Questions and Answers of Foundations of Finance

Star Supermarket made the following projections of sales for first six months of 2017:The cost of goods sold is 60 percent of sales, purchases are all made in credit in previous month of sales. For
Aldagi Corporation is an insurance company, which operates in South Caucasus region. Since 2005, the company has increased its sales in the region and became a leader in health care, property-, and
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?
How does the use of current liabilities enhance profitability and also increase the firm’s risk of default on its financial obligations?
What is the hedging principle or principle of self-liquidating debt?
What are some examples of permanent and temporary investments in current assets?
Is trade credit a permanent, temporary, or spontaneous source of financing? Explain.
What three actions can a firm take to minimize its net working capital?
Define days of sales outstanding, days of sales in inventory, and days of payables outstanding.
What is the fundamental interest equation that underlies the calculation of the approximate cost-of-credit formula?
What is the annual percentage yield (APY), and how does it differ from the annual percentage rate (APR)?
What are some examples of unsecured and secured sources of short-term credit?
What are the types of credit agreements a firm can get that are secured by its accounts receivable as collateral?
What are some examples of loans secured by a firm’s inventories?
What is the goal of the firm?
How would you apply this goal in practice?
What is the agency problem, and why does it occur?
Why are ethics and trust important in business?
What are the basic types of issues addressed by the study of finance?
What are the duties of a treasurer? Of a controller?
Explain why large and growing firms tend to choose the corporate form.
What is an LLC?
What has brought on the era of the multinational corporation?
Has looking beyond U.S. borders been a profitable experience for U.S. corporations?
List the key advantages and disadvantages of a(a) sole proprietorship,(b) partnership,(c) corporation.
Identify the primary drawbacks of a corporation.
Show the differences between organizational forms using the following criteria:(a) number of owners, (b) liability for firm’s debts, (c) change in ownership dissolves the firm, and (d) taxation.
Ethical problems seem to be an issue in finance in the current global business environment. Several websites, like Bloomberg and CNN Money, have analyzed and discussed various financial scandals.
The five principles that form the foundations of finance—cash flow is what matters, money has a time value, risk requires a reward, market prices are generally right, and conflicts of interest
Assume you are an assistant financial analyst at an international corporation, Occulocorp, and you are interviewed by a radio broadcast journalist. You are asked to introduce and explain basic
Explain the difference between (a) public offerings and private placements, (b) primary markets and secondary markets, (c) the money market and the capital market, and(d) organized security exchanges
Name the benefits derived from the existence of stock exchanges.
What is the main difference between an investment banker and a commercial banker?
What are the three major functions of an investment banker?
What are the five key methods by which securities are distributed to final investors?
Within the financial markets, explain what we mean by “private placements” and name the advantages and disadvantages.
What is the opportunity cost of funds?
Over long periods of time, is the real rate of return higher on 30-year Treasury bonds or 30-year Aaa corporate bonds?
Distinguish between the concepts of the inflation premium and the default-risk premium.
Distinguish between the concepts of the maturity-risk premium and the liquidity-risk premium.
Write an equation that includes the building blocks of the nominal rate of interest.
Which shape of the yield curve is considered to be the most typical?
What are the key characteristics of an effective financial system?
Why do venture capital firms find start-ups and early-stage companies appealing to venture capital firm? Why are they not appealing to the broader public markets?
What is meant by the term private placement? What are its advantages and disadvantages within the financial markets?
Suppose you are a financial advisor and a corporate treasurer at a corporation, which is going to issue a new security. The corporation requires your expertise on flotation costs. In this context,
Assume the real risk-free rate of interest is 3%, while inflation is expected to be 3% for the next 2 years. If a 2-year Treasury note yields 6.5%, what is the maturity-risk premium for this 2-year
You have been asked for an approximation of the increase in real purchasing power. How would you answer with consideration to the following conditions: What is the approximate increase in real
Your CFO is considering an investment in Treasury bills. You have been asked for an approximation on real risk-free rate of interest with following data (ignore the cross product between the real
You have been asked to provide an approximation of the real interest rate considering following situation: the real riskfree rate of interest is 4.8% and the expected rate of inflation is constant at
You work at the central bank and have been asked to estimate appropriate nominal interest rates for several different Treasury bonds with different maturity dates. You have been told to employ the
Discuss the shape of the yield curve based on the following:a. Find any yield curve in the Internet.b. Discuss three theories that explain the term structure of interest rate.
