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Questions and Answers of
Financial Management
What is the economic interpretation of a lease's IRR?
What discount rate is used in a lessor's NPV analysis?
What is the economic interpretation of the lessor's NPV? The lessor's IRR?
What is lease analysis symmetry?
What impact does this symmetry have on the economic viability of leasing?
How do lessors set the lease payment amount?
What is a leveraged lease?
How does leveraging affect the lessee's analysis?
What is the usual impact of lease leveraging on the lessor's expected rate of return and risk?
What are some economic factors that motivate leasing—that is, what asymmetries might exist that make leasing beneficial to both lessors and lessees?
Would it ever make sense to lease an asset that has a negative NAL when evaluated by a conventional lease analysis? Explain your answer.
Does leasing lead to increased credit availability?
Should the component-cost estimates reflect historical costs or marginal costs?
What are some methods used to estimate a business's cost of debt?
For investor-owned firms, how is the before-tax cost of debt converted to an after-tax cost?
Does the effective cost of debt differ materially between businesses that are similar in all respects except ownership?
Describe the CAPM approach to estimating a business's cost of equity.
What is the best proxy for the risk-free rate in the CAPM? Why?
What are the three types of beta that can be used in the CAPM?
Describe the DCF approach to estimating a business's cost of equity.
What are three common methods for estimating the future dividend growth rate for use in the DCF model?
Describe the debt-cost-plus-risk-premium approach to estimating a business's cost of equity.
Is there a difference between the risk premium used in the CAPM and the one used in the debt-cost-plus-risk-premium model?
How would you choose among widely different estimates of R(Re)?
Is there a cost of equity for not-for-profit businesses?
How can this cost be estimated?
What is the general formula for finding the CCC?
What weights should be used in the formula? Why?
What is the primary difference between the CCCs for investor-owned and not-for-profit firms?
Is the CCC constant regardless of the amount of new capital required? Explain your answer.
Explain the economic interpretation of the CCC.
Is the CCC affected by short-term financing plans? Explain your answer.
Is the CCC the appropriate opportunity cost for all projects that a business evaluates?
What is your reaction to this statement: “Leasing is preferable to buying because it preserves the business's liquidity”?
What is the basic concept of the CCC?
What financing sources are typically included in a firm's cost-ofcapital estimate?
Should the component costs be estimated on a before-tax basis or an after-tax basis?
Draw a graph similar to the one shown in exhibit 9.4 and explain its implications.Data from Exhibit 9.4Ann Arbor Health Care: Corporate and Project Costs of CapitalThe key point here is that the CCC
Are flotation costs relevant to the CCC estimate? Explain your answer.
Explain the concept of divisional costs of capital.
When is it appropriate to apply the CCC when evaluating a new project proposal? When is it inappropriate?
What problems do small businesses face when estimating the CCC?
What is the size premium? Liquidity premium? Unique risk premium?
Describe the build-up method for estimating a small business's cost of equity.
What are the factors that affect the CCC estimate?
What is the impact of debt financing on a business's risk and return?
Why does the use of debt financing leverage up (increase) owners’ return?
What are some determinants of business risk?
What are the similarities between operating leverage and financial leverage?
What is the single most important conclusion of the MM zero-tax model?
What is the single most important conclusion of the MM model with corporate taxes?
How does the Miller model differ from the MM model with corporate taxes?
Should we accept one of the models presented thus far as being correct? Why or why not?
What is the underlying cause of the “gain from leverage” in the MM model with corporate taxes?
What are the implications of the Miller model under various tax assumptions?
What is the primary implication of the Miller model given the current tax situation in the United States?
In your view, which of the assumptions used in the models is most likely to invalidate them?
What type of risk is initially assessed?
Briefly describe sensitivity analysis.
What type of risk does it attempt to measure?
Is sensitivity analysis a good risk assessment tool? If not, what is its value in the capital budgeting process?
Briefly describe scenario analysis.
What type of risk does it attempt to measure?
What are its strengths and weaknesses?
Briefly, what is Monte Carlo simulation?
What are two ratios that measure debt management?
What are two ratios that measure asset management?
How can comparative and trend analyses be used to interpret ratio results?
Explain how the Du Pont equation combines several ratios to obtain an overview of a business's financial condition.
Why may a focus on operating revenue and operating income be preferable to a focus on total revenues and net income?
What is the difference between financial statement analysis and operating indicator analysis?
Why is operating indicator analysis important?
Describe four indicators that are commonly used in operating indicator analysis.
Briefly describe some of the problems encountered when performing financial statement analysis and operating indicator analysis.
Explain how inflation effects created problems in the Bayside illustration.
What is EVA, and how is it measured?
Why is EVA a better measure of financial performance than are accounting measures such as earnings per share and return on equity?
What does EVA tell managers about how to achieve good financial performance?
Why is it important to be familiar with the comparative data set?
What is a KPI? A dashboard?
How are KPIs and dashboards used in financial condition analysis?
Briefly describe the nature and use of the following corporate planning tools:a. Missionb. Goalsc. Objectives
Why do financial planners need to be familiar with the business's strategic plan?
What is the purpose of a business's operating plan?
What is the most common time horizon for operating plans?
Briefly describe the contents of a typical operating plan.
What are the five steps of the financial planning process?
What are two approaches to the total operating revenue forecast?
Discuss some factors that must be considered when developing an operating revenue forecast.
Why is it necessary for planners to distinguish between volume changes and reimbursement changes?
What is the starting point from which forecasted financial statements are created?
Briefly describe the mechanics of the constant growth forecasting method.
Why is the external financing plan so important in the planning process?
Do you think most healthcare businesses use the constant growth method to develop pro forma financial statements, or do you think they use some other methodology?
How do the following factors affect the external financing requirement?a. Projected revenue growth rateb. Capacity utilizationc. Capital intensityd. Profitabilitye. Dividend policy (for
Describe several conditions under which the constant growth method can produce questionable results.
Do these conditions often exist in real-world forecasting?
Identify several techniques that can be used instead of constant growth forecasting.
Which techniques do you think produce the most accurate forecasts? Which techniques do you think are the most costly to use?
Why do computerized forecasting models play such an important role in corporate management?
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