Briefly describe the following theories of the general shape of the yield curve: (a) expectations theory, (b) liquidity preference theory, and (c) market segmentation theory.
> Rimier Corp. forecasts sales of $650,000 for 2020. Assume that the firm has fixed costs of $250,000 and variable costs amounting to 35% of sales. Operating expenses are estimated to include fixed costs of $28,000 and a variable portion equal to 7.5% of s
> What is the financial manager’s goal in selecting investment projects for the firm? Define the capital budgeting process, and explain how it helps managers achieve their goal.
> How would you calculate the cost of preferred stock?
> What is an efficient portfolio? How can the return and standard deviation of a portfolio be determined?
> What methods can be used to find the before-tax cost of debt?
> What are the net proceeds from the sale of a bond? What are flotation costs, and how do they affect a bond’s net proceeds?
> What are the typical sources of long-term capital available to the firm?
> What does the firm’s capital structure represent?
> What role does the cost of capital play in the firm’s long-term investment decisions? How does it relate to the firm’s ability to maximize shareholder wealth?
> What is the weighted average cost of capital (WACC), and how is it calculated?
> Why is the cost of financing a project with retained earnings less than the cost of financing it with a new issue of common stock?
> During the year, Xero Inc. experienced an increase in net fixed assets of $300,000 and had depreciation of $200,000. It also experienced an increase in current assets of $150,000 and an increase in accounts payable and accruals of $75,000. If operating c
> What premise about share value underlies the constant-growth valuation (Gordon growth) model that we use to measure the cost of common stock equity, rs?
> What is risk in the context of financial decision making?
> Why is the correlation between asset returns important? How does diversification allow risky assets to be combined so that the risk of the portfolio is less than the risk of the individual assets in it?
> What does the coefficient of variation reveal about an investment’s risk that the standard deviation does not?
> What relationship exists between the size of the standard deviation and the degree of asset risk?
> What does a plot of the probability distribution of outcomes show a decision maker about an asset’s risk?
> Explain how the range is used in scenario analysis.
> Compare the following risk preferences: (a) risk averse, (b) risk neutral, and (c) risk seeking. Which risk preference is most common among financial managers? What is the difference between risk aversion and risk tolerance?
> Define return, and describe how to find the total rate of return on an investment.
> Define and specify the general equation for the value of any asset, V0.
> Determine the operating cash flow (OCF) for Kleczka Inc., based on the following data. (All values are in thousands of dollars.) During the year the firm had sales of $2,500, cost of goods sold totaled $1,800, operating expenses totaled $300, and depreci
> What impact would the following changes have on the security market line and therefore on the required return for a given level of risk? (a) An increase in inflationary expectations. (b) Investors become less risk averse.
> Explain the meaning of each variable in the capital asset pricing model (CAPM) equation. What is the security market line (SML)?
> What risk does beta measure? How can you find the beta of a portfolio?
> How are total risk, non diversifiable risk, and diversifiable risk related? Why is non diversifiable risk the only relevant risk?
> How does international diversification enhance risk reduction? When might international diversification result in subpar returns? What are political risks, and how do they affect international diversification?
> What does the efficient-market hypothesis (EMH) say about (a) securities prices, (b) their reaction to new information, and (c) investor opportunities to profit? What is the behavioral finance challenge to this hypothesis?
> Describe the events that occur in an efficient market in response to new information that cause the expected return to exceed the required return. What happens to the market value?
> Explain the cumulative feature of preferred stock. What is the purpose of a call feature in a preferred stock issue?
> What claims do preferred stockholders have with respect to distribution of earnings (dividends) and assets?
> What are the advantages to both U.S.-based and foreign corporations of issuing stock outside their home markets? What are American depositary receipts (ADRs)? What are American depositary shares (ADSs)?
> Classify the following changes in each of the accounts as either an inflow or an outflow of cash. During the year (a) marketable securities increased, (b) land and buildings decreased, (c) accounts payable increased, (d) vehicles decreased, (e) accounts
> Explain the relationships among authorized shares, outstanding shares, treasury stock, and issued shares.
> How does a rights offering protect a firm’s stockholders against the dilution of ownership?
> What risks do common stockholders take that other suppliers of capital do not?
> Assuming that all other variables remain unchanged, what effect would each of the following have on stock price? (a) The firm’s risk premium increases. (b) The firm’s required return decreases. (c) The dividend expected next year decreases. (d) The growt
> Explain the linkages among financial decisions, return, risk, and stock value.
> Explain each of the three other approaches to common stock valuation: (a) book value, (b) liquidation value, and (c) P/E multiples. Which of them is considered the best?
> Describe the free cash flow valuation model, and explain how it differs from the dividend valuation models. What is the appeal of this model?
> Describe, compare, and contrast the following common stock dividend valuation models: (a) zero-growth, (b) constant-growth, and (c) variable-growth.
> What are the key differences between debt and equity?
> What is a conversion feature? A call feature? What are stock purchase warrants?
> The installed cost of a new computerized controller was $65,000. Calculate the depreciation schedule by year assuming a recovery period of 5 years and using the appropriate MACRS depreciation percentages .
> How is the cost of bond financing typically related to the cost of short term borrowing? In addition to the maturity of a bond, what other major factors affect its cost to the issuer?
> Differentiate between standard debt provisions and restrictive covenants included in a bond indenture. What are the consequences if a bond issuer violates any of these covenants?
> What are typical maturities, denominations, and interest payments of a corporate bond? What mechanisms protect bondholders?
