Describe the term “indifference level” in conjunction with EBIT/eps analysis.
> Farrokh and Scheherezade Sharabianlou signed a purchase agreement to buy a building owned by Berenstein Associates for $2 million. They deposited $115,000 toward the purchase. Before the deal closed, an environmental assessment of the property indicated
> Claudia Aceves borrowed from U.S. Bank to buy a home. Two years later, she could no longer afford the monthly payments. The bank notified her that it planned to foreclose on her home. (Foreclosure is a process that allows a lender to repossess and sell t
> International Business Machines Corp. (IBM) hired Niels Jensen in 2000 as a software sales representative. According to the brochure on IBM’s “Sales Incentive Plan” (SIP), “the more you sell, the more earnings for you.” But “the SIP program does not cons
> The Smiths buy a house. They borrow 80 percent of the purchase price from the local ABC Savings and Loan. Before they make their first payment, ABC transfers the right to receive mortgage payments to Citibank. (a) The first group will outline what would
> Cyber crime costs consumers millions of dollars per year, and it costs businesses, including banks and other credit-card issuers, even more. Nonetheless, when cyber criminals are caught and convicted, they are rarely ordered to pay restitution or sentenc
> 1. Finance principles focus on an individual’s a. political and economic behavior. b. economic and social behavior. c. economic and ethical behavior. d. ethical and political behavior. 2. Which principle of finance is not an economic principle? a.
> 1. When did the “Great Recession” occur? a. 1999–2000 b. 2005–2006 c. 2007–2008 d. 2008–2009 2. The reasons for studying finance are to make informed a. economic, personal and business investment, and career decisions. b. political, economic, and
> 1. Finance is the study of how individuals, institutions, governments, and businesses a. acquire, spend, and manage money and other financial assets. b. spend and manage financial assets. c. acquire and spend money. d. acquire and manage money and re
> Visit a firm’s website and obtain historical quarterly balance sheet information from it or from its SEC EDGAR filings (www.walmart.com and www.walgreens.com may be two good sites to use). Record quarterly balance sheet data for several years in a spread
> Using the information below, compute the percentage returns for the following securities:
> Briefly describe how the financial environment has changed during the past few years.
> Briefly describe the terms entrepreneurial finance and personal finance.
> What are the three areas of finance?
> What is meant by the term financial environment?
> Briefly discuss the developments that led to the 2007-2008 financial crisis.
> 1. Which of the following does not appear on the income statement for a firm? a. Net cash flow b. Depreciation c. Gross profit d. Interest expense 2. Which of the following is also referred to as operating income? a. Earnings before interest b. Ea
> Describe how the cost of preferred stock is determined.
> How can a firm estimate its cost of debt financing?
> What is the relationship between a firm’s cost of capital and investor required rates of return?
> Following the Fed’s efforts to lower interest rates, what actions by investors increased their potential exposure to risk?
> How did the Fed’s loose money policies after the 2007-2009 recession affect investors?
> How have the Fed’s policies since the 2007-2009 recession affected corporate financing decisions?
> Corporate tax rates vary with the amount of taxable income. What currently is the range (lowest and highest) of corporate tax rates in the United States?
> What implications might the pecking order and market-timing hypotheses have for an optimal capital structure? Is the weighted average cost of capital still an important concept under these hypotheses?
> How do you expect the capital structures of two firms to differ if one is involved in steel production and the other does designs software to solve business problems?
> Why is it said that the personal-income-tax rate in the United States is progressive?
> 1. Which of these principles guide corporations in the creation of their public accounting statements? a. FINRA b. FASB c. GAAP d. SEC 2. How does the accrual concept affect financial statement data? a. Revenue and expenses are recognized when a s
> How do agency costs affect a firm’s optimal capital structure? How can differences in agency costs explain capital structure differences across countries?
> Assume that a corporation purchases a new piece of equipment for $90,000. The equipment qualifies for a three-year class life for depreciation purposes. a. What is the dollar amount of depreciation that can be taken in the first year? b. Determine the de
> Briefly describe the trends that have occurred in the corporate use of debt.
> Describe the reasoning behind the static tradeoff hypothesis.
> Assume a corporation earns $75,000 in pretax income. a. Determine the firm’s income tax liability. b. Calculate the firm’s average income tax rate.
> If a firm is eligible to receive tax credits, how might that affect its use of debt?
> How do corporate control concerns affect a firm’s capital structure?
> Find the annual depreciation expenses for the following items: a. Original cost is $35,000 for an asset in the three-year class. b. Original cost is $70,000 for an asset in the five-year class.
> Briefly explain how the factors of flexibility and timing affect the mix between debt and equity capital.
> What would the tax obligation be for a corporation with pretax earnings as shown below. What would be the personal tax obligation of a person filing her taxes under the “single” filing status if she had the above pretax income levels? a. $60,000 b. $150,
> 1. In which of the following ways does a proprietorship differ from a partnership? a. Number of owners b. Owner liability c. Liquidity of ownership d. Taxation 2. In what ways does a limited partnership differ from a corporation? a. Limited liabili
> Describe how the degree of combined leverage can be determined by the degrees of operating and financial leverage.
> Determine the marginal and average tax rates under the tax law for corporations with the following amounts of taxable income: a. $60,000 b. $150,000 c. $500,000
> What is meant by the degree of combined leverage?
> How might the following influences affect a firm’s financial risk (consider each separately)? a. Interest rates on the firm’s short-term bank loans are reduced b. The firm refinances a mortgage on one of its buildings at a lower interest rate c. Tax rate
> What is meant by the statement that depreciation provides a tax shield? Explain how this works.
