New Semester Started Get 50% OFF Study Help! --h --m --s Claim Now

Question Answers

Textbooks

Find textbooks, questions and answers

Oops, something went wrong!

Change your search query and then try again

Result Not Found

Books FREE
Study Help
Tutors
AI Study Planner NEW
Sell Books

Search
Sign In
Register

study help
business
financial management

Financial Management Theory And Practice 11th Edition Eugene F Brigham, Michael C Ehrhardt - Solutions

Pension fund data are found in the annual report section entitled "Notes to Consolidated Financial Statements." For example, the 1991 IBM Annual Report indicated a present value of pension benefits of \(\$ 16.2\) billion for its \(\mathrm{U}\). S. plan and a plan asset value of \(\$ 25.2\)
If the returns on these assets are less than perfectly positively correlated with the fund's other assets, then the addition of such investments as foreign stocks and precious metals would lower the overall risk of the portfolio. In other words, if these assets have a lower beta than the fund's
a. Defined benefit plans carry with them economic incentive to discriminate against older workers in hiring, while defined contribution plans and cash balance plans are neutral in this regard.b. There is an economic incentive for employers to discriminate against women in their hiring practices if
Most economists would argue that insurance premiums of any type should reflect the relative risk to the insurer. Thus, corporate liability insurance is higher for drug manufacturers than for greeting card makers, and life insurance is higher for smokers than for nonsmokers.
The major difference in ownership structure is that investor-owned firms have welldefined owners, who own stock in the business and exercise control over the firm through the proxy mechanism. Conversely, not-for-profit firms do not have stockholders. Control rests in a board of trustees comprised
No. The asymmetric information theory refers to a preferred "pecking order" of financing by corporate managers, with new common stock being the least preferred because of the negative signals that new stock issues typically send to investors. Since not-for-profit firms have no common stock, this
No. The break in an investor-owned firm's MCC schedule is due to the higher cost involved with issuing new common stock once the firm's retained earnings has been exhausted. Since not-for-profit firms do not have common stock, there are no such breaks in their MCC schedules. In fact, all of a
a. Without access to tax-exempt debt, all of the benefits to using debt for a not-for-profit firm would disappear. Thus, in accordance with MM capital structure theory, and considering financial distress and agency costs related to debt, the firm's optimal capital structure would be zero debt.b.
Since not-for-profit businesses are expected to provide a social value in addition to an economic benefit, project analysis must consider social value along with expected cash flows. The summation of a project's net present social and cash flow values is its total net present value (TNPV). If the
Since most not-for-profit firms have a myriad of different products or services, a new project's contribution to the riskiness of the overall firm's portfolio of projects, or its corporate risk, is the most relevant risk. Stand-alone risk would be relevant if the firm had only one project. Market
No. If perfect information existed, then all potential buyers and bond insurance companies would have the same full knowledge of the risks inherent in the not-for-profit firm's bond. Accordingly, an equilibrium rate would be established for the firm's bond based on this risk. Since no asymmetric
Only cash can be spent or reinvested, and since accounting profits do not represent cash, they are of less fundamental importance than cash flows for investment analysis. Recall that in the stock valuation chapters we focused on dividends and free cash flows, which represent cash flows, rather than
Since the cost of capital includes a premium for expected inflation, failure to adjust cash flows means that the denominator, but not the numerator, rises with inflation, and this lowers the calculated NPV.
Capital budgeting analysis should only include those cash flows which will be affected by the decision. Sunk costs are unrecoverable and cannot be changed, so they have no bearing on the capital budgeting decision. Opportunity costs represent the cash flows the firm gives up by investing in this
When a firm takes on a new capital budgeting project, it typically must increase its investment in receivables and inventories, over and above the increase in payables and accruals, thus increasing its net operating working capital. Since this increase must be financed, it is included as an outflow
Simulation analysis involves working with continuous probability distributions, and the output of a simulation analysis is a distribution of net present values or rates of return. Scenario analysis involves picking several points on the various probability distributions and determining cash flows
a. Real options occur when managers can influence the size and risk of a project's cash flows by taking different actions during the project's life. They are referred to as real options because they deal with real as opposed to financial assets. They are also called managerial options because they
Postponing the project means that cash flows come later rather than sooner; however, waiting may allow you to take advantage of changing conditions. It might make sense, however, to proceed today if there are important advantages to being the first competitor to enter a market.
