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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

What is the formula for finding the nominal annual cost of trade credit?AppendixLO1
What is the formula for the effective annual cost of trade credit?AppendixLO1
How does the cost of costly trade credit generally compare with the cost of shortterm bank loans?AppendixLO1
Explain how a firm that expects to need funds during the coming year might make sure the needed funds will be available.AppendixLO1
What is commercial paper?AppendixLO1
What types of companies can use commercial paper to meet their short-term financing needs?AppendixLO1
How does the cost of commercial paper compare with the cost of short-term bank loans? With the cost of Treasury bills?AppendixLO1
What is a secured loan?AppendixLO1
What are some types of current assets that are pledged as security for short-term loans?AppendixLO1
Assuming the firm's sales volume remained constant, would you expect it to have a higher cash balance during a tight-money period or during an easy-money period? Why?AppendixLO1
What are the two principal reasons for holding cash? Can a firm estimate its target cash balance by summing the cash held to satisfy each of the two?AppendixLO1
Is it true that when one firm sells to another on credit, the seller records the transaction as an account receivable while the buyer records it as an account payable and that, disregarding
What are the four elements of a firm's credit policy? To what extent can firms set their own credit policies as opposed to having to accept policies that are dictated by "the competition"?AppendixLO1
a. What is the days sales outstanding (DSO) for a firm whose sales are $2,920,000 per year and whose accounts receivable are $312,000?b. Is it true that if this firm sells on terms of 3/10, net 40,
Is it true that it a firm calculates its days sales outstanding, it has no need for an aging schedule?AppendixLO1
How does the seasonal nature of a firm's sales influence its decision regarding the amount of short-term credit to use in its financial structure?AppendixLO1
What arc the advantages of matching the maturities of assets and liabilities? What are the disadvantages?AppendixLO1
From the standpoint of the borrower, is long-term or short-term credit riskier? Explain.Would it ever make sense to borrow on a short-term basis if short-term rates were above longterm
If long-term credit exposes a borrower to less risk, why would people or firms ever borrow on a short-term basis?AppendixLO1
"Firms can control their accrued liabilities within fairly wide limits; depending on the cost of accrued liabilities, financing from this source will be increased or decreased." Discuss.AppendixLO1
Is it true that both trade credit and accrued liabilities represent a spontaneous source of capital for financing growth? Explain.AppendixLO1
Is it true that most firms are able to obtain some free trade credit and that additional trade credit is often available, but at a cost? Explain.AppendixLO1
The availability of bank credit is often more important to a small firm than to a large one.Why?AppendixLO1
What kinds of firms use commercial paper? Could Mama and Papa Gus's Corner Grocery borrow using this form of credit?AppendixLO1
Given that commercial paper interest rates are generally lower than bank loan rates to a given borrower, why might firms that are capable of selling commercial paper also use bank credit?AppendixLO1
Suppose a firm can obtain funds by borrowing at the prime rate or by selling commercial paper.a. If the prime rate is 4.75 percent, what is a reasonable estimate for the cost of commercial paper?b.
Define each of the following terms:Key termsa. Working capital; net working capital; net operating working capital; working capital policyb. Cash conversion cycle model; inventory conversion period;
Permanent current assets; temporary current assets m. Moderate current asset financing policy; aggressive current asset financing policy; conservative current asset financing policy n. Maturity
The Calgary Company is attempting to establish a current assets policy. Fixed assets are$600,000, and the firm plans to maintain a 50 percent debt-to-assets ratio. The interest rate is 10 percent on
What are the three main areas of finance?AppendixLO1
If you have definite plans to go into one area, why is it necessary that you know something about the other areas?AppendixLO1
Why is it necessary for business students who do not plan to major in finance to understand the basics of finance?AppendixLO1
What two key trends are becoming increasingly important in financial management today?AppendixLO1
How has financial management changed from the early 1900s to the present?AppendixLO1
How might a person become better prepared for a career in financial management?AppendixLO1
What are the key differences between sole proprietorships, partnerships, and corporations?AppendixLO1
Why will the value of any business other than a very small one probably be maximized if it is organized as a corporation?AppendixLO1
Identify the two primary subordinates who report to the firm's chief financial officer, and indicate the primary responsibilities of each.AppendixLO1
What are some specific activities with which a firm's finance staff is involved?AppendixLO1
What is management's primary goal?AppendixLO1
What actions could be taken to remove a management team if it departs from the goal of maximizing shareholder wealth?AppendixLO1
What would happen if one firm attempted to exercise costly socially responsible programs but its competitors did not follow suit?AppendixLO1
How does the goal of stock price maximization benefit society at large?AppendixLO1
How would you define "business ethics"?AppendixLO1
Is "being ethical" good for profits in the long run? In the short run?AppendixLO1
What are agency costs, and who bears them?AppendixLO1
What are some mechanisms that encourage managers to act in the best interests of stockholders? To not take advantage of bondholders?AppendixLO1
Why should managers not take actions that are unfair to any of the firm's stakeholders?AppendixLO1
Identify some factors beyond a firm's control that influence its stock price.AppendixLO1
Is profit maximization an appropriate goal for financial managers?AppendixLO1
Should financial managers concentrate strictly on cash flow and ignore the impact of their decisions on EPS?AppendixLO1
What are the three principal forms of business organization? WTiat are the advantages and disadvantages of each?AppendixLO1
Would the "normal" rate of return on investment be the same in all industries? Would "normal"rates of return change over time? Explain.AppendixLO1
