Question: Why is the cost of retained earnings

> What is the most likely explanation for the use of preferred stock from a corporate viewpoint?

> How does the preemptive right protect stockholders from dilution?

> How does the stockholder, in general, feel about the relevance of dividends?

> What is the purpose of cumulative voting? Are there any disadvantages to management?

> Why might a corporation use a special category such as founders’ stock in issuing common stock?

> What is an advantage of floating rate preferred stock for the risk-averse investor?

> Why has corporate management become increasingly sensitive to the desires of large institutional investors?

> What is the purpose of serial repayments and sinking funds?

> What method of “bond repayment” reduces debt and increases the amount of common stock outstanding?

> Take the following list of securities and arrange them in order of their priority of claims: Preferred stock………………………..Senior debenture Subordinated debenture………..Senior secured debt Common stock………………………Junior secured debt

> Discuss the relationship between the coupon rate (original interest rate at time of issue) on a bond and its security provisions.

> Explain the close parallel between a finance lease and the borrow-purchase decision from the viewpoint of both the balance sheet and the income statement.

> What are some specific features of bond agreements?

> Discuss the difference between a passive and an active dividend policy.

> What do we mean by capitalizing lease payments?

> What is a Eurobond?

> Explain how floating rate bonds can save the investor from potential embarrassments in portfolio valuations.

> What cost of capital is generally used in evaluating a bond refunding decision? Why?

> How does the bond rating affect the interest rate paid by a corporation on its bonds?

> Corporate debt has been expanding very dramatically in the last three decades. What has been the impact on interest coverage, particularly since 1977?

> If a company was looking for capital by way of a private placement, where would it look for funds?

> Discuss the reason for the differences between underwriting spreads for stocks and bonds.

> Discuss how an underwriting syndicate decreases risk for each underwriter and at the same time facilitates the distribution process.

> What is privatization?

> What advantages to the corporation and the stockholder do dividend reinvestment plans offer?

> How might a leveraged buyout eventually lead to high returns for companies?

> Why is secondary trading in the security markets important?

> What are electronic communication networks (ECNs)? Generally speaking, are they currently part of the operations of the New York Stock Exchange and the NASDAQ Stock Market?

> Do corporations rely more on external or internal funds as sources of financing?

> What are three forms of corporate securities discussed in the chapter?

> What is a key tax characteristic associated with state and local (municipal) securities?

> How does foreign investment help the U.S. government?

> What foreign industry has privatization been most important in?

> What was the purpose of the Sarbanes–Oxley Act of 2002?

> What act of Congress created the Securities and Exchange Commission?

> Does it make sense for a corporation to repurchase its own stock? Explain.

> What was the primary purpose of the Securities Act of 1933?

> How would you define efficient security markets?

> In addition to U.S. corporations, what government groups compete for funds in the U.S. capital markets?

> Assume a company, correlated with the economy, is evaluating six projects, of which two are positively correlated with the economy, two are negatively correlated, and two are not correlated with it at all. Which two projects would you select to minimize

> If corporate managers are risk-averse, does this mean they will not take risks? Explain.

> If a corporation has projects that will earn more than the cost of capital, should it ration capital?

> What does the term mutually exclusive investments mean?

> What is normally used as the discount rate in the net present value method?

> What are the weaknesses of the payback method?

> What are the important administrative considerations in the capital budgeting process?

> Preferred stock is often referred to as a hybrid security. What is meant by this term as applied to preferred stock?

> How are the weights determined to arrive at the optimal weighted average cost of capital?

> Why is the cost of issuing new common stock (Kn) higher than the cost of retained earnings (Ke)?

> Explain why retained earnings have an associated opportunity cost?

> What are the two sources of equity (ownership) capital for the firm?

> In computing the cost of capital, do we use the historical costs of existing debt and equity or the current costs as determined in the market? Why?

> How does the cost of a source of capital relate to the valuation concepts presented previously in Chapter 10?

> What effect would inflation have on a company’s cost of capital?

> Why do we use the overall cost of capital for investment decisions even when only one source of capital will be used (e.g., debt)?

> What two conditions must be met to go from Formula 10-7 to Formula 10-8 in using the dividend valuation model?

> Why might management use a poison pill strategy?

> What type of dividend pattern for common stock is similar to the dividend payment for preferred stock?

> Why is a change in required yield for preferred stock likely to have a greater impact on price than a change in required yield for bonds?

> What are the three adjustments that have to be made in going from annual to semiannual bond analysis?

> If inflationary expectations increase, what is likely to happen to yield to maturity on bonds in the marketplace? What is also likely to happen to the price of bonds?