> How might the following influences affect a firm’s business risk (consider each separately)? a. Imports increase the level of competition b. Labor costs decline c. Health care costs (provided for all employees) increase d. The firm’s proportion of social
> Briefly explain the concepts of business risk, operating leverage, and financial leverage in terms of an income statement.
> How is financial leverage created? Describe how the degree of financial leverage is calculated.
> Explain why determining a firm’s optimum debt/equity mix is important.
> Describe how a firm’s business risk can be measured and indicate how operating leverage impacts on business risk.
> 1. What are typical titles for a firm's top financial officers? a. Corporate financial officer, treasurer, controlling manager b. Chief financial officer, payroll, controller c. Controlling manager, chief bill payment officer, financial manager d. Co
> What is EBIT/eps analysis? What information does it provide managers?
> How does management’s strategies toward corporate growth and dividends affect its capital structure policy?
> A booming economy creates an unexpectedly high sales growth rate for a firm with a low internal growth rate. How can the firm respond to this unplanned sales increase?
> The management of Albar Incorporate has decided to increase the firm’s use of debt form 30 percent to 45 percent of assets. How will this affect its internal growth rate in the future? Its sustainable growth rate?
> Should book value weights or market value weights be used to evaluate a firm’s current capital structure weights? Why?
> What is the weighted average cost of capital? Describe how it is calculated.
> How does the cost of new common stock differ from the cost of retained earnings?
> Describe two methods for estimating the cost of retained earnings.
> What is a firm’s capital structure?
> 1. What is a mission or vision statement? a. Management’s plan for the year b. Statement of a firm’s main reason for being c. To be the best d. Written by the firm’s founders’ and is never changed 2. Why is a mission statement important to a firm?
> What is meant by a project’s net present value? How is it used for choosing between projects?
> What kinds of nonfinancial information are needed in order to conduct the analysis of a project?
> What kinds of financial data are needed in order to conduct the analysis of a project?
> Identify some capital budgeting considerations that are unique to multinational corporations.
> Briefly describe the five stages in the capita- budgeting process.
> Where do businesses find attractive capital-budgeting projects?
> How do “mutually exclusive” and “independent” projects differ?
> What is a risk-adjusted discount rate? How are risk-adjusted discount rates determined for individual projects?
> What is a way to keep managers accountable for their capital budgeting forecasts and estimates?
> Why is depreciation considered to be a “tax shield”?
> 1. According to the Capital Asset Pricing Model, which of the following is the market portfolio made up of? a. All assets b. All risky assets c. Shares of common stocks d. Stocks, bonds, and real estate 2. According to the Capital Asset Pricing Mod
> Why is the change in net working capital included in operating cash flow estimates?
> How is a project’s cash flow statement similar to that of a firm? How is it different?
> Classify each of the following as a sunk cost, an opportunity cost, or neither. a. The firm has spent $1 million thus far to develop the next-generation robotic arm; it is now examining whether the project should continue. b. A piece of ground owned by t
> Our bank will finance the product expansion project with at a loan interest rate of 10 percent. Make sure the project’s cash flow estimates include this interest expense.” Do you agree or disagree? Explain.
> Our firm owns property around Chicago that would be an ideal location for the new warehouse. And since we already own the land there isn’t any cash flow needed to purchase it.” Do you agree or disagree with this statement? Explain.
> Why is proper management of fixed assets crucial to the success of a firm?
> What types of cash flows are considered to be irrelevant when analyzing a project?
> Label each of the following as a cannibalization effect, enhancement effect, or neither. Explain your answers. a. A computer manufacturer seeks to produce a high quality engineering work station, thinking that consumers will believe the firm's standard P
> What are the three types of relevant cash flows to be considered in analyzing a project?
> How is the “stand-alone principle” applied when evaluating whether to invest in projects?
> 1. Systematic risk is _____________ and unsystematic risk is _____________. a. diversifiable, diversifiable b. un diversifiable, un diversifiable c. un diversifiable, diversifiable d. diversifiable, un diversifiable 2. What is total risk or portfol
> Why might managers want to use other techniques besides NPV to make capital budgeting decisions?
> Why do the NPV, IRR, and profitability index technique sometimes rank projects differently?
> Describe the payback period method for making capital budgeting decisions.
> Describe the term “profitability index” and explain how it is used to compare projects.
> How does the modified internal rate of return measure improve upon the IRR measure?
> Identify the internal rate of return method and describe how it is used in making capital budgeting decisions.
> What is meant by capital budgeting? Briefly describe some characteristics of capital budgeting.
> Explain how discounting and compensating balances affect the effective cost of financing.
> Explain what a bank line of credit is.
> What is meant by an unsecured loan? Are these loans an important form of bank lending?
> 1. In the context of investing, what is a portfolio? a. A briefcase full of legal papers b. A collection of your personal art work c. Any combination of financial assets or investments d. A plan for investing as you grow older 2. The expected retur
> Prepare a list of advantages and disadvantages of short-term bank borrowing relative to other short-term financing sources.
> What influences affect the nature of the demand for short-term versus long-term funds?
> Explain how a conservative approach to financing a firm’s assets is a low risk/low expected return strategy whereas an aggressive approach to financing is a high risk/high expected return strategy.
> Explain the strategies businesses can use to finance their assets with short-term and long-term funds.
> When a business firm uses its inventory as collateral for a bank loan, how is the problem of storing and guarding the inventory accomplished for the bank?
> Why would a business use the services of a factor?
> Describe how a factor differs from a commercial finance company in terms of accounts-receivable financing.
> What is meant by “permanent” current assets? How do “temporary” current assets differ from permanent current assets?
