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financial management
Fundamentals Of Financial Management 12th Edition Richard Bulliet, Eugene F Brigham, Brigham/Houston - Solutions
3-10 How does the deductibility of interest and dividends by the paying corporation affect the choice of financing (that is, the use of debt versus equity)?
3-9 What does double taxation of corporate income mean? Could income ever be subject to triple taxation? Explain your answer.
3-8 What is meant by the following statement: Our tax rates are progressive.
3-7 Would it be possible for a company to report negative free cash flow and still be highly valued by investors; that is, could a negative free cash flow ever be a good thing in the eyes of investors? Explain your answer.
3-6 What is free cash flow? If you were an investor, why might you be more interested in free cash flow than net income?
3-5 Financial statements are based on generally accepted accounting principles (GAAP) and are audited by CPA firms. Therefore, do investors need to worry about the validity of those statements? Explain your answer.
3-4 Explain the following statement: While the balance sheet can be thought of as a snapshot of a firm’s financial position at a point in time, the income statement reports on operations over a period of time.
3-3 If a “typical” firm reports $20 million of retained earnings on its balance sheet, could its directors declare a $20 million cash dividend without having any qualms about what they were doing? Explain your answer.
3-2 Who are some of the basic users of financial statements, and how do they use them?
3-1 What four financial statements are contained in most annual reports?
24 What is the logic behind allowing tax loss carry-backs/carry-forwards?
23 How does our tax system influence the use of debt financing by corporations?
22 What are long-term capital gains? Are they taxed like other income? Explain.
21 What’s a muni bond, and how are these bonds taxed?
20 What’s the AMT, and why was it instituted?
19 What’s the difference between marginal and average tax rates?
18 Explain this statement: Our tax rates are progressive.
17 Explain why the following statement is true: The retained earnings account reported on the balance sheet does not represent cash and is not “available”for dividend payments or anything else.
16 Why do changes in retained earnings occur?
15 What is the statement of stockholders’ equity designed to tell us?
14 Identify and briefly explain the three types of activities shown in the statement of cash flows.
13 What is the statement of cash flows, and what are some questions it answers?
12 Which is more like a snapshot of the firm’s operations—the balance sheet or the income statement? Explain your answer.
11 What is EBITDA?
10 What is EBIT, or operating income?
9 Why is earnings per share called “the bottom line”?
8 Allied were a grocery chain rather than a food processor? Explain. (Inventories, accounts receivable, and accounts payable would experience seasonal fluctuations; no—less seasonality)
7 What items on Allied’s December 31 balance sheet would probably be different from its June 30 values? Would these differences be as large if
6 What was Allied’s net working capital on December 31, 2007? ($650 million)
5 How is the order in which items are shown on the balance sheet determined?
4 What is the balance sheet, and what information does it provide?
3 Why is the annual report of great interest to investors?
2 What four financial statements are typically included in the annual report?
1 What is the annual report, and what two types of information does it provide?
2-1 FINANCIAL MARKETS AND INSTITUTIONS Assume that you recently graduated with a degree in finance and have just reported to work as an investment adviser at the brokerage firm of Smyth Barry & Co. Your first assignment is to explain the nature of the U.S. financial markets to Michelle Varga, a
2-12 Explain whether the following statements are true or false.a. Derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high returns
2-11 Briefly explain what is meant by the term efficiency continuum.
2-10 Investors expect a company to announce a 10% increase in earnings; instead, the company announces a 1% increase. If the market is semi-strong form efficient, which of the following would you expect to happen? (Hint: Refer to Footnote 13 in this chapter.)a. The stock’s price will increase
2-9 Describe the three different forms of market efficiency.
2-7 Differentiate between dealer markets and stock markets that have a physical location.
2-6 What types of changes have financial markets experienced during the last two decades?Have they been perceived as positive or negative changes? Explain.
2-5 What would happen to the U.S. standard of living if people lost faith in the safety of the financial institutions? Explain.
2-4 Indicate whether the following instruments are examples of money market or capital market securities.a. U.S. Treasury billsb. Long-term corporate bondsc. Common stocksd. Preferred stockse. Dealer commercial paper
2-3 Is an initial public offering an example of a primary or a secondary market transaction?Explain.
2-1 How does a cost-efficient capital market help reduce the prices of goods and services?
26 What is behavioral finance? What are the implications of behavioral finance for market efficiency?
25 Is it possible that the market for individual stocks could be highly efficient but the market for whole companies could be less efficient?
24 Why is it good for the economy that markets be efficient?
23 Is the market for all stocks equally efficient? Explain.
22 What does it mean for a market to be “efficient”?
21 If we constructed a chart like Figure 2-2 for an average S&P 500 stock, do you think it would show more or less volatility? Explain.
20 Would you expect a portfolio that consisted of the NYSE stocks to be more or less risky than a portfolio of Nasdaq stocks?
