Questions and Answers of Financial Management

Why are securities valuation concepts important to healthcare financial management?
What is the general valuation model?
How are bonds valued?
What is a zero-coupon bond?
What is meant by a bond's YTM? By its YTC?
Differentiate price risk from reinvestment rate risk.
In what forms do common stock investors receive returns?
How do common stockholders exercise their right of control?
What is the preemptive right, and what is its purpose?
What is a private placement, and what are its primary advantages over a public offering?
Briefly, what is an employee stock purchase plan?
What is a direct purchase plan?
What is the difference between selling Tenet shares in the primary market and selling the firm's shares in the secondary market?
What is the difference between a listed stock and an unlisted stock?
What are the disadvantages of going public?
What are the advantages and disadvantages associated with common stock financing?
Do investor-owned businesses have a significant financing advantage over not-for-profit businesses?
What are three methods for valuing common stocks, and when does each apply?
What sources of equity (fund capital) do not-for-profit businesses have?
Write out and explain the dividend valuation model for a constant growth stock in both the valuation and expected rate of return forms.
What are the assumptions of the constant growth model?
What are the key features of constant growth regarding dividend yield and capital gains yield?
What are the key features of the nonconstant growth model?
Explain how to estimate stock value using the free cash flow method.
What is meant by security market equilibrium?
What securities are most likely to be in equilibrium?
What is meant by the term marginal investor?
What two conditions must hold for markets to be efficient?
Briefly, what is the EMH?
What are the implications of the EMH for investors and managers?
What is meant by the phrase “beat the market”?
Explain the meaning of the term risk/return trade-off.
In what markets does this trade-off hold?
Explain the features of a combination lease.
How do per procedure and fixed payment operating lease terms differ?
What is the difference between a guideline and a nonguideline lease?
What are some provisions that would make a lease nonguideline?
Why should the IRS care about lease provisions?
What is a tax-exempt lease?
Why were some leases referred to as off-balance-sheet financing prior to 2019?
How are leases accounted for in a lessee's financial statements?
Explain how the cash flows are structured in conducting a dollarbased NAL analysis.
What discount rate should be used when lessees perform lease analyses?
What is the economic interpretation of the NAL?
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?

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