In the management of cash and marketable securities, why should the primary
concern be for safety and liquidity rather than maximization of profit?
Cash and marketable securities are generally used to meet the transacti
Corporate debt has been expanding very dramatically since World War II. What
has been the impact on interest coverage, particularly since 1977?
In 1977, the average U.S. manufacturing corporation had its interest cove
Under what circumstances would it be advisable to borrow money to take a
It is advisable to borrow in order to take a cash discount when the cost of
borrowing is less than the cost of foregoing the discou
What advantages does a sole proprietorship offer? What is a major drawback of
this type of organization?
A sole proprietor ship offers the advances of simplicity of decision making and
low organizational and operating c
If we divide users of ratios into short-term lenders, long-term lenders, and
stockholders, which ratios would each group be most interested in, and for what
Short-term lendersliquidity because their concern is
In what way is an investment banker a risk taker?
The investment banker is a risk taker (underwriter) in that the investment
banking house agrees to buy the securities from the corporation and resell them
to other sec
Discuss the various uses for break-even analysis.
Such analysis allows the firm to determine at what level of operations it will
break even and to explore the relationship between volume, costs, and profits.
What was the impetus behind the increased merger activity in the late 1990s
and early 2000s?
The impetus could be found in low interest rates, changing stock prices, new
regulations, intense competition, evolving tech
How does the marginal principle of retained earnings relate to the returns that a
stockholder may make in other investments?
The marginal principle of retained earnings suggests that the corporation must
do an analysi
What are the basic benefits and purposes of developing pro forma statements and
a cash budget?
The pro-forma financial statements and cash budget enable the firm to determine
its future level of asset needs and the asso
Why do we use the overall cost of capital for investment decisions even when
only one source of capital will be used (e.g., debt)?
Though an investment financed by low-cost debt might appear acceptable at
Explain how rapidly expanding sales can drain the cash resources of a firm.
Rapidly expanding sales will require a buildup in assets to support the growth.
In particular, more and more of the increase in current asset w
Discuss some financial variables that affect the price-earnings, ratio.
The price-earnings ratio will be influenced by the earnings and sales growth of
the firm, the risk or volatility in performance, the debt-equity st
Why has corporate management become increasingly sensitive to the desires of
large institutional investors?
Corporate management has become increasingly sensitive to the desires of large
institutional investors becaus
What are the important administrative considerations in the capital budgeting
Important administrative considerations relate to: the search for and discovery
of investment opportunities, the collection of dat
In addition to U.S. corporations, what government groups complete for funds in
the U.S. capital markets?
The federal government, government agencies, and state and local governments
all compete for funds.
How is the future value (Appendix A) related to the present value of a single
sum (Appendix B)?
The future value represents the expected worth of a single amount, whereas the
present value represents the current worth.
What risks does a foreign affiliate of a multinational firm face in today's
In addition to the normal risks that a domestic firm faces (such as the risk
associated with maintaining sales and market sha
What are the basic advantages to the corporation of issuing convertible
The advantages to the corporation of a convertible security are:
a. The interest rate is lower than on a straight issue.
b. This type
If corporate managers are risk-averse, does this mean they will not take risks?
Risk-averse corporate managers are not unwilling to take risks, but will require
a higher return from risky investments. There m
How is valuation of any financial asset related to future cash flows?
The valuation of a financial asset is equal to the present value of future cash
Why might investors demand a lower rate of return for