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Questions and Answers of
Corporate Finance
1. What do you think is the difference in philosophy between the two? 2. How does the life cycle theory enter the discussion? 3. Based on the original interview with Richard and Monica and this one,
What is a balance sheet, and why is it important?
In your opinion, which presents results more fairly, finance or accounting? Explain.
What are reasons that a person may have a poor net cash flow yet be considered to be in good financial health?
What is the major difference between household accounting and business accounting?
Elaborate on the two approaches to making projections for a cash flow statement?
What is household equity, and how do you calculate it?
Why segregate a balance sheet by type of asset and type of liability?
What is a cash flow statement, and why is it important?
Detail the sections of a functional cash flow statement?
Contrast a functional and a traditional cash flow statement?
Is an increase in debt a plus or minus from a cash flow standpoint? Explain.
What is a pro forma statement? What is its use?
Outline some expenses of a pro forma statement that cannot use inflation to project their growth and indicate what rate should be used?
Contrast the views of finance and accounting on recording operating results?
1. Construct the balance sheet. 2. Does it look substantial? 3. Would you tell Richard and Monica that it was strong? Why? Richard called and said that he had compiled a list of assets and would send
What is cash flow planning?
Maya had a low nondiscretionary cost percentage and a high discretionary one. Is that good or bad? Explain.
What are the reasons that a person's gross saving percentage may be low, while his or her net cash flow may be high?
Why is cash flow planning so important?
List five reasons for saving?
Why do some people have difficulty saving?
Provide five methods for helping people to save?
Why do people construct a budget?
What is a liquidity substitute? When should it be used?
Why are financial ratios important?
Chris's current liabilities exceeded his current assets. He said not to worry; he could use his credit card if he needed extra funds. What do you think of this practice?
April made $50,000 in year 1 and $60,000 in year 2. She had the following yearly outflows: _________________________ Year 1 ____________ Year 2 Nondiscretionary .............. $25,000
Using the following statistics, calculate Jackson's current and emergency fund ratios.Current assets .......................... $2,000Current liabilities ....................... 1,000Liquid assets
Jamie had the following figures over the past four years.a. Calculate the nondiscretionary cost percentage and what the change in the ratio demonstrates over time. b. Calculate the discretionary cost
Sharon had gross income of $120,000 and nondiscretionary expenses of $32,000. She also had discretionary expenses of $10,000, and her capital expenditures on leisure items were $5,000. What is her
Abby had the following statistics. Calculate the gross savings percentage.Net cash flow .................................... $6,000Nondiscretionary expenses ..................... 35,000Discretionary
Robert Smith asks for your help in preparing his cash flow statement. He tells you that his salary before taxes is $250,000 and that he has no mortgage on his home. Which of the following statements
Six months ago, a client purchased a new bedroom suite for $6,500. For purposes of preparing accurate financial statements, this purchase would appear as a(an) 1. Use asset on the client's net worth
1. What observation do you have about the couple's expenditures? 2. What might the conversation above tell you about Richard? 3. What might Monica's actions tell you about both Monica and Richard? 4.
What is debt's role in the household?
Alexis wants to buy a large home relative to her income and thinks that she may not qualify for a mortgage for 80 percent of the price. She expects interest rates to rise and anticipates staying in
When is a home equity loan better than refinancing a first mortgage?
Credit cards are a grossly inefficient way to borrow money. True or false? Explain and discuss their advantages.
Why borrow using secured debt?
Pension loans save you money because you pay yourself back. True or false? Explain.
Are loans from friends and relatives a good practice? Explain.
What borrowing mechanism provides the lowest cost. Why?
How can you improve your credit? Indicate the specific steps to do so.
Jeremy is in financial difficulty. He owes $5,000 and cannot pay it back now. Should he declare bankruptcy? Why? What do you think he should do?
What is the difference between debt and fixed obligations?
In calculating the ratio times fixed payments earned, after-tax interest payments are added back in the denominator. Why?
What is the difference between debt and intangible liabilities?
Contrast operating risk and financial risk.
Why is operating leverage as it pertains to risk important?
Harry was deciding on the separation of outlays into nondiscretionary and discretionary. What advice would you offer him on the division as it relates to risk?
What is APR and why is it important?
List and explain the borrowing factors?
Contrast the strengths and weaknesses of a fixed-rate mortgage with those of a variable rate mortgage?
Dorothy has the following projected cash flows: income, $65,000; fixed operating costs excluding interest, $44,000; variable outlays, $7,000; interest cost, $5,000; and repayment of debt,
For the $8,000 loan John needed, he was given a choice of in loans with the following characteristics.a. $1,200 in interest paid at the end of the period.b. $1,200 in interest paid at the beginning
Melinda has a 15-year fixed-rate mortgage for $150,000 at a 6.5 percent rate. Calculate her monthly mortgage payments?