> What are the three factors that influence the required rate of return by investors?

> Why might investors demand a lower rate of return for an investment in Microsoft as compared to United Airlines?

> How is the supernormal growth pattern likely to vary from the normal, constant growth pattern?

> What two components make up the required rate of return on common stock?

> How is valuation of any financial asset related to future cash flows?

> How is the present value of a single sum related to the present value of an annuity?

> During a rights offering, the underlying stock is said to sell “rights-on” and “ex-rights.” Explain the meaning of these terms and their significance to current stockholders and potential stockholders.

> How does the capital asset pricing model help explain changing costs of capital?

> How is the future value (Appendix A) related to the present value of a single sum (Appendix B)?

> What effect will disinflation following a highly inflationary period have on the reported income of the firm?

> Is there any validity in rule-of-thumb ratios for all corporations (for example, a current ratio of 2 to 1 or debt to assets of 50 percent)?

> What advantage does the fixed charge coverage ratio offer over simply using times interest earned?

> Assume you are looking at many companies with equal risk. Which ones will have the highest stock prices?

> If the accounts receivable turnover ratio is decreasing, what will be happening to the average collection period?

> In terms of the life of the securities offered, what is the difference between money and capital markets?

> Comment on why inflation may restrict the usefulness of the balance sheet as normally presented.

> How is the income statement related to the balance sheet?

> What are the three primary sections of the statement of cash flows? In what section would the payment of a cash dividend be shown?

> If common stockholders are the owners of the company, why do they have the last claim on assets and a residual claim on income?

> Explain how depreciation generates actual cash flows for the company.

> What document is necessary to form a corporation?

> In a corporation, what group has the ultimate responsibility for protecting and managing the stockholders' interests?

> What is the difference between accumulated depreciation and depreciation expense? How are they related?

> What advantages does a sole proprietorship offer? What is a major drawback of this type of organization?

> Assume that Rf = 6 percent and the market risk premium (Km – Rf) is 7.0 percent. Compute Kj for the following betas using Formula 11A-2. a. 0.6 b. 1.3 c. 1.9

> How did the recession of 2007–2009 compare with other recessions since the Great Depression in terms of length?

> Twenty-five-year B-rated bonds of Parker Optical Company were initially issued at a 12 percent yield. After 10 years, the bonds have been upgraded to Aa2. Such bonds are currently yielding 10 percent to maturity. Use Table 16-3 to determine the price of

> Frantic Fast Foods had earnings after taxes of $420,000 in the year 20X1 with 309,000 shares outstanding. On January 1, 20X2, the firm issued 20,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings afte

> Gary’s Pipe and Steel Company expects sales next year to be $800,000 if the economy is strong, $500,000 if the economy is steady, and $350,000 if the economy is weak. Gary believes there is a 20 percent probability the economy will be strong, a 50 percen

> Put an X by the security that has the feature best related to the following considerations.

> Boise Timber Co. computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $6,500,000, but 10 percent of this value is represented by depreciation. Its contribution margin (price minus vari

> Air Purifier Inc. computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $2,450,000, but 15 percent of this value is represented by depreciation. Its contribution margin (price minus var

> Calloway Cab Company determines its break-even strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $450,000, but 5 percent of this value is represented by depreciation. Its contribution margin (price minus variabl

> Shawn Pen & Pencil Sets Inc. has fixed costs of $80,000. Its product currently sells for $5 per unit and has variable costs of $2.50 per unit. Mr. Bic, the head of manufacturing, proposes to buy new equipment that will cost $400,000 and drive up fixed co

> Eaton Tool Company has fixed costs of $255,000, sells its units for $66, and has variable costs of $36 per unit. a. Compute the break-even point. b. Ms. Eaton comes up with a new plan to cut fixed costs to $200,000. However, more labor will now be requir

> Therapeutic Systems sells its products for $13 per unit. It has the following costs: Separate the expenses between fixed and variable costs per unit. Using this information and the sales price per unit of $13, compute the break-even point.

> Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows: The company is currently financed with 50 percent debt and 50 percent equity (common stock, par value of $10). In order to expand the fac

> Mr. Gold is in the widget business. He currently sells 1.5 million widgets a year at $6 each. His variable cost to produce the widgets is $4 per unit, and he has $1,550,000 in fixed costs. His sales-to-assets ratio is six times, and 30 percent of his ass

> The Lopez-Portillo Company has $10.6 million in assets, 80 percent financed by debt, and 20 percent financed by common stock. The interest rate on the debt is 9 percent and the par value of the stock is $10 per share. President Lopez-Portillo is consider