How do financial managers calculate the average tax rate?
> Explain how a firm determines the optimal level of current assets.
> Explain the bird in the hand theory of cash dividends.
> What is the Modigliani and Miller theory of dividends? Explain.
> What are some of the factors that common stockholders consider when deciding how much, if any, cash dividends they desire from the corporation in which they have invested?
> Are there any legal factors that could restrict a corporation in its attempt to pay cash dividends to common stockholders? Explain.
> Explain the role of cash and of earnings when a corporation is deciding how much, if any, cash dividends to pay to common stockholders.
> Explain how earnings available to common stockholders and common stock dividends paid from the current income statement affect the balance sheet item retained earnings.
> Under what circumstances is a warrant’s value high? Explain.
> Explain why warrants are rarely exercised unless the time to maturity is small?
> How does a preemptive right protect the interests of existing stockholders?
> What does an investment banker do when underwriting a new security issue for a corporation?
> What are the advantages and the disadvantages of a new stock issue?
> How are the members of the board of directors of a corporation chosen and to whom do these board members owe their primary allegiance?
> What are some of the government requirements imposed on a public corporation that are not imposed on a private, closely held corporation?
> How does a mortgage bond compare to a debenture?
> What is a callable bond? What is a puttable bond? How do each of these features affect their respective market interest rates?
> If a convertible bond has a conversion ratio of 20, a face value of $1,000, a coupon rate of 8 percent, and the market price for the company’s stock is $15 per share, what is the convertible bond’s conversion value?
> Which ratios would a potential long-term bond investor be most interested in? Explain. Answer Current and potential lenders of long-term funds, such as banks and bondholders, are interested in debt ratios. When a business's debt ratios increase signifi
> What are some examples of restrictive covenants that might be specified in a bond’s indenture?
> How does a sinking fund function in the retirement of an outstanding bond issue?
> Give two examples of types of companies likely to have high operating leverage.
> Does high operating leverage always mean high business risk? Explain.
> Why is the replacement value of assets method not generally used to value complete businesses?
> All other things held constant, how would the market price of a bond be affected if coupon interest payments were made semiannually instead of annually?
> Describe the general pattern of cash flows from a bond with a positive coupon rate.
> How financing costs are generally incorporated into the capital budgeting analysis process?
> What role does depreciation play in estimating incremental cash flows?
> How do we estimate expected incremental cash flows for a proposed capital budgeting project?
> What are the characteristics of an efficient market?
> What is a sunk cost? Is it relevant when evaluating a proposed capital budgeting project? Explain.
> Why do we focus on cash flows instead of profits when evaluating proposed capital budgeting projects?
> What is the decision rule for accepting or rejecting proposed projects when using internal rate of return?
> What is the decision rule for accepting or rejecting proposed projects when using net present value?
> How does the net present value relate to the value of the firm?
> Explain why we measure a project’s risk as the change in the CV.
> Explain how to measure the firm risk of a capital budgeting project.
> For a given IOS and MCC, how do financial managers decide which proposed capital budgeting projects to accept, and which to reject?
> How do tax considerations affect the cost of debt and the cost of equity?
> What does the “weight” refer to in the weighted average cost of capital?
> What is the time value of money?
> When a company issues new securities, how do flotation costs affect the cost of raising that capital?
> Which is lower for a given company: the cost of debt or the cost of equity? Explain. Ignore taxes in your answer.
> What is an annuity?
> How is present value affected by a change in the discount rate?
> How do risk-averse investors compensate for risk when they take on investment projects?
> Compare diversifiable and non-diversifiable risk. Which do you think is more important to financial managers in business firms?
> What happens to the riskiness of a portfolio if assets with very low correlations (even negative correlations) are combined?
> What action(s) should be taken if analysis of pro forma financial statements reveals positive trends? Negative trends?
> Why are trend analysis and industry comparison important to financial ratio analysis?
> What are financial markets? Why do they exist?
> One of the implicit assumptions we made in calculating the external funds needed was that the company was operating at full capacity. If the company is operating at less than full capacity, how will this affect the external funds needed?
> In the context of the dividend growth model, is it true that the growth rate in dividends and the growth rate in the price of the stock are identical?
> What does it mean to say that a proposed merger will take advantage of available economies of scale? Suppose Eastern Power Co. and Western Power Co. are located in different time zones. Both operate at 60 percent of capacity except for peak periods, when
> Suppose a firm has a book balance of $2 million. At the automatic teller machine (ATM), the cash manager finds out that the bank balance is $2.5 million. What is the situation here? If this is an ongoing situation, what ethical dilemma arises?
> A put option that expires in six months with an exercise price of $65 sells for $4.89. The stock is currently priced at $61, and the risk-free rate is 3.6 percent per year, compounded continuously. What is the price of a call option with the same exercis
> What is a proxy?
> What are the implications of the efficient market hypothesis for investors who buy and sell stocks in an attempt to “beat the market”?
> What is the relationship between the one-factor model and the CAPM?
> Why is it not necessarily bad for the cash flow from assets to be negative for a particular period?
