Why would a project that reaches the break-even point in terms of net income potentially be
bad for shareholders?
The EBIT-EPS capital structure approach focuses on finding a capital structure with the
highest EPS (earnings per share) over the expected ra
1. Enter the home page of the Jobs in the Money web site
(http:/www.jobsinthemoney.com/index.php?action=adv_search) and page through the finance
positions listed. If the salaries are listed, what skill sets or job characteristics lead to the
What role does par value play in the pricing and sale of common stock by the issuing
corporation? Why do most firms assign relatively low par values to their shares?
Par value, sometimes referred to as face value, is the nominal value assigned to an
What happens to the present value of a cash flow stream when the discount rate increases?
Place this in the context of an investment. If the required return on an investment goes up but
the expected cash flows do not change, would you be willing to pay th
What are American Depositary Receipts (ADR's) and why have they proven so popular with
An American Depository Receipt, or ADR, is a security issued by a U.S. depository bank to
domestic buyers as a substitute for direct ownership of stock
Why is using the cost of equity to discount project cash flows inappropriate when a firm uses
both debt and equity in its capital structure?
Capital structure is the manner in which a firms assets are financed; that is, the right-hand
side of the balance
Suppose that a mutual fund has a beta equal to 0.75. Is it necessarily the case that the standard
deviation of returns on the fund is less than the standard deviation of market returns?
A mutual fund is a type of an investment company that pools money fro
Suppose there are two risky assets. One offers a higher return than the other, but it also has a
higher standard deviation. Will one of these assets always lie on the efficient frontier? Will one
of them always be inefficient if held alone?
Risky asset is
When using discounted cash flow analysis to value an asset, explain why it is important to
measure the risk of the asset and to associate an expected return with that risk measure.
The procedure for valuing a risky asset involves three basic steps: (1) de
A firm issues a bond at par value. Shortly thereafter, interest rates fall. If you calculated the
coupon rate, coupon yield, and yield to maturity for this bond after the decline in interest
rates, which of the three values would be highest and which woul
Is the expected return on a stock with a beta=2.0 twice the expected return on a stock with a
Perhaps the single most important measure of stock risk or volatility is a stock's beta. It's
one of those at-a-glance measures that can provide seriou
What is meant by the term risk premium? Why must riskier assets offer a risk premium?
A risk premium is the amount of return one needs to realize before taking a chance with an
unsecured investment versus a guaranteed investment. This is a very important
Why are investors more concerned with the real returns than the nominal returns on their
Usually when someone is talking about how well an investment has performed they are
usually talking about the actual percentage increase of the value of
What's a simple way to assess and compare the default risk of publicly traded bonds? Describe
how a bond's interest rate risk is related to its maturity.
Bonds are debt instruments used by business and government to raise large sums of money,
often from a
Define the terms feasible set and efficient set.
Often investors have a combination of different stocks. Such a combination of stocks is
called a portfolio. One of the reasons why we would like to hold a combination of different stocks
is to reduce the ri
Suppose a supplier allows payment for inventory 30 days from delivery, and the firm is able to
sell all of the inventory within 15 days of delivery. How does this affect free cash flow?
Free cash flow is money earned from operations that a business can pu
Could a limited liability advantage of a corporation also lead to an agency problem? Why?
The Limited Liability Company (LLC) is a newer form of business entity. It has advantages
over corporations and partnerships. The LLCs main advantage over a partners
A particular business deal allows you the choice of receiving $1,000 today or receiving $2,000
ten years from today. How would your choice change based on your ability to invest money at
a very low rate of interest or a very high rate of interest?
Considering the financial information in the various financial statements, which statements
provide information on a company's performance over a reporting period? Which present
data on a company's current position?
Financial statements are summaries of m
What are the advantages/disadvantages of the different legal forms of business organizations?
The three key legal forms of business organization in the United States are sole
proprietorships, partnership, and corporations. A sole proprietorship is a busin
2. What role does the Sarbanes-Oxley Act of 2002 play in financial reporting? Are there
possible shortcomings to relying solely on financial statement analysis to value companies?
The Public Company Accounting Reform and Investor Protection Act, otherwise
Why should a financial manager have an integrated understanding of the 5 basic finance
functions? Why is the corporate governance function considered a finance function?
Corporate finance can be defined generally as the science of managing money in a busi
What are the key advantages of leasing as compared to borrowing to acquire an asset? What
are the key disadvantages of leasing?
One of the most important form of long term finance nowadays is Lease financing. In lease
financing a company can rent an asset
What is a debenture? Why do you think that this is the most common form of corporate bond
in the United States? Is it is much less commonly used elsewhere?
Corporations issue bonds to raise money to expand their businesses, cover operating costs,
What is stock flipping? Do investment banks encourage this kind of practice among their
There are many tools available to investors to make quick profits. One tool that is available
is flipping stocks - the practice of buying initial pub
A CFO says that her firm chooses a capital structure that allows it to maintain a credit rating
of AA. She reasons that a credit rating of AAA would be too conservative, but anything less
than AA would be too risky. What capital structure model does this
Why do firms with more-diverse shareholder bases typically pay higher dividends than
private firms or public firms with more concentrated ownership structures? How are fixed
dividends used as a bonding (commitment) mechanism by managers of firms with disp
Which method would you use to evaluate an investment project that involved modernizing a
firm's existing plant? The project will not affect the firm's target debt-to-equity ratio.
Investment Appraisal also known as Capital Budgeting is used to asses wheth
What are some of the differences in U.S. bankruptcy laws and those in place internationally?
What incentives do these differences provide for U.S. managers and for their peers in most
There are similarities in the bankruptcy codes of all
List and describe the three forms of informational efficiency. What is the implication for
technical analysis under each of these forms?
In order for a market to become efficient, investors must perceive that a market is inefficient
and possible to beat.