19 What is a Dutch auction, and what company used this procedure for its IPO?
17 What is an IPO?
16 Differentiate between primary and secondary markets.
15 Differentiate between closely held and publicly owned corporations.
14 What is the bid-ask spread?
13 What are the differences between the physical location exchanges and the Nasdaq stock market?
12 Traded Funds, and hedge funds? How are they similar?
11 What are some important differences between mutual funds, Exchange
10 List the major types of financial institutions and briefly describe the primary function of each.
9 What’s the difference between a commercial bank and an investment bank?
8 Why are financial markets essential for a healthy economy and economic growth?
7 Differentiate between private and public markets.
6 What’s the difference between primary markets and secondary markets?
5 Distinguish between money markets and capital markets.
4 What’s the difference between spot markets and futures markets?
3 Distinguish between physical asset markets and financial asset markets.
2 Why are efficient capital markets necessary for economic growth?
1 Name three ways capital is transferred between savers and borrowers.
1-15 Suppose you are a director of an energy company that has three divisions—natural gas, oil, and retail (gas stations). These divisions operate independently from one another, but all division managers report to the firm’s CEO. If you were on the compensation committee as discussed in
1-14 Suppose you were a member of Company X’s board of directors and chairperson of the company’s compensation committee. What factors should your committee consider when setting the CEO’s compensation? Should the compensation consist of a dollar salary, stock options that depend on the
1-13 Edmund Enterprises recently made a large investment to upgrade its technology. While these improvements won’t have much effect on performance in the short run, they are expected to reduce future costs significantly. What effect will this investment have on Edmund Enterprises’ earnings per
1-12 Investors generally can make one vote for each share of stock they hold. TIAA-CREF is the largest institutional shareholder in the United States; therefore, it holds many shares and has more votes than any other organization. Traditionally, this fund has acted as a passive investor, just going
1-11 The president of Southern Semiconductor Corporation (SSC) made this statement in the company’s annual report: “SSC’s primary goal is to increase the value of our common stockholders’ equity.” Later in the report, the following announcements were made:a. The company contributed $1.5
1-10 What are some actions that stockholders can take to ensure that management’s and stockholders’ interests are aligned?
1-9 Should stockholder wealth maximization be thought of as a long-term or a short-term goal?For example, if one action increases a firm’s stock price from a current level of $20 to $25 in 6 months and then to $30 in 5 years but another action keeps the stock at $20 for several years but then
1-8 What are the four forms of business organization? What are the advantages and disadvantages of each?
1-7 If a company’s board of directors wants management to maximize shareholder wealth, should the CEO’s compensation be set as a fixed dollar amount, or should the compensation depend on how well the firm performs? If it is to be based on performance, how should performance be measured? Would
1-6 Is it better for a firm’s actual stock price in the market to be under, over, or equal to its intrinsic value? Would your answer be the same from the standpoints of stockholders in general and a CEO who is about to exercise a million dollars in options and then retire? Explain.
1-5 Suppose three honest individuals gave you their estimates of Stock X’s intrinsic value. One person is your current roommate, the second person is a professional security analyst with an excellent reputation on Wall Street, and the third person is Company X’s CFO. If the three estimates
1-4 When is a stock said to be in equilibrium? At any given time, would you guess that most stocks are in equilibrium as you defined it? Explain.
1-3 What is a firm’s intrinsic value? its current stock price? Is the stock’s “true long-run value”more closely related to its intrinsic value or to its current price?
1-2 If most investors expect the same cash flows from Companies A and B but are more confident that A’s cash flows will be closer to their expected value, which company should have the higher stock price? Explain.
1-1 If you bought a share of stock, what would you expect to receive, when would you expect to receive it, and would you be certain that your expectations would be met?
23 Why might conflicts arise between stockholders and bondholders?
22 Should managers focus directly on the stock’s actual market price or its intrinsic value, or are both important? Explain.
21 What are three techniques stockholders can use to motivate managers to maximize their stock’s long-run price?
20 Unethical acts are generally committed by unethical people. What are some things companies can do to help ensure that their employees act ethically?
19 Can a firm’s executive compensation plan lead to unethical behavior?Explain.
18 How would you define “business ethics”?
17 What four trends affect business management in general and financial management in particular?
16 Should a firm’s managers help investors improve their estimates of the firm’s intrinsic value? Explain.
15 what would stockholders (as a group) want managers to do? Explain.
14 If a firm could maximize either its current market price or its intrinsic value,
13 Should managers estimate intrinsic values or leave that to outside security analysts? Explain.
12 Do stocks have known and “provable” intrinsic values, or might different people reach different conclusions about intrinsic values? Explain.
11 What’s the difference between a stock’s current market price and its intrinsic value?
10 What three areas of finance does this book cover? Are these areas independent of one another, or are they interrelated in the sense that someone working in one area should know something about each of the other areas?
9 Does it make sense for not-for-profit organizations such as hospitals and universities to have CFOs?
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