Timing options make it less likely that a project will be accepted today. Often, if a firm can delay a decision, it can increase the expected NPV of a project.
Having the option to abandon a project makes it more likely that the project will be accepted today.
The emphasis of the various types of analysts is by no means uniform nor should it be. Management is interested in all types of ratios for two reasons. First, the ratios point out weaknesses that should be strengthened; second, management recognizes that the other parties are interested in all the
Given that sales have not changed, a decrease in the total assets turnover means that the company's assets have increased. Also, the fact that the fixed assets turnover ratio remained constant implies that the company increased its current assets. Since the company's current ratio increased, and
Differences in the amounts of assets necessary to generate a dollar of sales cause asset turnover ratios to vary among industries. For example, a steel company needs a greater number of dollars in assets to produce a dollar in sales than does a grocery store chain. Also, profit margins and turnover
a. Cash, receivables, and inventories, as well as current liabilities, vary over the year for firms with seasonal sales patterns. Therefore, those ratios that examine balance sheet figures will vary unless averages (monthly ones are best) are used.b. Common equity is determined at a point in time,
Firms within the same industry may employ different accounting techniques, which make it difficult to compare financial ratios. More fundamentally, comparisons may be misleading if firms in the same industry differ in their other investments. For example, comparing Pepsico and Coca-Cola may be
Accounts payable, accrued wages, and accrued taxes increase spontaneously and proportionately with sales. Retained earnings increase, but not proportionately.
The equation gives good forecasts of financial requirements if the ratios \(A^{*} / \mathrm{S}\) and \(\mathrm{L}^{*} / \mathrm{S}\), as well as \(\mathrm{M}\) andd, are stable. Otherwise, another forecasting technique should be used.
a. + .b. +. It reduces spontaneous funds; however, it may eventually increase retained earnings.c. + .d. + .
The first step is to find the value of operations by discounting all expected future free cash flows at the weighted average cost of capital. The second step is to find the total corporate value by summing the value of operations, the value of nonoperating assets, and the value of growth options.
A company can be profitable and yet have an ROIC that is less than the WACC if the company has large capital requirements. If ROIC is less than the WACC, then the company is not earning enough on its capital to satisfy its investors. Growth adds even more capital that is not satisfying investors,
Entrenched managers consume to many perquisites, such as lavish offices, excessive staffs, country club memberships, and corporate jets. They also invest in projects or acquisitions that make the firm larger, even if they don't make the firm more valuable.
Stock options in compensation plans usually are issued with an exercise price equal to the current stock price. As long as the stock price increases, the option will become valuable, even if the stock price doesn't increase as much as investors expect.
Business risk refers to the uncertainty inherent in projections of future \(\mathrm{ROE}_{\mathrm{U}}\).
Firms with relatively high nonfinancial fixed costs are said to have a high degree of operating leverage.
Operating leverage affects EBIT and, through EBIT, EPS. Financial leverage has no effect on EBIT--it only affects EPS, given EBIT.
If sales tend to fluctuate widely, then cash flows and the ability to service fixed charges will also vary. Such a firm is said to have high business risk. Consequently, there is a relatively large risk that the firm will be unable to meet its fixed charges, and interest payments are fixed charges.
Public utilities place greater emphasis on long-term debt because they have more stable sales and profits as well as more fixed assets. Also, utilities have fixed assets which can be pledged as collateral. Further, trade firms use retained earnings to a greater extent, probably because these firms
EBIT depends on sales and operating costs. Interest is deducted from EBIT. At high debt levels, firms lose business, employees worry, and operations are not continuous because of financing difficulties. Thus, financial leverage can influence sales and costs, and hence EBIT, if excessive leverage is
The tax benefits from debt increase linearly, which causes a continuous increase in the firm's value and stock price. However, financial distress costs get higher and higher as more and more debt is employed, and these costs eventually offset and begin to outweigh the benefits of debt.
Modigliani and Miller show that the value of a leveraged firm must be equal to the value of an unleveraged firm. If this is not the case, investors in the leveraged firm will sell their shares (assume they owned \(10 \%\) ). They will then borrow an amount equal to \(10 \%\) of the debt of the
MM without taxes would support AT\&T, although if AT\&T really believed MM, they should not object to Gordon's 50 percent debt ratio. MM with taxes would lead ultimately to 100 percent debt, which neither Gordon nor AT\&T accepted. In effect, Gordon and AT\&T seemed to be taking a "traditional" or