> List and briefly describe the potential issuer- and issue-related risk components that are embodied in the risk premium. Which are the purely debt-specific risks?
> For a given class of similar-risk securities, what does each of the following yield curves reflect about interest rates: (a) downward sloping, (b) upward sloping, and (c) flat? What is the “normal” shape of the yield curve?
> What is the term structure of interest rates, and how is it related to the yield curve?
> Does the valuation process apply only to assets that provide an annual cash flow? Explain
> What are the three key inputs to the valuation process?
> Why is it important for financial managers to understand the valuation process?
> If we know that a firm has a net profit margin of 4.5%, total asset turnover of 0.72, and a financial leverage multiplier of 1.43, what is its ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings
> Compare the basic characteristics of Eurobonds and foreign bonds.
> What is the current yield for a bond? How are bond prices quoted? How are bonds rated, and why?
> What is the real rate of interest? Differentiate it from the nominal rate of interest.
> It is never too soon to begin investing for a child’s college education. Using the information provided at MyLab Finance, determine the present value you would need to invest today to ensure that your child receives the college education she deserves.
> It is tax time and you would like to make a tax-deductible contribution to an individual retirement account (IRA). Using the information provided at MyLab Finance, find the future value of an IRA contribution that grows until you retire.
> How are present value and future value calculations related?
> What effect does increasing the required return have on the present value of a future amount? Why?
> What is meant by “the present value of a future amount”? What is the general equation for present value?
> What effect would a decrease in the interest rate have on the future value of a deposit? What effect would an increase in the holding period have on future value?
> How is the compounding process related to the payment of interest on savings? What is the general equation for future value?
> Bluestone Metals Inc. is a metal fabrication firm that manufactures prefabricated metal parts for customers in a variety of industries. The firm’s motto is “If you need it, we can make it.” The CEO of
> What effect does compounding interest more frequently than annually have on (a) future value and (b) the effective annual rate (EAR)? Why?
> Define and differentiate among the three basic patterns of cash flow: (1) a single amount, (2) an annuity, and (3) a mixed stream.
> What are the two basic weaknesses of the simplified approaches to preparing pro forma statements?
> How do you calculate the future value of a mixed stream of cash flows? How do you calculate the present value of a mixed stream?
> Describe the judgmental approach for simplified preparation of the pro forma balance sheet.
> Why does the presence of fixed costs lead to errors in a pro forma income statement constructed using the percent-of-sales method? What is a better method?
> Because tax time comes around every year, you smartly decide to make equal contributions to your IRA at the end of every year. Using the information provided at MyLab Finance, calculate the future value of your IRA contributions when you retire.
> What is a perpetuity? Why is the present value of a perpetuity equal to the annual cash payment divided by the interest rate? Why doesn’t this chapter provide an equation showing you how to calculate the future value of a perpetuity?
> What is the cause of uncertainty in the cash budget, and what two techniques can be used to cope with this uncertainty?
> How can the formula for the future value of an annuity be modified to find the future value of an annuity due?
> Cooper Industries Inc. began 2019 with retained earnings of $25.32 million. During the year, it paid four quarterly dividends of $0.35 per share to 2.75 million common stockholders. Preferred stockholders, holding 500,000 shares, were paid two semiannua
> Assume that the Mexican peso currently trades at 12 pesos to the U.S. dollar. During the year, U.S. inflation is expected to average 3%, while Mexican inflation is expected to average 5%. What is the current value of one peso in terms of U.S. dollars? Gi
> What are the most efficient ways to calculate the present value of an ordinary annuity?
> What is the difference between an ordinary annuity and an annuity due? Which is more valuable? Why?
> What is the difference between future value and present value? Which approach is generally preferred by financial managers?
> Define and differentiate between a firm’s operating cash flow (OCF) and its free cash flow (FCF).
> Why do we exclude interest expense from operating cash flow?
> Describe the general format of the statement of cash flows. How are cash inflows differentiated from cash outflows on this statement?
> Why is depreciation (as well as amortization and depletion) considered a noncash charge?
> Explain why a decrease in cash is classified as a cash inflow (source) and why an increase in cash is classified as a cash outflow (use) in preparing the statement of cash flows.
> Describe the overall cash flow through the firm in terms of cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities.
> Briefly describe the first four modified accelerated cost recovery system (MACRS) property classes and recovery periods. Explain how the depreciation percentages are determined by using the MACRS recovery periods.
> Explain why the income statement can also be called a “profit-and-loss statement.” What exactly does the word balance mean in the title of the balance sheet? Why do we balance the two halves?
> What are the main types of decisions that financial managers make?
> Is maximizing shareholder wealth inconsistent with having concern for the welfare of a firm’s other stakeholders?
> What is risk? Why must financial managers consider risk as well as return when they evaluate a decision alternative or action?
> How can the firm structure management compensation to minimize agency problems?
> Define agency problems, and describe how they give rise to agency costs. Explain how a firm’s corporate governance structure can help avoid agency problems.
> What does it mean to say that corporations face a double taxation problem?
> What is the financial manager’s objective in evaluating pro forma statements?
> Which three statements result as part of the short-term (operating) financial planning process?
> What is the significance of the “plug” figure, external financing required? Differentiate between strategies associated with positive values and with negative values for external financing required.
> How is the percent-of-sales method used to prepare pro forma income statements?
> You are a summer intern at the office of a local tax preparer. To test your basic knowledge of financial statements, your manager gives you the following list of accounts and asks you to prepare a simple income statement using those accounts. a. Arrang
