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business
fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

Discuss the following statement: All else equal, firms with relatively stable sales are able to carry relatively high debt ratios. Is the statement true or false? Why?AppendixLO1
If Congress increased the personal tax rate on interest, dividends, and capital gains but simultaneously reduced the rate on corporate income, what effect would this have on the average company’s
Which of the following would likely encourage a firm to increase the debt in its capital structure?a. The corporate tax rate increases.b. The personal tax rate increases.c. Due to market changes, the
Why do public utilities generally use different capital structures than biotechnology companies?AppendixLO1
Why is EBIT generally considered independent of financial leverage? Why might EBIT actually be affected by financial leverage at high debt levels?AppendixLO1
Is the debt level that maximizes a firm’s expected EPS the same as the debt level that maximizes its stock price? Explain.AppendixLO1
If a firm goes from zero debt to successively higher levels of debt, why would you expect its stock price to rise first, then hit a peak, and then begin to decline?AppendixLO1
When the Bell System was broken up, the old AT&T was split into a new AT&T and seven regional telephone companies. The specific reason for forcing the breakup was to increase the degree of
A firm is about to double its assets to serve its rapidly growing market. It must choose between a highly automated production process and a less automated one. It also must choose a capital
BREAK-EVEN ANALYSIS A company’s fixed operating costs are $500,000, its variable costs are $3 00 per unit, and the product’s sales price is $4 00. What is the company’s break-even point; that
OPTIMAL CAPITAL STRUCTURE Jackson Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%,
RISK ANALYSISa. Given the following information, calculate the expected value for FirmC’sEPS.DataforFirms A and B are as follows: E EPSA $5 10, A $3 61, E EPSB $4 20, and B $2 96.Probability 0.1
UNLEVERED BETA Harley Motors has $10 million in assets, which were financed with $2 million of debt and $8 million in equity. Harley’s beta is currently 1 2, and its tax rate is 40%. Use the Hamada
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $20 million in invested capital, has $4 million
BREAK-EVEN ANALYSIS The Weaver Watch Company sells watches for $25, fixed costs are $140,000, and variable costs are $15 per watch.a. What is the firm’s gain or loss at sales of 8,000 watches? At
FINANCIAL LEVERAGE EFFECTS The Neal Company wants to estimate next year’s return on equity (ROE) under different financial leverage ratios. Neal’s total capital is $14 million, it currently uses
HAMADA EQUATION Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm
RECAPITALIZATION Tapley Inc. currently has total capital equal to $5 million, has zero debt, is in the 40% federal-plus-state tax bracket, has a net income of $1 million, and distributes 40% of its
RECAPITALIZATION Currently, Bloom Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Bloom’s debt currently has an 8% yield to maturity. The risk-free rate (rRF) is 5%, and
BREAKEVEN AND LEVERAGE Wingler Communications Corporation (WCC) produces premium stereo headphones that sell for $28 80 per set, and this year’s sales are expected to be 450,000 units. Variable
FINANCING ALTERNATIVES The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2015. Two alternatives are being considered:Common stock may be sold to net $60
WACC AND OPTIMAL CAPITAL STRUCTURE Elliott Athletics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred
What three areas of finance does this book cover? Are these areas independent of one another, or are they interrelated in the sense that someone working in one area should know something about each
Who is the CFO, where does this individual fit into the corporate hierarchy? What are some of his or her responsibilities?AppendixLO1
Does it make sense for not-for-profit organizations such as hospitals and universities to have CFOs? Why or why not?AppendixLO1
What is the relationship among economics, finance, and accounting?AppendixLO1
What are the key differences among proprietorships, partnerships, and corporations?AppendixLO1
How are LLCs and LLPs related to the other forms of organization?AppendixLO1
What is an S corporation, and what is its advantage over a C corporation? Why don’t firms such as IBM, GE, and Microsoft choose S corporation status?AppendixLO1
What are some reasons why the value of a business other than a small one is generally maximized when it is organized as a corporation?AppendixLO1
Suppose you are relatively wealthy and are looking for a potential investment.You do not plan to be active in the business. Would you be more interested in investing in a partnership or in a
What’s the difference between a stock’s current market price and its intrinsic value?AppendixLO1
Do stocks have known and “provable” intrinsic values, or might different people reach different conclusions about intrinsic values? Explain.AppendixLO1
Should managers estimate intrinsic values or leave that to outside security analysts? Explain.AppendixLO1
If a firm could maximize either its current market price or its intrinsic value, what would stockholders (as a group) want managers to do? Explain.AppendixLO1
Should a firm’s managers help investors improve their estimates of the firm’s intrinsic value? Explain.AppendixLO1
What are three techniques stockholders can use tomotivate managers to maximize their stock’s long-run price?AppendixLO1
Should managers focus directly on the stock’s actual market price or its intrinsic value, or are both important? Explain.AppendixLO1
Why might conflicts arise between stockholders and debtholders?AppendixLO1
How might astute bondholders react if stockholders take on risky projects?AppendixLO1
How can bondholders protect themselves from managers’ actions that negatively impact bondholders?AppendixLO1
Is maximizing shareholder value inconsistent with being socially responsible?Explain.AppendixLO1
