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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

Explain how a financial manager might estimate his or her firm’s optimal capital budget.
What is capital rationing? What types of firms might encounter capital rationing?
In terms of Figure 13.5, how would an event such as the credit crisis of 2008, where interest rates for many corporate borrowers climbed quite high, affect the size of the capital budget?Figure 13.5
What is done in the post-audit?
Identify several benefits of the post-audit.
What are some factors that complicate the post-audit process?
Define each of the following terms:a. Real option; option valueb. Growth option; abandonment optionc. Investment timing option; flexibility optiond. Marginal cost of capital; IRR schedulee. Optimal
firm is considering a project with the following after-tax cash flows:You learn that the firm can abandon the project, if it so chooses, after 1 year of operation, in which case it can sell the asset
Harmon Corporation has four potential projects: M, N, O, and P.Projects O and P are mutually exclusive. The table provides the required investment and NPV for each project.Using the information in
Use a spreadsheet model to evaluate the project analyzed in Problem 13-8.Problem 13-8Enterprises is considering buying a vacant lot for an after-tax cost of $1.4 million. If the property is
Define the terms “book-value capital structure,” “market-value capital structure,” and“target capital structure,” and explain why they differ from one another.
Would the market-value debt ratio tend to be higher than the book-value debt ratio during a stock market boom or a recession? Explain.
Why would the WACC based on market values tend to be higher than the one based on book values if the stock price exceeded its book value?
Which would you expect to be more stable over time, a firm’s book-value or marketvalue capital structure? Explain.
What is business risk, and how can it be measured?
Why does business risk vary from industry to industry?
How does operating leverage affect business risk?
What is financial risk, and how does it arise?
Explain this statement: Using financial leverage has both good and bad effects.
What happens to the component costs of debt and equity when the debt ratio is increased? Why does this occur?
Using the Hamada equation, explain the effects of financial leverage on beta.
What is the equation for calculating a firm’s unlevered beta?
What would be the cost of equity for Firm X at Equity/Capital ratios of 1.0 (no debt)and 0.58 assuming that rRF = 5% and RPM = 4%?Use the Hamada equation to calculate the unlevered beta for Firm X
Using a graph and illustrative data, discuss the premiums for financial risk and business risk at different debt levels. Do these premiums vary depending on the debt level? Explain.Is expected EPS
Why does MM’s theory with taxes lead to 100% debt?
How would an increase in corporate taxes tend to affect an average firm’s capital structure? What about an increase in the personal tax rate?
Explain what asymmetric information means, and how signals affect capital structure decisions.
What is meant by reserve borrowing capacity, and why is it important to firms?
How can the use of debt serve to discipline managers?
What is the pecking order hypothesis, and how does it influence firms’ capital structures?
How do “windows of opportunity” impact a firm’s capital structure?
How does sales stability affect the target capital structure?
How do the types of assets used affect a firm’s capital structure?
How do taxes affect the target capital structure?
How do the attitudes of lenders and rating agencies affect capital structure?
How does the firm’s internal condition affect its actual capital structure?
What is financial flexibility, and is it increased or decreased by a high debt ratio?Explain.
Why do wide variations in the use of financial leverage occur across industries and among individual firms in each industry?
What is the likely impact of the TCJA on the average company’ capital structure?
Define each of the following terms:a. Capital; capital structure; optimal capital structureb. Business risk; financial riskc. Financial leverage; operating leverage; operating breakevend. Hamada
Olinde Electronics Inc. produces stereo components that sell at P = $100 per unit. Olinde’s fixed costs are $200,000, variable costs are $50 per unit, 5,000 components are produced and sold each
Carlisle Industries is trying to determine its optimal capital structure, which now consists of only common equity. The firm will add debt to its capital structure if it minimizes its WACC, but the
a. Given the following information, calculate the expected value for Firm C’s EPS. Data for Firms A and B are as follows: E(EPSA) = $5.10, σA = $3.61, E(EPSB) 5 $4.20, andσB = $2.96. Firm A: EPS
Hartman Motors has $18 million in assets, which were financed with$6 million of debt and $12 million in equity. Hartman’s beta is currently 1.3, and its tax rate is 25%. Use the Hamada equation to
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 of EBIT, and is in the 25%
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 only common equity, it has
Situational Software Co. (SSC) 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 should
The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2022. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds
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
OptIMaL CapItaL strUCtUre Assume that you have just been hired as business manager of Campus Deli (CD), which is located adjacent to the campus. Sales were $1,100,000 last year, variable costs were
This chapter provides an overview of the effects of leverage and describes the process that firms use to determine their optimal capital structure. The chapter also indicates that capital structures
Explain briefly the ideas behind the dividend irrelevance theory.