Martha has seven years remaining on her $160,000 mortgage, which has a 7.5 percent rate. She would have to pay $4,500 to refinance. Martha expects to live in the house for another five years. She is
How much would a person save by borrowing money at 6 percent for a home equity loan versus 18 percent for a credit card loan. Assume a marginal tax bracket of 30 percent?
Given the following statistics, calculate the mortgage cost percent.Annual mortgage interest ................................. $ 9,000Annual principal payment ...................................
Elena is in the 28 percent bracket and has the following real estate and non-real estate related costs.Nonmortgage interest and principal ............................. $ 4,000Mortgage interest
Louis had the following cash flow items:Cash flow from operations ............................... $40,000Interest payments ............................................. 6,000Total interest and debt
The Moores recently found out that they can reduce their mortgage interest rate from 12 percent to 8 percent. The value of homes in their neighborhood has been increasing at the rate of 7.5 percent
A young couple would like to purchase a new home using one of the following mortgages: Mortgage no. 1: 10.5 percent interest with 5 discount points to be paid at time of closing Mortgage no. 2: 11.5
A CFP® professional meets with two new clients who would like advice about their mortgage. In the review, the CFP® professional finds that their essential expenses exceed their income. Mortgage
1. What do you think of Richard's idea of borrowing to place money in the stock market?2. Do you think the couple should refinance their mortgage?3. Should they use the adjustable-rate mortgage
1. Is this pattern common? 2. What is your recommendation? Brad and Barbara say they use credit cards all the time. They always intend to pay them off by the end of the month, but they often don't.
Describe the three approaches to decision making for capital expenditures?
Compare capital budgeting practices as outlined in this chapter with those used on a day-to-day basis?
What changes in day-to-day capital expenditure selections can you recommend?
Name three factors involved in the purchase of a car.
What factors should you consider when you aren't sure whether to buy or lease a car?
What are the advantages of leasing over purchasing in general?
Why are more people leasing?
Is leasing less costly than purchasing? Explain.
Discuss the advantages and disadvantages of leasing a car?
Briefly explain total portfolio management (TPM)?
Compare capital expenditures with marketable securities as an investment?
Why should capital expenditures be treated separately on a cash flow statement?
What are the strengths and weaknesses of the net present value (NPV) and internal rate of return (IRR) methods?
Why calculate a profitability index?
Why are durable goods considered to be capital expenditures?
Why is education a capital expenditure?
Contrast life cycle human-asset valuations for skilled and unskilled workers?
Laurence was presented with a capital expenditure for a furnace that would cost $12,000 today and would generate the following savings.Year _______________________ Amount1
Helen, a sociologist, is considering buying a new power lawn mower. It would save her 30 minutes of work a week, which she would use to see another client. Her fee is $16 per hour and she works 50
Marcia had a choice of two washing machines of equal performance. One cost $400 and had a present value (PV) of $230 in savings over having clothes done through an outside service. The second cost
Billy is considering enrolling in an MBA program. It would cost him $22,000 a year for two years. He believes it would raise his salary, which is now $50,000 a year, by the following amounts:Year
John is considering buying a new car for $15,000 if purchased today. He also could wait to purchase the vehicle three years from now for $18,000. If John can invest in the capital markets and earn a
As the owner of a business, you must make an investment decision. The investment will expand your company's production plant at a cost of $1 million. The expansion will generate income of $150,000
Item A has an NPV of $300 and an original cost of $500. Item B has an NPV of $350 and an original cost of $700. What is the profitability index (PI) of items A and B, and which is a more attractive
Joan has a choice of purchasing a car for $20,000 with 9.7 percent interest cost to borrow and a three-year repayment period for leasing the vehicle. Leasing the auto would cost $300 a month for a
Investment A costs $10,000,000 and offers a single cash inflow of $13,000,000 after one year. Investment B costs $1,000,000 and will be worth $2,000,000 at the end of the year. The appropriate
Smith invests in a limited partnership that requires an outlay of $9,200 today. At the end of years 1 through 5, he will receive the after-tax cash flows shown below. The partnership will be
1. Do we know yet whether Monica's fears about retirement are justified? Do you have any preliminary opinion about this? 2. Do you think she should consider a new furnace now? 3. Complete the furnace
Why do people purchase a home?
What is the cap rate's significance in terms of real estate?
What do commodities protect against? What is the downside to commodity investment?
Why is investing in gold appealing?
How should exchange traded funds (ETF) and other commodities be treated from an investment standpoint? What is their main value? Explain.
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