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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

Milk [2]Why is skimmed milk always cheaper than regular milk even if it is healthier?
Ketchup [2]As an empirical investigation, check your local supermarket. Does 2 ketchup bottles of 0.5 litres cost the same as one ketchup bottle of 1 liter? What does this tell you about value
Break-even analysis: Calculate the accounting operating profit break-even point and pretax operating cash flow break-even point for each of the three production choices outlined below. Choice Price
percent depending on their financing plan. All three projects cost the same at $500,000. Expected cash flow streams are shown in the following table. Which projects would be accepted at a discount
Analysts following the Tomkovick Golf Company were given the following balance sheet information for the years ended June 30, 2020, and June 30, 2019:In addition, it was reported that the company had
Describe factors that managers consider when setting the dividend payouts for their firms.
Define stock dividends and stock splits, and explain how they differ from other types of dividends and from stock repurchases.
Discuss the benefits and costs associated with dividend payments, and compare the relative advantages and disadvantages of dividends and stock repurchases.
Explain what a stock repurchase is and how companies repurchase their stock. Calculate how taxes affect the after-tax proceeds that a stockholder receives from a dividend and from a stock repurchase.
Explain what a dividend is, and describe the different types of dividends and the dividend payment process. Calculate the expected change in a stock’s price around an ex-dividend date.
Discuss some of the practical considerations that managers are concerned with when they choose a firm’s capital structure.
Describe the trade-off and pecking order theories of capital structure choice and explain what the empirical evidence tells us about these theories.
Discuss the benefits and costs of using debt financing and calculate the value of the income tax benefit associated with debt.
Describe the two Modigliani and Miller propositions, the key assumptions underlying them, and their relevance to capital structure decisions. Use Proposition 2 to calculate the return on equity.
Review the common types of commercial bank loans, their terms, and how they are priced.
Explain why a firm that has access to the public markets might elect to raise money through a private placement.
Discuss the costs of bringing a general cash offer to market.
Explain why, when underwriting new security offerings, investment bankers prefer that the securities be underpriced. Compute the total cost of an IPO.
Discuss the advantages and disadvantages of going public and compute the net proceeds from an IPO.
Describe the role of venture capitalists in the economy and discuss how they reduce their risk when investing in start-up businesses.
Explain what is meant by bootstrapping when raising seed financing and why bootstrapping is important.
Describe three current asset financing strategies, and discuss the main sources of short-term financing.
Define cash collection time, discuss how a firm can minimize this time, and compute the economic costs and benefits of a lockbox.
Explain the trade-off between carrying costs and reorder costs, and compute the economic order quantity for a firm’s inventory orders.
Explain how accounts receivable are created and managed, and compute the cost of trade credit.
Discuss the relative advantages and disadvantages of pursuing (1) flexible and (2) restrictive current asset management strategies.
Define the operating and cash conversion cycles, explain how they are used, and compute their values for a firm.
Define net working capital, discuss the importance of working capital management, and compute a firm’s net working capital.
Calculate the weighted average cost of capital for a firm, explain the limitations of using a firm’s weighted average cost of capital as the discount rate when evaluating a project, and discuss the
Calculate the cost of common stock and the cost of preferred stock for a firm.
Calculate the cost of debt for a firm.
Explain what the weighted average cost of capital for a firm is and why it is often used as a discount rate to evaluate projects.
Define sensitivity analysis, scenario analysis, and simulation analysis and describe how they are used to evaluate the risks associated with a project.
Define the economic break-even point and be able to calculate it for a project.
Define and calculate the pretax operating cash flow and accounting operating profit break-even points and the crossover levels of unit sales for a project.
Calculate and distinguish between the degree of pretax cash flow operating leverage and the degree of accounting operating leverage.
Explain and demonstrate how variable costs and fixed costs affect the volatility of pretax operating cash flows and accounting operating profits.
Determine the appropriate time to harvest an asset.
Explain the concept of equivalent annual cost and use it to compare projects with unequal lives, decide when to replace an existing asset, and calculate the opportunity cost of using an existing
Describe how distinguishing between variable and fixed costs can be useful in forecasting operating expenses.
Discuss the five general rules for incremental aftertax free cash flow calculations and explain why cash flows stated in nominal (real) dollars should be discounted using a nominal (real) discount
Explain why incremental after-tax free cash flows are relevant in evaluating a project and calculate them for a project.
Explain the benefits of postaudit and periodic reviews of capital projects.
Explain how the profitability index can be used to rank projects when a firm faces capital rationing and describe the limitations that apply to the profitability index.