When Boeing decides to invest $5 billion in a new jet airliner, are its managers certain of the project’s effects on Boeing’s future profits and stock price? Explain.AppendixLO1
Can a firm’s executive compensation plan lead to unethical behavior? Explain.AppendixLO1
Unethical acts are generally committed by unethical people. What are some things companies can do to help ensure that their employees act ethically?AppendixLO1
Define each of the following terms:a. Sarbanes–Oxley Actb. Proprietorship; partnership; corporationc. S corporation; limited liability company (LLC); limited liability partnership (LLP)d. Intrinsic
What is a firm’s intrinsic value? Its current stock price? Is the stock’s “true” long-run value more closely related to its intrinsic value or to its current price?AppendixLO1
When is a stock said to be in equilibrium? Why might a stock at any point in time not be in equilibrium?AppendixLO1
Suppose three honest individuals gave you their estimates of Stock X’s intrinsic value. One person is your current roommate, the second person is a professional security analyst with an excellent
Is it better for a firm’s actual stock price in the market to be under, over, or equal to its intrinsic value? Would your answer be the same from the standpoints of stockholders in general and a
If a company’s board of directors wants management to maximize shareholder wealth, should the CEO’s compensation be set as a fixed dollar amount, or should the compensation depend on how well the
What are the various forms of business organization? What are the advantages and disadvantages of each?AppendixLO1
Should stockholder wealth maximization be thought of as a long-term or a short-term goal? For example, if one action increases a firm’s stock price from a current level of $20 to $25 in 6 months
What are some actions that stockholders can take to ensure that management’s and stockholders’interests are aligned?AppendixLO1
Edmund Enterprises recently made a large investment to upgrade its technology. While these improvements won’t have much effect on performance in the short run, they are expected to reduce future
Suppose you were a member of Company X’s board of directors and chairperson of the company’s compensation committee. What factors should your committee consider when setting the CEO’s
Suppose you are a director of an energy company that has three divisions—natural gas, oil, and retail (gas stations). These divisions operate independently from one another, but all division
Bedrock Company has $70 million in debt and $30 million in equity. The debt matures in one year and has a 10% interest rate, so the company is promising to pay back $77 million to its debtholders one
Why is the quick ratio also called an acid test?AppendixLO1
How did the term "working capital" originate?AppendixLO1
Differentiate between net working capital and net operating working capital.AppendixLO1
Define the following terms: inventory conversion period, receivables collection period, and payables deferral period. Give the equation for each term.AppendixLO1
What is the cash conversion cycle? What is its equation?AppendixLO1
What should the firm's goal be regarding the cash conversion cycle? Explain your answer.AppendixLO1
What are some actions the firm can take to shorten its cash conversion cycle?AppendixLO1
Identify and explain three alternative current asset investment policies.AppendixLO1
What are the principal components of working capital?AppendixLO1
What are the reasons for not wanting to hold too little working capital? For not wanting to hold too much?AppendixLO1
What is the fundamental trade-off that managers face when managing working capital?AppendixLO1
Why is cash management important?AppendixLO1
What are the two primary motives for holding cash?AppendixLO1
What are the two secondary motives for holding cash as noted in the finance and economics literature?AppendixLO1
What is the purpose of a cash budget?AppendixLO1
What are the three major sections of a cash budget?AppendixLO1
Suppose a firm's cash flows do not occur uniformly throughout the month. What AppendixLO1
effect would this have on the accuracy of the forecasted borrowing requirements?AppendixLO1
How could uncertainty be handled in a cash budget?AppendixLO1
Does depreciation appear in a cash budget? Explain.AppendixLO1
Why might a company hold Low-yielding marketable securities when it could earn a much higher return on operating assets?AppendixLO1
Why would a low interest rate environment lead to larger cash balances?AppendixLO1
How might improvements in telecommunications technology affect the level of corporations' cash balances?AppendixLO1
Why is good inventory management essential to a firm's success?AppendixLO1
What departments should be involved in inventory decisions?AppendixLO1
What are the three categories of inventory costs?AppendixLO1
What are some components of inventory carrying costs?AppendixLO1
What are some components of inventory ordering costs?AppendixLO1
Explain how a new firm's receivables balance is built up over time.AppendixLO1
Define days sales outstanding (DSO). What can be learned from it? How is it affected by sales fluctuations?AppendixLO1
What is an aging schedule? What can be learned from it? How is it affected by sales fluctuations?AppendixLO1
What are the four credit policy variables?AppendixLO1
What is meant by the term "permanent current assets"?AppendixLO1
What is meant by the term "temporary current assets"?AppendixLO1
What is meant by the term "current asset financing policy"?AppendixLO1
What are three alternative current asset financing policies? Is one best?AppendixLO1
What are the advantages and disadvantages of short-term debt over long-term debt?AppendixLO1
What types of short-term credit are classified as accrued liabilities?AppendixLO1
What is the cost of accrued liabilities?AppendixLO1
How much control do financial managers have over the dollar amount of accrued liabilities?AppendixLO1
What is trade credit?AppendixLO1
What is the difference between free trade credit and costly trade credit?AppendixLO1

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