Would the role of a financial manager be likely to increase or decrease in importance relative to other executives if the rate of inflation increased? Explain.AppendixLO1
Should stockholder wealth maximization be thought of as a long-term or a short-term goal—for example, if one action would probably increase the firm's stock price from a current level of $20 to $25
Drawing on your background in accounting, can you think of any accounting differences that might make it difficult to compare the relative performance of different firms?AppendixLO1
Would the management of a firm in an oligopolistic or in a competitive industry be more likely to engage in what might be called "socially conscious" practices? Explain your reasoning.AppendixLO1
What's the difference between stock price maximization and profit maximization? Under what conditions might profit maximization not lead to stock price maximization?AppendixLO1
If you were the president of a large, publicly owned corporation, would you make decisions to maximize stockholders' welfare or your own personal interests? What are some actions stock- holders could
The president of Southern Semiconductor Corporation (SSC) made this statement in the company's annual report: "SSC's primary goal is to increase the value of the common stockholders'equity over
Assume that you are serving on the board of directors of a medium-sized corporation and that you are responsible for establishing the compensation policies of senior management. You believe that the
If the overall stock market is extremely volatile, and if many analysts foresee the possibility of a stock market crash, how might these factors influence the way corporations choose to compensate
Teacher's Insurance and Annuity Association-College Retirement Equity Fund (TIAA-CREF)is the largest institutional shareholder in the United States. Traditionally, TIAA-CREF has acted as a passive
The senior managers of Hancock Oil are evaluating a new oil exploration project. The project requires a large amount of capital and is quite risky, but it has the possibility of being extremely
Edmund Enterprises recently made a large investment in upgrading its technology. WTiile the technology improvements will not have much of an impact on performance in the short run, they are expected
What is a multinational corporation?AppendixLO1
Discuss the following statement: The United States is not immune to the influence of foreign corporations over U.S. economic and political policies.AppendixLO1
Identify and briefly discuss five major factors that complicate financialmanagement in multinational firms.AppendixLO1
What is the international monetary system?AppendixLO1
What is the difference between spot and forward exchange rates?AppendixLO1
What is the basic difference between floating and fixed exchange rates?AppendixLO1
Differentiate between devaluation/revaluation of a currency and depreciation/appreciation of a currency.AppendixLO1
What are the two broad categories of the various currency regimes? What are the subgroups of those two broad categories?AppendixLO1
Explain the difference between direct and indirect quotations.What is a cross rate?AppendixLO1
Assume that today 1 Canadian dollar is worth 0.75 U.S. dollar. How many Canadian dollars would you receive for 1 U.S. dollar?AppendixLO1
Assume that 1 U.S. dollar can be exchanged for 105 Japanese yen or for 0.80 euro. What is the euro/yen exchange rate?AppendixLO1
Suppose a U.S. firm must pay 200 million Swiss francs to a Swiss firm in 90 days.Briefly explain how the firm would use forward exchange rates to “lock in” the price of the payable due in 90
Using data in Table 17.3, if a U.S. firm entered into a 90-day forward contract, how many dollars would be required to honor the 200 million Swiss franc obligation when it is due?AppendixLO1
What is interest rate parity?AppendixLO1
Assume that interest rate parity holds. When a currency trades at a forward premium, what does that imply about domestic rates relative to foreign interest rates? When a currency trades at a forward
Assume that 90-day U.S. securities have a 3.5% annualized interest rate, whereas 90-day Canadian securities have a 4% annualized interest rate. In the spot market, 1 U.S. dollar can be exchanged for
On the basis of your answer to the previous question, is the Canadian dollar selling at a premium or discount on the forward rate?AppendixLO1
What is purchasing power parity?AppendixLO1
A television set sells for 1,000 U.S. dollars. In the spotmarket, $1 = 110 Japanese yen. If purchasing power parity holds, what should be the price (in yen) of the same television set in
Price differences in “similar” products in different countries often exist. What can explain those differences?AppendixLO1
What happens over time to the currencies of countries with higher inflation rates than U.S. inflation rates? To the currencies of countries with lower inflation rates?AppendixLO1
Why might a multinational corporation decide to borrow in a country such as Brazil, where interest rates are high, rather than in a country such as Switzerland, where interest rates are
What are the three major types of international credit markets?AppendixLO1
What is LIBOR?AppendixLO1
What are ADRs?AppendixLO1
What is country risk?AppendixLO1
What is exchange rate risk?AppendixLO1
On what two factors does the return on a foreign investment depend?AppendixLO1
What are the relevant cash flows for an international investment—the cash flows produced by the subsidiary in the country in which it operates or the cash flows in dollars that it sends to its
Why might the cost of capital for a foreign project differ from that of an equivalent domestic project? Could it be lower? Explain.AppendixLO1
What adjustments might be made to the domestic cost of capital for a foreign investment due to exchange rate risk, political risk, and country risk?AppendixLO1
KEY TERMS Define each of the following terms:a. Multinational, or global, corporationb. Vertically integrated investmentc. International monetary systemd. Exchange ratee. Freely floating regime;
CROSS RATES Suppose the exchange rate between the U.S. dollar and the EMU euro is€0 75=$1 00 and the exchange rate between the U.S. dollar and the Canadian dollar is$1 00=C$1 02. What is the cross
Why do U.S. corporations build manufacturing plants abroad when they can build them at home?AppendixLO1
If the euro depreciates against the U.S. dollar, can a dollar buy more or fewer euros as a result? Explain.AppendixLO1

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