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business
foundations of finance

Foundations Of Finance 7th Edition Arthur J Keown, John D Martin, J William Petty - Solutions

1. What factors might an MNC consider in making a capital structure decision?
2. How can a parent company use transfer pricing to move funds from a subsidiary in a depreciatingcurrency country to a strong-currency country?
1. Describe the risk-reduction techniques of leading and lagging Je
3. Give a simple explanation of economic exposure.
2. Give a simple explanation of transaction exposure.
1. Give a simple explanation of translation exposure.
2. What is the international Fisher effect?
1. What does the law of one price say?
1. In simple terms, what does the interest rate parity theory mean?
4. Describe exchange rate risk in direct foreign investment.
3. What is a forward exchange rate?
2. Who is an arbitrageur? How does an arbitrageur make money?
1. What is a spot transaction? What is a direct quote? An indirect quote?
1. Why do U.S. companies invest overseas?
3. What assumptions underlie the EOQ formula?
2. What is the fundamental objective of the economic order quantity (EOQ) formula?
1. Describe the types of inventory that firms have.
2. What is meant by the yield structure of marketable securities?
1. What are financial risk and interest rate risk?
2. How would you estimate the financial benefits of using a lockbox system?
1. Describe the use of the break-even concept with respect to the management of cash.
3. Describe the following methods for managing cash outflow: zero balance accounts and payablethrough drafts.
2. What is a lockbox arrangement and how does its use reduce a firm’s float?
1. Define float and its origins in the cash management process (_.e. mail processing and transit).
2. What should be the composition of the firm’s marketable-securities portfolio?
1. What can be done to speed up cash collections and slow down or better control cash outflows?
2. What are the fundamental decisions that the financial manager must make with respect to cash management?
1. Describe the relationship between the firm’s cash management program and the firm's risk of insolvency.
2. What are the three motives for holding cash?
1. Describe the typical cash flow cycle for a firm.
4. What are some examples of loans secured by a firm’s inventories?
3. What are the types of credit agreements a firm can get that are secured by its accounts receivable as collateral?
2. What is the difference between a line of credit and a revolving credit agreement?
1. What are some examples of unsecured and secured sources of short-term credit?
2. What is the effective annual rate (EAR) and how does it differ from the annual percentage rate(APR)?
1. What is the fundamental interest equation that underlies the calculation of the approximate costof-credit formula?
2. Define days of sales outstanding, days of sales in inventory, and days of payables outstanding.
1. What three actions can a firm take to minimize its net working capital?
3. Is trade credit a permanent, temporary, or spontaneous source of financing? Explain.
2. What are some examples of permanent and temporary investments in current assets?
1. What is the hedging principle or principle of self-liquidating debt?
2. How does the use of current liabilities enhance profitability and also increase the firm’s risk of default on its financial obligations?
1. How does investing more heavily in current assets while not increasing the firm’s current liabilities decrease both the firm’s risk and its expected return on its investment?
2. How is a cash budget used in financial planning?
1. What is a cash budget?
2. Under what circumstances does a firm violate the basic relationship underlying the percent of sales forecast method?
1. What, in words, is the fundamental relationship (equation) used in making percent of sales forecasts?
What is the distinction between discretionary financing needs (DFN) and external financing needs (EEN )?
- What are some examples of spontaneous and discretionary sources of financing?
. What is the percent of sales method of financial forecasting?
- Why are sales forecasts so important to developing a firm’s financial plans?
1. It we cannot predict the future perfectly, then why do firms engage in financial forecasting?
3. Within the context of a stock repurchase, what is meant by a tender offer?
2. What financial relationships must hold for a stock repurchase to be a perfect substitute for a cash dividend payment to stockholders?
1. Identify three reasons why a firm might buy back its own common stock shares.
2. What managerial logic might lie behind a stock split or a stock dividend?'
1. What is the difference between a stock split and a stock dividend?
2. Distinguish among the (a) declaration date, (b) date of record, and (c) ex-dividend date.
1. What is the typical frequency with which cash dividends are paid to investors?
2. Identify and explain three different dividend policies. Hint: One of these is a constant dividend payout ratio.
1. Identify some practical considerations that affect a firm’s payout policy.
5. Distinguish between the residual dividend theory and the clientele effect.
4. How might personal taxes affect both the firm’s dividend policy and its share price?
3. Why are cash dividend payments thought to be more certain than capital gains?
2. What is meant by the bird-in-the-hand dividend theory?
1. Summarize the position that a dividend policy may be irrelevant with regard to the firm’s stock price.
2. How does the firm’s actual dividend policy affect its need for externally generated financial capital?
1. Provide a financial executive with a useful definition of the term dividend payout ratio.
2. Why is capital structure design both an art and a science?
1. Identify several factors that influence the decision to issue debt.
2. How are various leverage ratios and industry norms used in capital structure management?
1. Explain the meaning of the EBIT-EPS indifference point.
2. What is the key attribute that defines a firm’s optimal capital structure?
1. What is the objective of capital structure management?
2. If a firm’s operating and financial leverage are such that a 10 percent change in sales revenue produced a 20 percent change in EBIT, and a 10 percent change in EBIT led to a 20 percent change
1. How do operating and financial leverage interact to affect the volatility of a firm’s earnings per share?
3. If the ratio of the percent change in earnings per share to the corresponding percent change in EBIT’were 2, what percent change in earnings would you expect to follow a 15 percent decline in
2. How does financial leverage affect the volatility of firm earnings in response to changes in EBIT?
1. What creates financial leverage in a firm’s capital structure?
2. What is the effect of operating leverage on the volatility of a firm’s EBIT?
1. When is operating leverage present in the firm’s cost structure? What condition is necessary for operating leverage not to be present in the firm’s cost structure?
2. When is it useful or sometimes necessary to compute the break-even point in terms of sales dollars rather than units of output?
1. Distinguish among fixed costs, variable costs, and semivariable costs.
2. What is a scenario analysis? What is a sensitivity analysis? When would you perform a sensitivity analysis?
1. Explain how simulations work.
2. Describe two methods for estimating a project’s systematic risk.
1. What is the most commonly used method for incorporating risk into the capital-budgeting decision?How is this technique related to Principle 3?
4. What problems are associated with using systematic risk as the measure for risk in capital budgeting?
3. What is systematic risk?
2. Isa project’s standing alone risk the appropriate level of risk for capital budgeting? Why or why not?
1. In terms of capital budgeting, a project’s risk can be looked at on three levels. What are they and what are the measures of risk?
3. Give an example of an option to abandon a project. Why might this be of value?
1. Give an example of an option to delay a project. Why might this be of value?ae 2. Give an example of an option to expand a project. Why might this be of value?
3. Although depreciation is not a cash flow item, it plays an important role in the calculation of cash flows. How does depreciation affect a project’s cash flows?
2. What is a free cash flow? How do we calculate it?
1. In general, a project’s cash flows will fall into one of three categories. What are these categories?
2. If Ford introduces a new auto line, might some of the cash flows from that new car line be diverted from existing product lines? How should you deal with this?
1. What is an incremental cash flow? What is a sunk cost? Why must you account for opportunity costs?
1. What methods do corporations use to enter international markets?
1. What capital-budgeting criteria seem to be used most frequently in the real world? Why do you think this is so?

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