Questions and Answers of Financial Management

What are some typical classifications?
What role does project size (cost) play in the classifications?
What is the role of financial analysis in capital budgeting decision-making in for profit firms?
Why is the financial analysis of projects important in not-for-profit businesses?
Describe the four steps in capital budgeting financial analysis.
Briefly discuss the following concepts associated with cash flow estimation:a. Incremental cash flowb. Cash flow versus accounting incomec. Cash flow timingd. Project lifee. Sunk
Briefly describe how a project cash flow analysis is constructed.
Is it necessary to include depreciation expense in a cash flow analysis for a not-for-profit provider? Explain your answer.
What are the key differences between cash flow analyses performed by investor-owned and not-for-profit organizations?
How do expansion and replacement project analyses differ?
Why is breakeven information valuable to decision-makers?
Describe several types of breakeven analysis.
Briefly describe how to calculate NPV, IRR, and MIRR.
Explain the rationale behind each method.
Why is MIRR a better rate-of-return measure than IRR?
Do the three methods lead to the same conclusions regarding project profitability? Explain your answer.
Should capital budgeting analyses look at only one breakeven or profitability measure? Explain.
Why should qualitative factors also play a role in capital budgeting decisions?
Why should projects that have high expected profitability be viewed with some skepticism?
Is it always necessary to adjust project cash flows to account for unequal lives?
Briefly describe the two methods for adjusting for unequal lives.
Define economic life, as opposed to physical life.
Should projects be viewed as having one fixed life, or should they be considered as having alternative lives?
Describe the NPSV model of capital budgeting.
Describe the construction and use of a project scoring matrix.
Why are postaudits important to the efficiency of a business?
Can capital budgeting tools be used in different settings? Explain your answer.
How is each type of project risk measured, both in absolute and relative terms?
Name and define the three types of risk relevant to capital budgeting.
How are these risks related?
Should managers of investor-owned providers focus exclusively on a project's market risk?
What condition creates project risk?
What makes one project riskier than another?
Are mergers in the health services sector increasing or decreasing? Explain your answer.
Describe one recent merger in the healthcare sector.
Define synergy. Is synergy a valid rationale for mergers?
Describe several situations that might produce synergistic gains in the health services sector.
Suppose your firm can purchase another firm for only half of its replacement value. Would this opportunity be sufficient justification for the acquisition?
Discuss the merits of diversification as a rationale for mergers.
Can managers’ personal incentives motivate mergers? Explain your answer.
How can breakup value motivate mergers?
What are the three primary economic classifications of mergers?
Briefly describe the characteristics of each classification.
What is the difference between a hostile merger and a friendly merger?
Describe the mechanics of a typical friendly takeover and of a typical hostile takeover.
What is the charitable trust doctrine, and what impact does it have on for-profit acquisitions of not-for-profit firms?
What unique problems arise in the acquisition of a not-for-profit business by an investor-owned business as a result of outstanding municipal debt?
Briefly describe two approaches commonly used to value acquisition candidates.
What are some problems that occur when valuing target firms?
Which approach do you believe to be best? Explain your answer.
What unique considerations arise when valuing small, privately held businesses?
How does the amount of potential synergistic benefits affect the likelihood that a merger will be consummated?
What are some factors that influence the starting and final bid prices?
What are some alternative ways of structuring takeover bids?
How do taxes influence the payment structure?
How do securities laws affect the payment structure?
What is due diligence analysis?
Why is due diligence analysis so important in the merger process?
What is the difference between a merger and a corporate alliance?
What is a joint venture? Give some reasons why joint ventures may be advantageous to the parties involved.
Describe the concept of goodwill.
What is the economic interpretation of the expected rate of return?
What is the difference between the expected rate of return and the realized rate of return?
What is stand-alone risk?
What are some measures of stand-alone risk?
Is one measure better than another?
What is a portfolio of assets?
What is a well-diversified portfolio?
What happens to the risk of a single investment when it is held as part of a portfolio of assets?
Explain the differences between stand-alone risk, diversifiable risk, and market risk.
Why should all investors hold well-diversified portfolios rather than individual assets?
Is standard deviation the appropriate risk measure for an individual asset?
Is standard deviation the appropriate risk measure for an investor's portfolio of assets? Explain your answer.
What is the CAPM?
What is the appropriate measure of risk in the CAPM?
Write out the equation for the SML, and graph it.
How do changes in risk aversion and inflation expectations affect the SML?
What are the pros and cons regarding the CAPM?
What is the “price” of debt capital?
What four factors affect the cost of money?
What is the difference between short-term debt and long-term debt?
Describe the key features of a term loan.
Describe the primary features of long-term debt securities.
What is the primary motivation for investors to purchase municipal bonds?
Describe the major differences between corporate and municipal bonds.
What is a serial issue, and why is it used?
What are the advantages and disadvantages of short-term debt versus long-term debt?
Explain the difference between rollover risk and renewal risk.
What are the major rating agencies?
What are some criteria that the rating agencies use when assigning ratings?
What impact do debt ratings have on the cost of debt to the issuing firm?
Write out the equation for the required interest rate on a debt security.
What is the difference between the RRF and the RF?
Do the interest rates on Treasury securities include a DRP? An LP? A PRP? Explain your answer.
Does the DRP incorporate only the probability of default? Explain your answer.
What is price risk? What types of debt securities have the largest price risk premium?
What is a yield curve, and what information is needed to create this curve?
What is the difference between a normal yield curve and an inverted one?
If short-term rates are lower than long-term rates, why may a business still choose to finance with long-term debt?
Explain the following statement: “A firm's financing policy depends in large part on the nature of its assets.”

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