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fundamentals of corporate finance 11th

Questions and Answers of Fundamentals Of Corporate Finance 11th

If the firm has been a recent target of social criticism, how has it responded?
If it does, how has it earned this reputation?
Does the firm have a particularly good or bad reputation as a corporate citizen?
What does the firm say about its social responsibilities?
How much trading volume is there on this stock?
How many analysts follow the firm?
How widely held and traded is the stock? What proportion of its shares are widely traded (floats)?
Do any of the bonds issued by the firm come with special protections against stockholder expropriation?
Are there are bond covenants (that you can uncover) that have been imposed on the firm as part of the borrowing?
Does the firm have any publicly traded debt?
Do any of the directors have large stockholdings or represent those who do?
How many of the directors are CEOs of other companies?
How many of the directors have other connections to the firm (as suppliers, clients, customers, etc.)?
How many of the directors are inside directors?
Who is on the board of directors of the company? How long have they served as directors?
How much equity in the company does the CEO own and in what form(stocks or options)?
How much did the CEO make last year? What form did the compensation take(salary, bonus, and option components)?
If it is a “family-run” company, is the CEO part of the family? If not, what career path did the CEO take to get to the top? (Did he or she come from within the organization or from outside?)
Who is the CEO of the company? How long has he or she been CEO?
How does this firm view its social obligations and manage its image in society?
How does this firm interact with financial markets? How do markets get information about the firm?
Is there a potential conflict between stockholders and lenders to the firm? If so, how is it managed?
Is this a company where there is a separation between management and ownership? If so, how responsive is management to stockholders?
Reader’s Digest has voting and nonvoting shares. About 70 percent of the voting shares are held by charitable institutions, which are headed by the CEO of Reader’s Digest. Assume that you are a
Unicom is a regulated utility serving Northern Illinois. The following table lists the stock prices and dividends on Unicom from 1989 to 1998.Year Price Dividends 1989 $ 36.10 $ 3.00 1990 $ 33.60 $
The following table summarizes the annual returns you would have made on two companies –Scientific Atlanta, a satellite and data equipment manufacturer, and AT&T, the telecomm giant, from 1988 to
You are in a world where there are only two assets, gold and stocks. You are interested in investing your money in one, the other or both assets. Consequently you collect the following data on the
Assume that you have half your money invested in Times Mirror, the media company, and the other half invested in Unilever, the consumer product giant. The expected returns and standard deviations on
You have been asked to analyze the standard deviation of a portfolio composed of the following three assets:Investment Expected Return Standard Deviation Sony Corporation 11% 23%Tesoro Petroleum 9%
What is the expected variance of a portfolio of 5, 10, 20, 50 and 100 securities.How many securities need to be held before the risk of a portfolio is only 10% more than the minimum?
The following table lists returns on the market portfolio and on Microsoft, each year from 1989 to 1998.Year Microsoft Market Portfolio 1989 80.95% 31.49%1990 -47.37% -3.17%1991 31% 30.57%1992
You are using the arbitrage pricing model to estimate the expected return on Bethlehem Steel, and have derived the following estimates for the factor betas and risk premia:Factor Beta Risk Premi 1
You are using the multi-factor model to estimate the expected return on Emerson Electric, and have derived the following estimates for the factor betas and risk premia:Macro-economic Factor Measure
Who is the average investor in this stock? (Individual or pension fund, taxable or taxexempt, small or large, domestic or foreign)
Who is the marginal investor in this stock?
How many stockholders does the company have?
What percent of the stock is held by institutional investors?
Does the company have listings in foreign markets? (If you can, estimate the percent of the stock held by non-domestic investors)
Who are the insiders in this company? (Besides the managers and directors, anyone with more than 5% is treated as an insider)
What role do the insiders play in running the company?
What percent of the stock is held by insiders in the company?
What percent of the stock is held by employees overall? (Include the holdings by employee pension plans)
Have insiders been buying or selling stock in this company in the most recent year?
What value would you assign your firm (or its equity), given how comparable firms are valued?
How does your firm’s valuation (in multiple terms) compare to those of the other firms in the industry?
What industry does the firm belong to, and what are the comparable firms?
What multiple would you use to value the firm or its equity?
What is the value of equity per share?
Are there equity options outstanding (management options, convertible bonds)and how much are they worth?
Does the firm have cash and nonoperating assets, and what are their values?
What is the value of the operating assets of the firm, based on a discounted cash flow model?
If there is anticipated high growth with excess returns, what are the barriers to entry that will allow these excess returns to continue? For how long?
