Question: Why is the use of debt financing

> In the context of capital budgeting, what is an opportunity cost?

> Do you think the company would have suffered the same fate if its product had been less popular? Why or why not?

> Porsche was one of the last manufacturers to enter the sports utility vehicle market. Why would one company decide to proceed with a product when other companies, at least initially, decide not to enter the market?

> Porsche was one of the last manufacturers to enter the sports utility vehicle market. Why would one company decide to proceed with a product when other companies, at least initially, decide not to enter the market?

> What factors influence a firm’s choice of external versus internal equity financing?

> Another option usually available is to reduce the firm’s outstanding debt. What are the advantages and disadvantages of this use of excess cash?

> Referring back to the Bank of America example at the beginning of the chapter, note that we suggested that Bank of America’s stockholders probably didn’t suffer as a result of the reported loss. What do you think was the basis for our conclusion?

> Suppose a firm enters a fixed for floating interest rate swap with a swap dealer. Describe the cash flows that will occur as a result of the swap.

> Nina Corp. uses no debt. The weighted average cost of capital is 9 percent. If the current market value of the equity is $37 million and there are no taxes, what is EBIT?

> You own a stock portfolio invested 10 percent in Stock Q , 35 percent in Stock R , 20 percent in Stock S , and 35 percent in Stock T . The betas for these four stocks are .75, 1.90, 1.38, and 1.16, respectively. What is the portfolio beta?

> Looking back at the crossover bonds we discussed in the chapter, why do you think split ratings such as these occur?

> In the context of capital budgeting, what is an opportunity cost?

> In evaluating the Cayenne, would you consider the possible damage to Porsche’s reputation as erosion?

> In evaluating the Cayenne, would you consider the possible damage to Porsche’s reputation as erosion?

> Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.

> If you are an exporter who must make payments in foreign currency three months after receiving each shipment and you predict that the domestic currency will appreciate in value over this period, is there any value in hedging your currency exposure?

> One option a firm usually has with any excess cash is to pay its suppliers more quickly. What are the advantages and disadvantages of this use of excess cash?

> Is it ethical for large firms to unilaterally lengthen their payables periods, particularly when dealing with smaller suppliers?

> What is the basic goal of financial management with regard to capital structure?

> What is the difference between internal financing and external financing?

> What is wrong with measuring the performance of a U.S. growth stock manager against a benchmark composed of British stocks?

> Could a company’s cash flow to stockholders be negative in a given year? Explain how this might come about. What about cash flow to creditors?

> Suppose the interest rate on T-bills suddenly and unexpectedly rises. All other things being the same, what is the impact on call option values? On put option values?

> What is the difference between the term structure of interest rates and the yield curve?

> Suppose that when TMCC offered the security for $24,099 the U.S. Treasury had offered an essentially identical security. Do you think it would have had a higher or lower price? Why?

> Is it unfair or unethical for corporations to create classes of stock with unequal voting rights?

> We discussed five international capital market relationships: Relative PPP, IRP, UFR, UIP, and the international Fisher effect. Which of these would you expect to hold most closely? Which do you think would be most likely to be violated?

> Suppose a company in which you own stock has attracted two take over offers. Would it ever make sense for your company’s management to favor the lower offer? Does the form of payment affect your answer at all?

> If a company’s inventory carrying costs are $5 million per year and its fixed order costs are $8 million per year, do you think the firm keeps too much inventory on hand or too little? Why?

> No More Pencils, Inc., disburses checks every two weeks that average $58,000 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an interest-bearing account that pays .015 percent per day for

> It is sometimes argued that excess cash held by a firm can aggravate agency problems and, more generally, reduce incentives for shareholder wealth maximization. How would you describe the issue here?

> What impact did the announcement have on BlueSky’s suppliers?

> As you increase the length of time involved, what happens to future values? What happens to present values?

> A put option and a call option with an exercise price of $55 expire in two months and sell for $2.65 and $5.32, respectively. If the stock is currently priced at $57.30, what is the annual continuously compounded rate of interest?

> Explain why the after tax borrowing rate is the appropriate discount rate to use in lease evaluation. Refer to the following example for Questions 10–12. In May 2011, Air Lease Corporation (ALC) announced that it had signed lease agreements for 29 aircra

> Firms sometimes use the threat of a bankruptcy filing to force creditors to renegotiate terms. Critics argue that in such cases the firm is using bankruptcy laws “as a sword rather than a shield.” Is this an ethical tactic?

> What is homemade leverage?

> Both ROA and ROE measure profitability. Which one is more useful for comparing two companies? Why?

> You own a callable, convertible bond with a conversion ratio of 24.25. The stock is currently selling for $48 per share. The issuer of the bond has announced a call at a call price of 110. What are your options here? What should you do?

