Assignment #1 answers

Assignment #1 answers - Answers to Assignment No. 1 Chapter...

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Answers to Assignment No. 1 Chapter 1- Questions and Problems: Answer to Q 10 a. Real assets are items that are used to produce goods and services. Real assets include both tangible and intangible items. Tangible (physical) real assets include such items as machinery, building, and inventories. Intangible real assets include items such as research ideas, brand names and skilled work force. In contrast, financial assets are items that have value only because of their claim to cash flows generated by real assets. Many different types of financial assets exist, including bank loans, bonds, stocks, and options. b. Investment or capital budgeting decisions involve deciding which real assets to acquire. Financing decision involved arranging the money needed to pay for investments in the real assets. So, when making investment decisions you decide what to spend money on and when making financing decisions, you decide how to get the money to spend. c. Both capital budgeting and capital structure are long-term decisions. Capital budgeting decisions is the process of deciding the real asset investment plans. Capital structure decision is the process of deciding the mix of the long-term financing to use to fund the firm’s assets. Essentially, capital structure decision involves selecting between equity financing and long- term debt financing. Answer to Q 11 Capital budgeting decisions Should a new computer be purchased? Should the firm develop a new drug? Should the firm shut down an unprofitable factory? Financing decisions Should the firm borrow money from a bank or sell bonds? Should the firm issue preferred stock or common stock? Should the firm buy or lease a new machine that it is committed to acquiring? Answer to Q 12 The stock price reflects the value of both current and future dividends the shareholders will receive. In contrast, profits reflect performance in the current year only. Profit maximizing managers may try to improve this year’s profits at the expense of future profits. But stock price maximizing managers will take account of the entire stream of cash flows that the firm can generate. They are more apt to be forward looking.
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This document was uploaded on 03/07/2011.

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Assignment #1 answers - Answers to Assignment No. 1 Chapter...

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