Compute the internal rate of return (IRR) for a capital project and discuss the conditions under which the IRR technique and the NPV technique produce different results.
Explain why the accounting rate of return (ARR) is not recommended for use as a capital expenditure decision-making tool.
Describe the strengths and weaknesses of the payback period as a capital expenditure decision-making tool and compute the payback period for a capital project.
Explain the benefits of using the net present value(NPV) method to analyze capital expenditure decisions and calculate the NPV for a capital project.
Discuss why capital budgeting decisions are the most important investment decisions made by a firm’s management.
Explain how valuing preferred stock with a stated maturity differs from valuing preferred stock with no maturity, and calculate the price of a share of preferred stock under both conditions.
Explain why g must be less than R in the constantgrowth dividend model.
Discuss the assumptions that are necessary to make the general dividend-valuation model easier to use, and use the model to compute the value of a firm’s stock.
Describe how the general dividend-valuation model values a share of stock.
Describe how expected future cash flows, discounted at the required rate of return, determine the value of common stock.
Describe the two types of stock securities, and explain why many financial analysts treat preferred stock as a special type of bond rather than as an equity security.
List and describe the four types of secondary markets.
Describe the factors that determine the level and shape of the yield curve.
Discuss the concept of default risk and know how to compute a default risk premium.
Explain why investors in bonds are subject to interest rate risk and why it is important to understand the bond theorems.
Distinguish between a bond’s coupon rate, yield to maturity, and effective annual yield.
Explain how to calculate the value of a bond and why bond prices vary negatively with interest rate movements.
Describe the market for corporate bonds and three types of corporate bonds.
Describe what the Capital Asset Pricing Model(CAPM) tells us and how to use it to evaluate whether the expected return of an asset is sufficient to compensate an investor for the risks associated
Discuss why systematic risk matters to investors and how this measure relates to expected returns.
Explain the concept of diversification and its effect on risk.
Explain what an arithmetic average return is and what a geometric average return is, and calculate these returns for an asset.
Explain what the standard deviation of returns is and why it is very useful in finance, and calculate it for an asset.
Explain what an expected return is, and calculate the expected return for an asset.
Describe the two components of a total holding period return, and calculate this return for an asset.
Discuss why the effective annual interest rate (EAR)is the appropriate way to annualize interest rates, and calculate the EAR.
Discuss growing annuities and perpetuities, as well as their application in business, and calculate their values.
Explain what a perpetuity is and where we see them in business, and calculate the value of a perpetuity.
Explain the difference between an ordinary annuity and an annuity due, and calculate the present value and the future value of an ordinary annuity and an annuity due.
Explain why cash flows occurring at different times must be adjusted to reflect their value as of a common date before they can be compared, and compute the present value and the future value for
Discuss why the concept of compounding is not restricted to money, and use the future value formula to calculate growth rates.
Explain the concept of present value and how it relates to future value, and use the present value formula to make business decisions.
Explain the concept of future value, including the meaning of the terms principal, simple interest, and compound interest, and use the future value formula to make business decisions.
Explain the concept of time value of money and why it is so important in the field of finance.
Identify the major limitations in using financial statement analysis.
Explain what benchmarks are, describe how they are prepared, and discuss why they are important in financial statement analysis.
Describe the DuPont system of analysis and be able to use it to evaluate a firm’s performance and identify corrective actions that may be necessary.
Discuss how financial ratios facilitate financial analysis and be able to compute and use them to analyze a firm’s performance.
Describe common-size financial statements, explain why they are used, and be able to prepare and use them to analyze the historical performance of a firm.
Explain the four perspectives from which financial statements can be viewed.
Discuss the difference between average and marginal tax rates.
Identify the cash flow to a firm’s investors using its financial statements.
Explain how the four major financial statements discussed in this chapter are related.
Understand the calculation of cash flows from operating, investing, and financing activities required in the statement of cash flows.
Identify the basic equation for the income statement and the information it provides.
Describe how market-value balance sheets differ from book-value balance sheets.
Explain the balance sheet identity and why a balance sheet must balance.
Discuss generally accepted accounting principles (GAAP) and their importance to the economy.
Compute the nominal and the real rates of interest, differentiating between them.
Explain how financial institutions serve the needs of consumers and small businesses.
Explain what an efficient market is and why market efficiency is important to financial managers.
Describe the primary, secondary, and money markets, explaining the special importance of secondary and money markets to business organizations.
Discuss direct financing and the important role that investment banks play in this process.
Describe the role of the financial system in the economy and the two basic ways in which money flows through the system.
Explain why ethics is an important topic in the study of corporate finance.
Discuss how agency conflicts affect the goal of maximizing stockholder value.

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