What did Modigliani and Miller assume about taxes and brokerage costs when they developed their dividend irrelevance theory?
Why did MM refer to the Gordon–Lintner dividend argument as the bird-in-the-hand fallacy?
Why do some investors prefer high-dividend-paying stocks?
Why might other investors prefer low-dividend-paying stocks?
Define (1) information content and (2) the clientele effect, and explain how they affect dividend policy.
What is catering theory, and how does it impact a firm’s dividend policy?
Explain the logic of the residual dividend model, the steps a firm would take to implement it, and the reason it is more likely to be used to establish a long-run payout target than to set the actual
How do firms use long-run planning models to help set dividend policy?
Which are more critical to the dividend decision, earnings or cash flow? Explain.
Explain the procedures used to actually pay the dividend.
What is the ex-dividend date, and why is it important to investors?
A firm has a capital budget of $30 million, net income of $35 million, and a target capital structure of 45% debt and 55% equity. If the residual dividend policy is used, what is the firm’s
What are dividend reinvestment plans?
What are dividend reinvestment plans. What are their advantages and disadvantages from both stockholders’ and firms’ perspectives?
Identify the four broad sets of factors that affect dividend policy.
What constraints affect dividend policy?
How do investment opportunities affect dividend policy?
How does the availability and cost of outside capital affect dividend policy?
What are stock dividends and stock splits?
How do stock dividends and splits affect stock prices?
In what situation should a firm pay a stock dividend?
In what situation should a firm split its stock?
Suppose you have 100 common shares of Tillman Industries. The EPS is $4.00, the DPS is $2.00, and the stock sells for $60 per share. Now Tillman announces a twofor-one split. Immediately after the
Explain how repurchases can (1) help stockholders limit taxes and (2) help firms change their capital structures.
What are three procedures a firm can use to repurchase its stock?
What are some advantages and disadvantages of stock repurchases?
How can stock repurchases help a company operate in accordance with the residual dividend model?
Define each of the following terms:a. Target payout ratio; optimal dividend policyb. Dividend irrelevance theory; bird-in-the-hand fallacyc. Information content (signaling) hypothesis; clienteles;
Components Manufacturing Corporation (CMC) has an all-common-equity capital structure. It has 200,000 shares of $2 par value common stock outstanding. When CMC’s founder, who was also its research
Discuss the pros and cons of having the directors formally announce a firm’s future dividend policy.
Coastal Carolina Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 45% with a $20
Brooks Sporting Inc. is prepared to report the following 2021 income statement(shown in thousands of dollars).Prior to reporting this income statement, the company wants to determine its annual
Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $0.75 out of annual earnings per share of $2.25. Currently, Rubenstein Bros.’ stock is selling for $12.50 per share.
In 2020, Keenan Company paid dividends totaling$3,600,000 on net income of $10.8 million. Note that 2020 was a normal year and that for the past 10 years, earnings have grown at a constant rate of
In this chapter’s opening vignette, we discussed Apple’s decision to establish a dividend payout policy in 2012 and the establishment of a share repurchase program that has returned $200 billion
How did the term working capital originate?
Differentiate between working capital and net working capital.
Differentiate between net working capital and net operating working capital.
Identify and explain three alternative current assets investment policies.
Use the DuPont equation to show how working capital policy affects a firm’s expected ROE.
Differentiate between permanent current assets and temporary current assets.
What does maturity matching mean, and what is the advantage of this financing policy?
What are the advantages and disadvantages of short-term versus long-term debt as identified in this section?
How would a reduction in the cash conversion cycle increase profitability?
What are some actions a firm can take to shorten its cash conversion cycle?
How could the cash budget be used when the terms of a bank loan are negotiated?
Suppose a firm’s cash flows do not occur uniformly throughout the month. What effect would this have on the accuracy of the forecasted borrowing requirements based on a monthly cash budget? How
What two definitions of cash are commonly encountered?

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