Questions and Answers of Understanding Management

Does the default risk premium incorporate only the probability of default? Explain your answer.
What is the difference between a normal yield curve and an abnormal one?
What are the general features of preferred stock?
Should preferred stock be considered as equity or debt financing?Explain your answer.
What are the tax advantages to purchasers of preferred stock?
What are the advantages and disadvantages of preferred stock financing?
Name several types of classified stock and explain their uses.
Briefly, what are employee stock purchase plans?
What is a dividend reinvestment plan (DRIP)?
What is the difference between selling HCA shares in the primary market and selling the firm’s shares in the secondary market?
What are some of the considerations involved in the decision to list a stock?
What are the key features of securities markets regulation?
What types of decisions must be made by the issuer and its investment banker?
What is the difference between an underwritten and a best efforts issue?
What are the sources of equity (fund capital) to not-for-profit businesses?
Under what conditions can it be used?
What is meant by a bond’s yield to maturity (YTM)? By its yield to call (YTC)?
Differentiate between price risk and reinvestment rate risk.
What is a perpetual preferred stock and how is it valued?
How are nonperpetual preferred stocks valued?
What are three potential methods for valuing common stocks, and when does each apply?
Explain the key features of the nonconstant growth model.
Briefly, what is the Efficient Markets Hypothesis (EMH)?
Explain the meaning of the term risk/return trade-off.
How do per procedure payment terms differ from conventional terms?
What is the difference between a tax-oriented lease and a non-tax-oriented lease?
What are some provisions that would make a lease non-tax-oriented?
Why is lease financing sometimes called off-balance-sheet financing?
How are leases accounted for in a business’s financial statements?
What is the economic interpretation of the net advantage to leasing?
What is the economic interpretation of a lease’s internal rate of return(IRR)?
Do larger residual values favor owning over leasing? Explain.
What is the basic concept of the corporate cost of capital?
Should the component costs be estimated on a before-tax or an after-tax basis?
Should the component cost estimates reflect historical or marginal costs?
What does Hamada’s equation attempt to do when it is used in the cost of equity estimation process?
What is the general formula for the corporate cost of capital?
What is the primary difference between the corporate costs of capital for investor-owned and not-for-profit firms?
Is the corporate cost of capital constant regardless of the amount of new capital required? Explain your answer.
Explain the economic interpretation of the corporate cost of capital.
Is the corporate cost of capital affected by short-term financing plans?Explain your answer.
Is the corporate cost of capital the appropriate opportunity cost for all projects that a business evaluates?
Draw a graph similar to the one shown in Figure 9.1 and explain its implications.
Are flotation costs relevant to the corporate cost of capital estimate?Explain your answer.
When is it appropriate to apply the corporate cost of capital when evaluating a new project proposal? When is it inappropriate?
What are the problems faced by small businesses when estimating the corporate cost of capital?
What are the factors that affect the corporate cost of capital estimate?
Why does the use of debt financing leverage up (increase) the return to stockholders?
What is business risk? How can it be measured?
What is financial risk? How can it be measured?
Describe some types of financial distress costs.
What are the implications of the trade-off models?
Explain the difference between permanent and temporary assets.
What are the three strategies for choosing debt maturities?
Why is project financial analysis important in not-for-profit businesses?
What are the key differences in cash flow analyses performed by investor-owned and not-for-profit organizations?
What is the difference between “regular” payback and discounted payback?
What are the differences between the certainty equivalent (CE) and risk-adjusted discount rate (RADR) methods for risk incorporation?
What is the profitability index, and why is it useful under capital rationing?
What governs financial reporting requirements in the health services industry?
What type of information is provided by each type of statement?
What are two ratios that measure market value?
How are common size statements created?
What advantage do common size statements have over regular statements when conducting a financial statement analysis?
What is percentage change analysis?
Which analytical techniques should be used in a complete financial statement analysis?
What is the difference between financial statement and operating indicator analyses?
Briefly, describe some of the problems encountered when performing financial statement and operating indicator analyses.
What is economic value added (EVA), and how is it measured?
What is a key performance indicator (KPI)? A dashboard?
What are the principal components of the financial forecast?
What is the starting point for creating forecasted financial statements?
Why is the external financing requirement so important to the planning process?
How do the following factors affect the external financing requirement?a. Revenue growth rateb. Capacity utilizationc. Capital intensityd. Profitabilitye. For investor-owned firms, dividend policyf.
Describe several conditions under which the constant growth method can give questionable results.
Do these conditions happen often in “real-world” forecasting?
Which techniques do you think would be the most accurate? The most costly?
Why are computerized forecasting models playing an increasingly important role in corporate management?
What are the basic financial control tools and how do they work?
Does the cash budget require an extensive knowledge of accounting principles?
What is float?
How do businesses use float to increase cash management efficiency?
What are some methods that businesses can use to accelerate receipts?
What are some methods that businesses can use to control disbursements?
Why are these the securities of choice?
Why do businesses, mostly not-for-profit hospitals, hold long-term investment portfolios?
Why do the securities held differ from those held in marketable securities portfolios?
Explain how a business’s receivables balance is built up over time and why there are costs associated with carrying receivables.
Briefly, discuss three means by which a firm can monitor its receivables position.
What are some of the unique problems faced by healthcare providers in managing receivables?
What is the revenue cycle and how does electronic data interchange(EDI) fit in?
What are the four credit policy variables?
Which one is most important to healthcare providers? Explain your answer.
What is a credit-scoring system?
How have hospitals reacted to criticism about their billing and collection practices for the insured?
What are some of the costs associated with inventories?
Briefly, describe the economic ordering quantity (EOQ) model and its implications for inventory management.
What is trade credit?
How should businesses make the decision as to how much trade credit to use?
What are the five major merger waves that have occurred in the United States?

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