The value of a growing tax shield is greater than the value of a constant tax shield. This means that for a given initial level of debt a growing firm will have more value from the debt tax shield than a non-growing firm. Thus for a given face value of debt, \(\mathrm{D}\), and unlevered value of
If equity is viewed as an option on the total value of the firm with a strike price equal to the face value of debt then the equity value should be affected by risk in the same way that an option is affected by risk. An option is worth more if the underlying asset is more risky, so a manager
a. From the stockholders' point of view, an increase in the personal income tax rate would make it more desirable for a firm to retain and reinvest earnings. Consequently, an increase in personal tax rates should lower the aggregate payout ratio.b. If the depreciation allowances were raised, cash
The difference is largely one of accounting. In the case of a split, the firm simply increases the number of shares and simultaneously reduces the par or stated value per share. In the case of a stock dividend, there must be a transfer from retained earnings to capital stock. For most firms, a 100
a. The residual distribution policy is based on the premise that, since new common stock is more costly than retained earnings, a firm should use all the retained earnings it can to satisfy its common equity requirement. Thus, the distribution under this policy is a function of the firm's
a. True. When investors sell their stock they are subject to capital gains taxes.b. True. If a company's stock splits 2 for 1 , and you own 100 shares, then after the split you will own 200 shares.c. True. Dividend reinvestment plans that involve newly issued stock will increase the amount of
No. The role of the investment banker is more important if the stock demand curve has a steep slope and the negative signaling effect is substantial. Under such conditions, the investment banker will have a harder time holding up the stock price.
No. The real value of a security is determined by the equilibrium forces of an efficient market. Assuming that the information provided on newly issued securities is accurate, the market will establish the value of a security regardless of the opinions rendered by the SEC, or, for that matter,
a. Going public would tend to make attracting capital easier and to decrease flotation costs.b. The increasing institutionalization of the "buy side" of the stock and bond markets should increase a firm's ability to attract capital and should reduce flotation costs.c. Financial conglomerates can
Investment bankers must investigate the firms whose securities they sell, simply because, if an issue is overvalued and suffers marked price declines after the issue, the banker will find it increasingly difficult to dispose of the new issue. In other words, reputation is highly important in the
An operating lease is usually cancelable and includes maintenance. Operating leases are, frequently, for a period significantly shorter than the economic life of the asset, so the lessor often does not recover his full investment during the period of the basic lease. A financial lease, on the other
You would expect to find that lessees, in general, are in relatively low income-tax brackets, while lessors tend to be in high tax brackets. The reason for this is that owning tends to provide tax shelters in the early years of a project's life. These tax shelters are more valuable to taxpayers in
The banks, when they initially went into leasing, were paying relatively high tax rates. However, since municipal bonds are tax-exempt, their heavy investments in municipals lowered the banks' effective tax rates. Similarly, when the REIT loans began to sour, this further reduced the bank's income,
Lease payments, like depreciation, are deductible for tax purposes. If a 20 -year asset were depreciated over a 20 -year life, depreciation charges would be \(1 / 20\) per year (more if MACRS were used). However, if the asset were leased for, say, 3 years, tax deductions would be \(1 / 3\) each
In fact, Congress did this in 1981. Depreciable lives were shorter than before; corporate tax rates were essentially unchanged (they were lowered very slightly on income below \(\$ 50,000\) ); and the investment tax credit had been improved a bit by the easing of recapture if the asset was held for
A cancellation clause would reduce the risk to the lessee since the firm would be allowed to terminate the lease at any point. Since the lease is less risky than a standard financial lease, and less risky than straight debt, which cannot usually be prepaid without a prepayment charge, the discount
a. Pros:- The use of the leased premises or equipment is actually an exclusive right, and the payment for the premises is a liability that often must be met. Therefore, leases should be treated as both assets and liabilities.- A fixed policy of capitalizing leases among all companies would add to
Preferred stock is best thought of as being somewhere between debt (bonds) and equity (common stock). Like debt, preferred stock imposes a fixed charge on the firm, affords its holders no voting rights, and has priority over common stock in the event of bankruptcy. However, like equity, its
The trend in stock prices subsequent to an issue influences whether or not a convertible issue will be converted, but conversion itself typically does not provide a firm with additional funds. Indirectly, however, conversion may make it easier for a firm to get additional funds by lowering the debt