You have been assigned to work as an assistant to the chief financial officer (CFO) of Carat Designs, Inc. As one of your assignments, you have been asked to estimate the nominal interest rate for a
What can we learn by reviewing a firm’s income statement?
What basic relationship can we see in an income statement?
How do gross profits, operating income, and net income relate to the areas of business activity reported in the income statement?
What are earnings per share and dividends per share?
What is a profit margin? What are the different types of profit?
For the time frame reported, how is the balance sheet different from the income statement?
What is the basic balance sheet equation, and what does it mean?
What is a firm’s “accounting book value”?
What are a firm’s two principal sources of financing? Of what do these sources consist?
What is gross working capital? Net working capital?
What is a debt ratio?
Why doesn’t an income statement provide a measure of a firm’s cash flows?
What does each part tell us about a company?
How are taxes owed computed?
Why should we be more concerned with the marginal tax rate rather than the average tax rate?
Go to the home page of a large corporate and find its latest financial or annual reports. Look for key words in the income statement that appear in this chapter, such as sales, gross profits, and net
Prepare a balance sheet from the following information. What is the net working capital and debt ratio? Cash Accounts receivable Accounts payable Short-term notes payable Inventories Gross fixed
The balance sheet and consolidated income statement for Onno Corporation has been provided. What is the common-sized income statement and balance sheet for both years. Why is an accounting statement
A company recently announced an increase in its net income, yet its net cash flow declined relative to last year. Explain.
A company has cash from operating activities of $220, cash from investing activities of ($93), cash from financing activities of ($107) and a beginning cash balance of $27. What will the company´s
What is the Zed Corporation’s 2014 cash flow from operating activities? Zed Corporation Consolidated Balance Sheet for Years Ending December 31, 2013 and December, 31, 2014 (in $ millions) 2014
Ante enterprise has the following items in its income statement: sales were $1,250,000; operating expenses were $325,000; cost of goods sold came to $650,000; interest expense was $50,000; interest
What is the basic purpose of financial analysis?
How does a firm use financial ratios? Who else might use financial ratios and why?
Where can we find financial ratios for different companies or for peer groups?
What information about the firm is provided by liquidity measures?
Describe the two perspectives available for measuring liquidity.
Why might a very high current ratio actually indicate there’s a problem with a firm’s inventory or accounts receivable management? What might be another reason for a high current ratio?
Why might a successful (liquid) firm have an acid-test ratio that is less than 1?
Which number in a company’s income statement should be used to measure its profitability relative to its total assets? Why?
What two broad areas of the firm’s management does the operating return on assets assess?
What factors influence the operating profit margin?
A low total asset turnover indicates that a firm’s total assets are not being managed efficiently.What additional information would you want to know when this is the case?
What information is provided by the debt ratio?
Why is it important to calculate the times interest earned ratio, even for firms that have low debt ratios?
Why does operating income not give a complete picture of a firm’s ability to service its debt?
How is a company’s return on equity related to the firm’s operating return on assets?
How is a company’s return on equity related to the firm’s debt ratio?
What is the upside of debt financing? What is the downside?
What determines if a firm is creating or destroying shareholder value?
What measures can we use to determine whether a firm is creating shareholder value?
What is indicated by a price/book ratio that is greater than 1? Less than 1?
How does the information provided by a firm’s price/book ratio differ from that provided by its price/earnings ratio?
How do the profits shown in an income statement differ from economic profits?
When comparing a firm to its peers, why is it difficult to determine the industry to which the firm belongs?
Why do differences in the accounting practices of firms limit the usefulness of financial ratios?
Why should you be careful when comparing a firm with industry norms?

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