> If the risk of a stock increases, what is likely to happen to the price of call options on the stock? To the price of put options? Why?
> Evan, Inc., has offered $340 million cash for all of the common stock in Tanner Corporation. Based on recent market information, Tanner is worth $317 million as an independent operation. If the merger makes economic sense for Evan, what is the minimum es
> Why would TMCC be willing to accept such a small amount today ($24,099) in exchange for a promise to repay about four times that amount ($100,000) in the future?
> Miller Manufacturing has a target debt–equity ratio of .55. Its cost of equity is 14 percent, and its cost of debt is 7 percent. If the tax rate is 35 percent, what is Miller’s WACC?
> Bell Tolls, Inc., has an average collection period of 36 days. Its average daily investment in receivables is $58,300. What are annual credit sales? What is the receivables turnover?
> Which would a firm prefer: A net collection float or a net disbursement float? Why?
> What is wrong with the simple view that it is cheaper to issue a bond with a warrant or a convertible feature because the required coupon is lower?
> A stock is currently selling for $38 per share. A call option with an exercise price of $40 sells for $3.80 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, compounded continuously, what is the price of a put option
> If a market is semi strong form efficient, is it also weak form efficient? Explain.
> On subsidized Stafford loans, a common source of financial aid for college students, interest does not begin to accrue until repayment begins. Who receives a bigger subsidy, a freshman or a senior? Explain. Use the following information to answer the nex
> You notice that shares of stock in the Patel Corporation are going for $50 per share. Call options with an exercise price of $35 per share are selling for $10. What’s wrong here? Describe how you can take advantage of this mispricing if the option expire
> Is it possible for a firm to have too much cash? Why would shareholders care if a firm accumulates large amounts of cash?
> Would the goal of maximizing the value of the stock differ for financial management in a foreign country? Why or why not?
> At one point, Duracell International confirmed that it was planning to open battery manufacturing plants in China and India. Manufacturing in these countries allows Duracell to avoid import duties of between 30 and 35 percent that have made alkaline batt
> What is the difference between liquidation and reorganization?
> Are poison pills good or bad for stockholders? How do you think acquiring firms are able to get around poison pills?
> Why is a preferred stock with a dividend tied to short-term interest rates an attractive short-term investment for corporations with excess cash?
> Your company owns a vacant lot in a suburban area. What is the advantage of waiting to develop the lot?
> A stock market analyst is able to identify mispriced stocks by comparing the average price for the last 10 days to the average price for the last 60 days. If this is true, what do you know about the market?
> Mullineaux Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 13 percent, and the cost of debt is 6 percent. The relevant tax rate is 35 percent. What is Mullineaux’s WACC?
> What are the differences between a k -factor model and the market model?
> If a portfolio has a positive investment in every asset, can the standard deviation on the portfolio be less than that on every asset in the portfolio? What about the portfolio beta?
> What are some of the characteristics of a firm with a long operating cycle?
> Look at Table 10.1 and Figure 10.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2011? Why do you think they were so high during this period? What relationship underlies your answer? Table 10.1 Figure 10.7 Larg
> Suppose a company has a preferred stock issue and a common stock issue. Both have just paid a $2 dividend. Which do you think will have a higher price, a share of the preferred or a share of the common?
> Should lending laws be changed to require lenders to report EARs instead of APRs? Why or why not?
> What is the intrinsic value of a call option? Of a put option? How do we interpret these values?
> Treasury bid and ask quotes are sometimes given in terms of yields, so there would be a bid yield and an ask yield. Which do you think would be larger? Explain.
> Critically evaluate the following statement: Playing the stock market is like gambling. Such speculative investing has no social value, other than the pleasure people get from this form of gambling.
> Are exchange rate changes necessarily good or bad for a particular company?
> Why doesn’t financial distress always cause firms to die?
> Tidwell, Inc., has weekly credit sales of $27,500, and the average collection period is 27 days. The cost of production is 75 percent of the selling price. What is the average accounts receivable figure?
> What is the primary difference between a warrant and a traded call option?
> What is the difference between cash management and liquidity management?
> Assets Grohl Manufacturing, Inc., has recently installed a justin- time (JIT) inventory system. Describe the effect this is likely to have on the company’s carrying costs, shortage costs, and operating cycle.
> You are determining whether your company should undertake a new project and have calculated the NPV of the project using the WACC method when the CFO, a former accountant, notices that you did not use the interest payments in calculating the cash flows o
> What is the quirk in the tax code that makes a levered firm more valuable than an otherwise identical unlevered firm?
> True or false: The most important characteristic in determining the expected return of a well-diversified portfolio is the variances of the individual assets in the portfolio. Explain.
> Looking at the accounting statement of cash flows, what does the bottom line number mean? How useful is this number for analyzing a company?
> You own a portfolio that is 25 percent invested in Stock X , 40 percent in Stock Y , and 35 percent in Stock Z . The expected returns on these three stocks are 11 percent, 17 percent, and 14 percent, respectively. What is the expected return on the portf
> With regard to bid and ask prices on a Treasury bond, is it possible for the bid price to be higher? Why or why not?
