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 PC products will also be of higher quality. b. An airline offers taxicab service to and from the airport. c. A gas station adds service bays and a small convenience store. d. A mainframe computer manufacturer begins to sell personal computers. e. A snack food manufacturer starts marketing a new line of fat-free snacks. f. A firm seeks to export its products to foreign countries.
> 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
> Describe the term “indifference level” in conjunction with EBIT/eps analysis.
> 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?
> 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?
> What safeguards may a bank establish to protect itself when it lends on the basis of a customer’s receivables pledged as collateral for a loan?
> When might a business seek accounts receivable financing?
> 1. An efficient market has which of the following characteristics? a. New information causes a quick price change followed by smaller price changes as the market adjusts. b. New information causes a large price change followed by price changes in the o
> Is commercial paper a reliable source of financing? Why or why not?
> What is commercial paper and how important is it as a source of financing?
> Under what circumstances would a business secure its financing through a commercial finance company?
> What are the primary reasons for using trade credit for short-term financing?
> What is meant by trade credit? Briefly describe some of the possible terms for trade credit.
> What is the JOBS Act and what is its purpose?
> How does the Small Business Administration provide financing to businesses?
> Describe the revolving credit agreement and compare it with the bank line of credit.
> What is meant by net working capital? Briefly describe the financing implications when net working capital is positive.
> Why might firms want to maintain minimum desired cash balances?
> 1. The long-term average effect of the real risk-free rate of return and inflation expectations is seen in what number in Table 12.4? a. 3.07 percent b. 3.11 percent c. 3.58 percent d. 5.23 percent 2. The statement that “risk drives expected return
> 1. A loan backed by real property in the form of buildings and houses is called a(n) a. mortgage loan b. equity loan c. stock loan d. corporate loan 2. A debt security created by pooling together a group of mortgage loans whose periodic payments be
> Three sets of information are needed to construct a cash budget. Explain what they are.
> What is a cash budget? How does the treasurer use forecasts of cash surpluses and cash deficits?
> What affects the amount of financing provided by accounts payable as viewed in terms of the cash conversion cycle?
> Explain how the length of the operating cycle affects the amount of funds invested in accounts receivable and inventories.
> Describe how the length of the cash conversion cycle is determined.
> How is technology changing inventory management?
> How is technology affecting cash management? Order processing?
> What is JIT II?
> What are the benefits to the firm of reducing working capital?
> How is the financial manager involved in the management of inventories?
> 1. What must the probabilities of the different states of nature sum to? a. 0.0 b. 1.0 c. 100.0 d. -1.0 2. How is the expected return computed? a. By multiplying the probability of each state of nature with its return and add them together b. By
> How do credit terms and collection efforts affect the investment in accounts receivable?
> What risks arise when a firm lowers its credit standards to try to increase sales volume?
> How can a firm control the risk of changing exchange rates when billing an overseas customer?