> Suppose a certain stock currently sells for $30 per share. If a put option and a call option are available with $30 exercise prices, which do you think will sell for more? Explain.

> What are the three factors that determine a company’s price−earnings ratio?

> Suppose the current exchange rate for the Polish zloty is Z 3.14. The expected exchange rate in three years is Z 3.23. What is the difference in the annual inflation rates for the United States and Poland over this period? Assume that the anticipated rat

> If a company moves to a JIT inventory management system, what will happen to inventory turnover? What will happen to total asset turnover? What will happen to return on equity (ROE)?

> Why does the value of a share of stock depend on dividends?

> What impact did this change in payables policy have on BlueSky’s operating cycle? Its cash cycle?

> Why will convertible bonds not be voluntarily converted to stock before expiration?

> Your company currently uses traditional capital budgeting techniques, including net present value. After hearing about the use of real option analysis, your boss decides that your company should use real option analysis in place of net present value. How

> A put option and a call option with an exercise price of $85 and three months to expiration sell for $2.40 and $5.09, respectively. If the risk-free rate is 4.8 percent per year, compounded continuously, what is the current stock price?

> Critically evaluate the following statements: 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.

> How can the return on a portfolio be expressed in terms of a factor model?

> Why is it not necessarily bad for the operating cash flow to be negative for a particular period?

> True or false: The unsystematic risk of a share of stock is irrelevant for valuing the stock because it can be diversified away; therefore, it is also irrelevant for valuing a call option on the stock. Explain.

> Companies pay rating agencies such as Moody’s and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why do you think they do it?

> Define financial distress using the stock-based and flow-based approaches.

> Given that eGain Communications was up by almost 412 percent for 2011, why didn’t all investors hold eGain Communications?

> How does the number of periods in a moving average affect the responsiveness of the forecast?

> What advantages as a forecasting tool does exponential smoothing have over moving averages?

> What are the main uses of time study information?

> What is a time standard? What factors must be taken into account when developing standards?

> How are devices such as flow process charts and worker-machine charts useful?

> What are motion study principles? How are they classified?

> What is job design, and why is it important?

> What trade-offs are involved when deciding how often to rebalance an assembly line?

> As Foxconn cuts jobs as it shifts to greater use of automation, jobs will be created in other companies. In what types of companies would you expect to see jobs created?

> Determine the approximate number of tons of salt produced annually.

> Where would you place salt production in the product-process spectrum?

> Contrast the use of MAD and MSE in evaluating forecasts.

> What are some of the possible reasons why the company continues to use the old processing equipment instead of buying new, more modern equipment?

> Do you think that inadequate strategic planning was a factor that resulted in the company’s asking for trade protection?

> Briefly describe quality assurance efforts in round can production.

> What is group technology?

> What is cellular manufacturing? What are its main benefits and limitations?

> Why are product layouts atypical in service environments?

> Briefly outline the impact that job sequence has on each of the layout types.

> Briefly discuss the advantages and disadvantages of automation.

> Explain the importance of process selection in system design.

> Name two unethical behaviors related to process selection and two related to layout, and the ethical principles they violate.

> What factors would you consider in deciding whether to use wide or narrow control limits for forecasts?

> What are the major trade-offs in capacity planning?

> A new machine will cost $18,000, but result it will in savings of $2,400 per year. What will the payback time be in years?

> Why is the degree of customization an important consideration in process planning?

> A new piece of equipment will cost $12,000 and will result in a reduced operation cost of $1,500 per year. What will the payback time be in years?

> For laundry service, what might have been the rationale for asking another hospital to join it?

> In the housekeeping situation, why not just forget about outsourcing, especially since the hospital ended up rehiring its employees anyway?

> Does restaurant outsourcing increase capacity? Explain.

> What are some important disadvantages or limitations of outsourcing for restaurants?

> What advantages are there when restaurants outsource?

> Any increase in efficiency also increases utilization. Although the upper limit on efficiency is 100 percent, what can be done to achieve still higher levels of utilization?

> What is the purpose of establishing control limits for forecast errors?

> Contrast design capacity and effective capacity.

> What is the benefit to a business organization of having capacity measures?

> Briefly discuss how uncertainty affects capacity decisions.

> Hazel is thinking of making some of her operations sustainable. What are some ideas she might consider?

> How do capacity decisions influence productivity?

> How can a systems approach to capacity planning be useful?

> Give some examples of building flexibility into system design.

> How do long-term and short-term capacity considerations differ?

> Why does service management present more challenges than manufacturing?

> What managerial challenges do services present that manufacturing does not?

> When a new business is started, or a patent idea needs funding, venture capitalists or investment bankers will want to see a business plan that includes forecast information related to a profit and loss statement. What type of forecasting information do