Either warrants or convertibles could be used by a firm that expects to need additional financing in the future--warrants, because when they are exercised, additional funds will be brought into the firm directly; convertibles, because when they are converted, the equity base is expanded and debt
a. The value of a warrant depends primarily on the expected growth of the underlying stock's price. This growth, in turn, depends in a major way on the plowback of earnings; the higher the dividend payout, the lower the retention (or plowback) rate; hence, the slower the growth rate. Thus, warrant
The statement is made often. It is not really true, as a convertible's issue price reflects the underlying stock's present price. Further, when the bond or preferred stock is converted, the holder receives shares valued at the then-existing price, but effectively pays less than the market price for
If rights are used, they generally apply to voting securities. Although convertibles do not have voting rights, they are convertible into securities that do have the right to vote.
The convertible bond has an expected return which consists of an interest yield (10 percent) plus an expected capital gain. We know the expected capital gain must be at least 4 percent, because the total expected return on the convertible must be at least equal to that on the nonconvertible bond,
The two principal reasons for holding cash are for transactions and compensating balances. The target cash balance is not equal to the sum of the holdings for each reason because the same money can often partially satisfy both motives.
False. Both accounts will record the same transaction amount.
The four elements in a firm's credit policy are (1) credit standards, (2) credit period, (3) discount policy, and (4) collection policy. The firm is not required to accept the credit policies employed by its competition, but the optimal credit policy cannot be determined without considering
If an asset's life and returns can be positively determined, the maturity of the asset can be matched to the maturity of the liability incurred to finance the asset. This matching will ensure that funds are borrowed only for the time they are required to finance the asset and that adequate funds
From the standpoint of the borrower, short-term credit is riskier because short-term interest rates fluctuate more than long-term rates, and the firm may be unable to repay the debt. If the lender will not extend the loan, the firm could be forced into bankruptcy.A firm might borrow short-term if
This statement is false. A firm cannot ordinarily control its accruals since payrolls and the timing of wage payments are set by economic forces and by industry custom, while tax payment dates are established by law.
Yes. If a firm is able to buy on credit at all, if the credit terms include a discount for early payment, and if the firm pays during the discount period, it has obtained "free" trade credit. However, taking additional trade credit by paying after the discount period can be quite costly.
Commercial paper refers to promissory notes of large, strong corporations. These notes have maturities that generally vary from one day to 9 months, and the return is usually \(1 \frac{1}{2}\) to \(3 \frac{1}{2}\) percentage points below the prime lending rate. Mama and Pappa Gus could not use the
If the elimination of volatile cash flows through risk management techniques does not significantly change a firm's expected future cash flows and WACC, investors will be indifferent to holding a company with volatile cash flows versus a company with stable cash flows. Note that investors can
The six reasons why risk management might increase the value of a firm is that it allows corporations to (1) increase their use of debt; (2) maintain their capital budget over time; (3) avoid costs associated with financial distress; (4) utilize their comparative advantages in hedging relative to
There are several ways to reduce a firm's risk exposure. First, a firm can transfer its risk to an insurance company, which requires periodic premium payments established by the insurance company based on its perception of the firm's risk exposure. Second, the firm can transfer risk-producing
The futures market can be used to guard against interest rate and input price risk through the use of hedging. If the firm were concerned that interest rates will rise, it would use a short hedge, or sell financial futures contracts. If interest rates do rise, losses on the issue due to the higher
Swaps allow firms to reduce their financial risk by exchanging their debt for another party's debt, usually because the parties prefer the other's debt contract terms. There are several ways in which swaps reduce risk. Currency swaps, where firms exchange debt obligations denominated in different
The rehabilitation plan may be accepted because of the following:}- Expenses of liquidation may consume a large proportion of the assets.- The going-concern value of a firm is always substantially greater than its liquidating value. Hence, to preserve the life of the firm is to preserve a
Not necessarily. The going-concern value of a firm is a function of its outlook--it might be improved by changing the management or otherwise improving operations. The firm may be temporarily distressed.
Liquidations usually result in losses for the following reasons:- Assets typically have characteristics which make their value in existing uses greater than when resold.- The organizational value of a company is lost when liquidation takes place.- Because the claims of numerous parties must be
Because public utilities and railroads often involve essential services, reorganizations and mergers rather than liquidations are likely to take place. This is less true for industrial companies.
