Why are financial decisions based on incremental benefits and how does sunk cost affect the incremental benefit from a decision?
Suppose that you are a manager in a manufacturing business. How are the capital markets relevant to the effective performance of your job?
Assume that interest rates have increased substantially. Would this tend to increase or decrease the market value of a firm’s liabilities (relative to the book value of liabilities)?
Define the term working capital. How is working capital calculated? What does working capital measure?
Explain why the notes to a firm’s financial statements are an integral part of the financial statements.
Define the term capital market line (CML). What is the significance of the CML for investors?
What is the significance of the CML for investors?
What is the difference between diversifiable risk and non-diversifiable risk?
What is the basic approach that is used to value any asset, including bonds and common stocks?
How can it be possible to invest in two stocks and have less risk than if you invested all your money in only one of them?
Define beta and briefly describe what it measures?
What is it that the market will pay an investor for taking on nondiversifiable risk but will not pay an
Describe the cash conversion cycle and discuss its importance to working capital management.
Why are interest rates on short-term loans not necessarily comparable to each other? Give three possible reasons.
How would rapidly expanding sales produce negative cash flow?
What effect does safety stock have on the carrying cost of inventory?
Optical Supply Company offers credit terms of 2/10, net 60. If Optical Supply is considering a change in its credit terms to one of those indicated, explain whether the change should increase or decrease sales. (a) 2/10, net 30, (b) net 60, (c) 3/15, net 60, (d) 2/10, net 30, 30 extra.
Describe how you would go about estimating a required return for computing the NPV of a project.
What are the strengths and weaknesses of the payback and the discounted payback?
Which of the capital budgeting criteria are the most sound? Which are the least sound?
Phyllis believes that the firm should use straight-line depreciation for a capital project because it results in higher net income during the early years of the project’s life. Joanna believes that the firm should use the modified accelerated cost recovery system depreciation because it reduces the tax liability during the early years of the project’s life. Assuming you have a choice between depreciation methods, whose advice should you follow? Why?
What are some reasons why subordinated debt is typically rated lower than senior debt?
The development of the new issue junk bond market had important implications for capital structure choice. The existence of a viable junk bond market means that firms can comfortably maintain higher degrees of leverage than they could prior to the development of this market. Do you agree or disagree? Justify your answer.
What are the principal advantages and principal disadvantages of lease financing? Which of the purported advantages are really of dubious value?
Because the weighted average given in Equation (17.4) is always a correct measure of a required return, why do firms not create securities to finance each project and offer them in the capital market in order to accurately determine the required return for the project?
Identify the possible reasonable alternatives for fundraising and assess the impact each would have on the balance sheet and the debt/equity ratio.
Think about leases. Is leasing an alternative in your company? If so, what do you lease? Does your company lease big machines, or small things like copiers? What do you think are viable leasing options?
How important are the initial forecasts and budgets in capital rationing decisions. How accurate should they be?
Suppose you are a manager considering a capital budgeting project. You have examined the proposed project and, according to every relevant piece of information you can find, you feel the project should be undertaken. After submitting your analysis, the division head informs you that the project has not been approved for funding. Briefly discuss the possible causes of the difference between your opinion of the project and that of upper management.
From one point of view, inflation does not create a problem in the evaluation of a capital budgeting project. From another point of view, inflation creates tremendous problems in the evaluation of a apital budgeting project. What are these points of view? Which do you personally believe and why?
Why can the NPV and IRR methods disagree on the rankings for mutually exclusive projects? If they disagree, which method do you personally believe has more merit and why?
Suppose you are a manager considering a capital budgeting project. You have examined the proposed project and according to every relevant piece of information you can find, you feel this project should be undertaken. After submitting your analysis, the division head informs you that the project ahs not been approved for funding. Discuss the possible causes of the differences between your opinion and that of upper management.