? Explain.
> Explain why warrants are rarely exercised unless the time to maturity is small?
> How does a preemptive right protect the interests of existing stockholders?
> What does an investment banker do when underwriting a new security issue for a corporation?
> What are the advantages and the disadvantages of a new stock issue?
> How are the members of the board of directors of a corporation chosen and to whom do these board members owe their primary allegiance?
> What are some of the government requirements imposed on a public corporation that are not imposed on a private, closely held corporation?
> How does a mortgage bond compare to a debenture?
> What is a callable bond? What is a puttable bond? How do each of these features affect their respective market interest rates?
> If a convertible bond has a conversion ratio of 20, a face value of $1,000, a coupon rate of 8 percent, and the market price for the company’s stock is $15 per share, what is the convertible bond’s conversion value?
> Which ratios would a potential long-term bond investor be most interested in? Explain. Answer Current and potential lenders of long-term funds, such as banks and bondholders, are interested in debt ratios. When a business's debt ratios increase signifi
> What are some examples of restrictive covenants that might be specified in a bond’s indenture?
> How does a sinking fund function in the retirement of an outstanding bond issue?
> Give two examples of types of companies likely to have high operating leverage.
> Does high operating leverage always mean high business risk? Explain.
> Why is the replacement value of assets method not generally used to value complete businesses?
> All other things held constant, how would the market price of a bond be affected if coupon interest payments were made semiannually instead of annually?
> Describe the general pattern of cash flows from a bond with a positive coupon rate.
> How financing costs are generally incorporated into the capital budgeting analysis process?
> What role does depreciation play in estimating incremental cash flows?
> How do we estimate expected incremental cash flows for a proposed capital budgeting project?
> What are the characteristics of an efficient market?
> What is a sunk cost? Is it relevant when evaluating a proposed capital budgeting project? Explain.
> Why do we focus on cash flows instead of profits when evaluating proposed capital budgeting projects?
> What is the decision rule for accepting or rejecting proposed projects when using internal rate of return?
> What is the decision rule for accepting or rejecting proposed projects when using net present value?
> How does the net present value relate to the value of the firm?
> Explain why we measure a project’s risk as the change in the CV.
> Explain how to measure the firm risk of a capital budgeting project.
> For a given IOS and MCC, how do financial managers decide which proposed capital budgeting projects to accept, and which to reject?
> How do tax considerations affect the cost of debt and the cost of equity?
> What does the “weight” refer to in the weighted average cost of capital?
> What is the time value of money?
> When a company issues new securities, how do flotation costs affect the cost of raising that capital?
> Which is lower for a given company: the cost of debt or the cost of equity? Explain. Ignore taxes in your answer.
> What is an annuity?
> How is present value affected by a change in the discount rate?
> How do risk-averse investors compensate for risk when they take on investment projects?
> Compare diversifiable and non-diversifiable risk. Which do you think is more important to financial managers in business firms?
> What happens to the riskiness of a portfolio if assets with very low correlations (even negative correlations) are combined?
> What action(s) should be taken if analysis of pro forma financial statements reveals positive trends? Negative trends?
> Why are trend analysis and industry comparison important to financial ratio analysis?
> How do financial managers calculate the average tax rate?
> What are financial markets? Why do they exist?
> One of the implicit assumptions we made in calculating the external funds needed was that the company was operating at full capacity. If the company is operating at less than full capacity, how will this affect the external funds needed?
> In the context of the dividend growth model, is it true that the growth rate in dividends and the growth rate in the price of the stock are identical?
> What does it mean to say that a proposed merger will take advantage of available economies of scale? Suppose Eastern Power Co. and Western Power Co. are located in different time zones. Both operate at 60 percent of capacity except for peak periods, when