Horizontal and vertical mergers are most likely to result in governmental intervention, but mergers of this type are also most likely to result in operating synergy. Conglomerate and congeneric mergers are attacked by the government less often, but they also are less likely to provide any
A tender offer might be used. Although many tender offers are made by surprise and over the opposition of the target firm's management, tender offers can and often are made on a "friendly" basis. In this case, management (the board of directors) of the target company endorses the tender offer and
An operating merger involves integrating the company's operations in hopes of obtaining synergistic benefits, while a pure financial merger generally does not involve integrating the merged company's operations.
a. The probability distribution for complete certainty is a vertical line.b. The probability distribution for total uncertainty is the \(\mathrm{X}\) axis from \(-\infty\) to \(+\infty\).
Security A is less risky if held in a diversified portfolio because of its lower beta and negative correlation with other stocks. In a single-asset portfolio, Security A would be more risky because \(\sigma_{\mathrm{A}}>\sigma_{\mathrm{B}}\) and \(\mathrm{CV}_{\mathrm{A}}>\mathrm{CV}_{\mathrm{B}}\).
a. No, it is not riskless. The portfolio would be free of default risk and liquidity risk, but inflation could erode the portfolio's purchasing power. If the actual inflation rate is greater than that expected, interest rates in general will rise to incorporate a larger inflation premium (IP) and
The risk premium on a high beta stock would increase more.\[ \mathrm{RP}_{\mathrm{j}}=\text { Risk Premium for Stock } \mathrm{j}=\left(\mathrm{r}_{\mathrm{M}}-\mathrm{r}_{\mathrm{RF}}\right) \mathrm{b}_{\mathrm{j}} \]If risk aversion increases, the slope of the SML will increase, and so will the
According to the Security Market Line (SML) equation, an increase in beta will increase a company's expected return by an amount equal to the market risk premium times the change in beta. For example, assume that the risk-free rate is 6 percent, and the market risk premium is 5 percent. If the
Yes, if the portfolio's beta is equal to zero. In practice, however, it may be impossible to find individual stocks that have a nonpositive beta. In this case it would also be impossible to have a stock portfolio with a zero beta. Even if such a portfolio could be constructed, investors would
False. Short-term bond prices are less sensitive than long-term bond prices to interest rate changes because funds invested in short-term bonds can be reinvested at the new interest rate sooner than funds tied up in long-term bonds.
The price of the bond will fall and its YTM will rise if interest rates rise. If the bond still has a long term to maturity, its YTM will reflect long-term rates. Of course, the bond's price will be less affected by a change in interest rates if it has been outstanding a long time and matures
If interest rates decline significantly, the values of callable bonds will not rise by as much as those of bonds without the call provision. It is likely that the bonds would be called by the issuer before maturity, so that the issuer can take advantage of the new, lower rates.
From the corporation's viewpoint, one important factor in establishing a sinking fund is that its own bonds generally have a higher yield than do government bonds; hence, the company saves more interest by retiring its own bonds than it could earn by buying government bonds. This factor causes
True. The value of a share of stock is the PV of its expected future dividends. If the two investors expect the same future dividend stream, and they agree on the stock's riskiness, then they should reach similar conclusions as to the stock's value.
A perpetual bond is similar to a no-growth stock and to a share of preferred stock in the following ways:1. All three derive their values from a series of cash inflows--coupon payments from the perpetual bond, and dividends from both types of stock.2. All three are assumed to have indefinite lives
a. An option is a contract which gives its holder the right to buy or sell an asset at some predetermined price within a specified period of time. A call option allows the holder to buy the asset, while a put option allows the holder to sell the asset.b. A simple measure of an option's value is its
The market value of an option is typically higher than its exercise value due to the speculative nature of the investment. Options allow investors to gain a high degree of personal leverage when buying securities. The option allows the investor to limit his or her loss but amplify his or her
(1) An increase in stock price causes an increase in the value of a call option. (2) An increase in exercise price causes a decrease in the value of a call option. (3) An increase in the time to expiration causes an increase in the value of a call option. (4) An increase in the risk-free rate

Showing 2800 - 2900 of 4135

First
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
Last

Step by Step Answers

Services

Sitemap
Fun
Definitions
Become Tutor
Used Textbooks
Study Help Categories
Recent Questions
Expert Questions
Campus Wear
Sell Your Books

Company Info

Security
Copyrights
Privacy Policy
Terms & Conditions
SolutionInn Fee
Scholarship
Online Quiz
Give Feedback, Get Rewards

Get In Touch

About Us
Contact Us
Career
Jobs
FAQ
Student Discount
Campus Ambassador

Secure Payment

Download Our App

© 2026 SolutionInn. All Rights Reserved