What do the fundamentals suggest about earnings growth at this company?(How much is being reinvested and at what rate of return?)
How quickly do analysts expect this company’s earnings to grow in the future?
How fast have this company’s earnings grown historically?
How much did your firm reinvest last year in internal investments, acquisitions, R&D, and working capital?
What is your firm’s effective tax rate? What is its marginal tax rate? Which would you use in your valuation?
What is this firm’s accounting operating income? Would you adjust it for your valuation?
What is your estimate of value of equity in this firm? How does this compare to the market value?
When will your firm be in stable growth and what will your firm look like when it reaches stable growth?
What growth pattern would you pick for this firm? How long will high growth and excess returns last?
What type of cash flow (dividends, FCFE, or FCFF) would you choose to discount for this firm?
Relative to the rest of the firms in the market, does it pay too much or too little in dividends? (Use the market regression, if necessary.)
Relative to the sector to which this firm belongs, does it pay too much or too little in dividends? (Do a regression, if necessary.)
Given the relationship between dividends and FCFE and the trust you have in the management of this firm, would you change this firm’s dividend policy?
Is there any reason to believe that future investments of this firm will be different from the historical record?
How well have the managers of the firm picked investments, historically?(Look at the investment return section.)
What is the current cash balance for this firm?
What was the FCFE that this firm had over the last few years?
Cumulatively, how much cash has been returned to stockholders each year for the past few years?
How much stock has it bought back each year for the past few years?
How much has the firm paid out in dividends each year for the past few years?
How does this firm’s dividend policy compare to those of its peer group and to the rest of the market?
Given this dividend policy and the current cash balance of this firm, would you push the firm to change its dividend policy (return more or less cash to its owners)?
How much could this firm have returned to its stockholders over the past few years?How much did it actually return?
How does this firm compare with other firms in the sector in terms of dividend policy?
Are there any significant bond covenants that you know of that restrict the firm’s dividend policy?
How well can this firm forecast its future financing needs? How valuable is preserving flexibility to this firm?
Who are the marginal stockholders in this firm? Do they like dividends or would they prefer stock buybacks?
How easily can the firm convey information to financial markets? In other words, how necessary is it for them to use dividend policy as a signal?
How have these dividends related to earnings in these years?
How much has this company paid in dividends over the past few years?
Given this firm’s characteristics today, do you think that this firm should be paying more dividends, less dividends, or no dividends at all?
Has this firm ever paid out dividends? If yes, is there a pattern to the dividends over time?
What do the answers to the last three questions tell you about the kind of financing that this firm should use?
How sensitive is the sector’s value and operating income to the same variables?
How sensitive has this firm’s operating income been to changes in the same variables?
How sensitive has this firm’s value been to changes in macroeconomic variables such as interest rates, currency movements, inflation, and the economy?
What type of stockholders does this firm have? If cash had to be returned to them, would they prefer dividends or stock buybacks? (Again, look at the past. If the company has paid high dividends
What kind of projects does this firm expect to have? Can it expect to make excess returns on these projects? (Past project returns is a reasonable place to start—see the section under investment
If the firm is overlevered, is it in danger of bankruptcy? (Look at the bond rating if the company is rated. A junk bond rating suggests high bankruptcy risk.)
If the firm is underlevered, does it have the characteristics of a firm that is a likely takeover target? (Target firms in hostile takeovers tend to be smaller, have poorer project and stock price
What type of financing should this firm use? In particular,a. should the financing be short-term or long-term?b. what currency should it be in?c. what special features should the financing have?
If your firm’s actual debt ratio is different from its “recommended” debt ratio, how should they get from the actual to the optimal? In particular,a. should they do it gradually over time or
Relative to the rest of the firms in the market, does it have too much or too little in debt?
Relative to the industry to which this firm belongs, does it have too much or too little in debt?
How volatile is the operating income? What is the “normalized” operating income of this firm, and what is the optimal debt ratio of the firm at this level of income?
What rating does the company have at the optimal debt ratio? If you were to impose a rating constraint, what would it be? Why? What is the optimal debt ratio with this rating constraint?
What will happen to the stock price if the firm moves to the optimal and stockholders are rational?
What will happen to the firm value if the firm moves to its optimal?

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