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1. Give an example of a potential agency problem f...




1. Give an example of a potential agency problem for a corporation and identify three means by which the firm can help reduce or eliminate that problem. 2. Briefly describe CNBC?s American Greed story, Inside the WorldCom Scam. How does this story relate to the agency theory? Shareholder theory? Stakeholder theory? 3. Do you think that maximizing the current value of existing stock is an appropriate goal of the financial manager? Why or why not? 4. Explain why the marginal tax rate, rather than the average tax rate, is used when computing the cash flows from a proposed new project. 5. Explain why the DuPont identity is so useful to a financial manager. 6. Assume this is your first day on the job as the new chief financial officer of a mid-??size company. Identify the three key ratios that you would compute first as you begin to try to understand the financial status of the firm. Explain why you selected the three ratios that you did. 7. You are trying to compare the financial performance of your firm to that of similar firms. What are some of the key problems you might encounter in doing this comparison? Since there are no perfect or ideal standard ratios for a firm, why is ratio analysis still considered a valuable management tool? 8. Explain the time value of money principle. 9. You want to have $2.5 million saved on the day you retire. Explain how you can minimize the amount of cash you must invest in order to achieve this goal. 10. Benartzi and Thaler (2007) discuss ?Heuristics and Biases in Retirement Savings Behavior.? Examine how the ?Save More Tomorrow? program is constructed to overcome certain psychological biases. Do you have any suggestions to help individuals reach their savings and retirement goals? 11. Explain the similarities and differences among an ordinary annuity, an annuity due, and a perpetuity. Identify four ways that you can use annuity computations in your everyday life. 12. The time value of money principles can be applied to the valuation of corporate securities. Explain how corporate bonds and stocks are valued. 13. Describe what it means for a bond to trade at a discount or a premium. What is the relation between the market rate and the coupon rate when the bond trades at a discount? At a premium? 14. Identify one primary strength and one primary weakness for each of the following methods of investment analysis: 1) Net present value; 2) Internal rate of return; 3) Profitability index; 4) Payback period. Explain why the net present value is considered to be the best method of analyzing an investment. 15. The present value of the benefits of a particular investment happens to equal the initial cost of that investment at the required rate of 14 percent. What is the value of the investment's internal rate of return, its net present value, and its profitability index? 16. Explain the concept of incremental cash flow analysis and its purpose. In doing so, explain the difference between a sunk cost and an opportunity cost and give an example of each. 17. There are regulations that prohibit "insider trading," which is the use of non-??public information about a security to earn abnormal profits from trading that security. Which form of market efficiency would make these laws unnecessary? Explain why. 18. Compare and constrast Malkiel (2003) and Shiller?s (2003) arguments for and against market efficiency. Do you think markets are efficient? Why or why not? If so, what form (i.e., weak, semi-??strong, strong)? 19. For the period 1926-??2008, small-??company stocks had a risk premium of 12.6 percent. What does the term "risk premium" mean? Is the risk premium on these stocks considered to be relatively high or relative low as compared to other investment classes? Explain why. 20. What is the ?principle of diversification?? Why is the standard deviation of a portfolio less than the weighted average of the standard deviations of the assets in the portfolio? 21. Explain the differences between total risk, unsystematic risk, and systematic risk. Identify how these different risks are measured. 22. What is a company?s ?cost of capital?? How is it related to the return required by investors? 23. The cost of capital depends primarily on the use of the funds, not the source. Explain. 24. Assume a firm follows a policy of using its weighted average cost of capital as the required return for all of its proposed projects. Evaluate this policy. How will this policy affect the overall risk level of the firm over time? 25. You are considering a firm under three separate scenarios: 1) no debt, taxes or bankruptcy costs, 2) with debt and taxes but no bankruptcy costs, and 3) with debt, taxes, and bankruptcy costs. Under which one of these three scenarios will the firm have the highest value? Explain. COOGAN DEVELOPMENT CO., INC. 2002 Income Statement Sales $25,000 Cost of goods sold 15,000 Depreciation 3,000 Earnings before interest and taxes 7,000 Interest paid 1,000 Taxable income 6,000 Taxes (34%) 2,040 Net income 3,960 Retained earnings 2,376 Dividends 1,584 COOGAN DEVELOPMENT CO., INC. Balance Sheets as of December 31, 2002 ASSETS Current assets 2002 Cash $ 3,000 Accounts receivable 11,000 Inventory 4,500 Total current assets $ 18,500 Fixed assets Net plant and equipment 31,500 Total assets $ 50,000 LIABILITIES AND OWNERS? EQUITY Current liabilities Accounts payable $ 2,500 Notes payable 6,416 Total current liabilities $ 8,916 Long-??term debt $ 13,000 Owners? equity Common stock and paid-??in-??surplus 16,500 Retained earnings 11,584 Total owners? equity $ 28,084 Total liabilities and equity $ 50,000 Be sure to show your work (i.e., formulas and inputs). 1. Compute the quick ratio using 2002 financial statement data. 2. Compute the total debt ratio using 2002 financial statement data. 3. Assume that a Big Mac costs $2.50 today. If the price of a Big Mac increases at an annual rate of 3%, how much will a Big Mac cost when you retire 40 years from now? 4. Congratulations! You have just won the lottery. The lottery officials say that you prize is worth $5,000,000. However, you will actually receive your prize in 25 equal annual payments of $200,000 each with the first payment today. If appropriate interest rate is 7% per annum, what is the present value of your prize? 5. You are trying to plan for your retirement. You project that you will retire in 40 years. After retirement you estimate that you will need to withdraw from your retirement account $50,000 per year with the first withdrawal to occur at the end of the first year of retirement (i.e. 41 years from today). You estimate that you will live long enough to make 25 annual withdrawals from the account. You want to accumulate the necessary retirement funds by making equal annual deposits into the retirement account, with the first payment to be made one year from today. You currently have $10,000 that you will deposit into the account today. You estimate that the account will earn 7%. What should be the amount of your annual deposit? 6. You have just purchased a 10-??year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid each 6 months. If the yield to maturity is 10 percent, how much did you pay for it? 7. The last dividend on Spirex Corporation's common stock was $4.00, and the expected growth rate is 10 percent. If you require a rate of return of 20 percent, what is the highest price you should be willing to pay for this stock? 8. You are evaluating a capital budgeting project. The appropriate discount rate for the project is 12.5%. The initial cost of the project will be $200,000. The project is expected to produce positive after tax cash flows of $60,000 per year for 4 years. Winding up of the project will produce a salvage value for an additional after tax positive cash flow of $15,000 in the fourth year. What is the Net Present Value of the project? 9. If a stock has a beta coefficient, ?, equal to 1.20, the risk premium associated with the market is 9 percent, and the risk-??free rate is 5 percent, application of the capital asset pricing model indicates the appropriate return should be __________? 10. Scholes Industries has a target capital structure consisting of 40% debt, 15% preferred stock and 45% common equity. The before-??tax yield to maturity (YTM) on Scholes? long-??term bonds is 9.5%, its cost of preferred stock is 8% and its cost of equity is 12.5%. If the firm?s tax rate is 40%, what is Schole?s WACC?


Paper#5410 | Written in 18-Jul-2015

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