Reference no: EM134140

Question 1

1) Agency problems are said to be intrinsic in the corporate form of an association. Why do you think this is the case? Do you think agency problems occur in a sole proprietorship or a partnership? What steps would you take to reduce agency problems in a so-called typical corporation?

2) Why is it essential for a definite to maintain a sensible level of liquid assets? Do you think some industries require top or minor levels of liquid property than others? What factors might involve a firm's liquidity needs?

3) It has been said that anyone with a pencil can analyse financial ratios, but it takes a brain to construe them. What should financial analyst keep in mind when evaluating the financial statements of any firm?

4) The notion that money has time value is based on the continuation of a non-zero occasion rate. Why is the occasion rate so important? Create an example that shows, with an opportunity rate of 0%, that the value of $1 received today will be $1 in the future.

5) Imagine you are the treasurer of a small developed firm. Your firm is planning to go public one unsettled question concerns the market's necessary return on the stock. Given what you have learned, how do you think the essential return will involve the market value of your firm's stock?

How would you go about estimating this rate?

6) What is the stand-alone standard? Why is it important to the study of capital projects?

7) What is a ruined cost? Why is it important to understand this concept when analyzing capital projects?

8) What is operating influence? How is it measured? Why is it important to the analysis of capital spending projects?

9) You are discussing stock assessment techniques with your broker. You mention that your Finance professor stated that "a stock that will never pay a extra is valueless." Your broker says this is not true because

• You can always sell the stock to someone else.
• A share of stock represents a share of ownership in something touchable Argue for or against your broker's position.

10) In discussing benefit pricing, your textbook suggests that a shareholder will be indifferent between two bonds with equal yield to maturity, as long as they are of equal risk. Can you think of any real-world factors that might make an investor prefer one of these bonds over the other?

11) Evaluate discounted cash flow and non-discounted cash flow capital budgeting techniques. If you were to assess a project, which one of these techniques would you use?

12) Given our goals of firm value and investor wealth maximization, we have stressed the importance of Net Present Value. Yet many financial decision makers at well-known firms maintain to use less attractive measures rather than more desirable measures.
Why do you think this is the case?

13) According to your textbook, "an investment should be established if the net present value is positive and rejected if it is negative". What does a Net Present Value of zero mean? If you were a financial decision maker facing a project with NPV of zero (or close to zero) what would you do? Can you think of any other factors that might authority your decision?

14) What are the four methods of calculating effective cash flow? Under what conditions is each method suitable?

15) Briefly explain each of the three methods of performing the "what if" analysis described in your textbook. What is the financial analyst's main goal when conduct each analysis? Under what situation would each method be suitable?

16) Describe the three forms of market competence. Why should a financial decision maker, such as a corporate treasurer or CFO, be concerned with market efficiency?

17) We regularly assume that investors are "risk-averse return-seekers" If so, why do we contend that only systematic risk is important? Alternatively, why is total risk, on its own, not important to investors?

18) According to the CAPM, the usual return on a risky asset depends on 3 components. Explain each factor, and clarify the role of each one in determining usual return.

19) Why should financial decision makers find a good estimation of a firm's cost of capital? What are the consequences of using a discount rate that is higher or lower than a firm's true necessary return?

Question 2

How to use a worksheet to calculate and come up with the cash flows for the information listed below.

•Initial speculation outlay of $20 million for tools only

•Project and equipment life: 5 years

•Sales projected to be $12 million per year for 5 years.

•Suppose gross margin of 50 Percent

•Depreciation: Straight-line for tax purposes

•Selling, general, and administrative expenses: 10 Percent of sales

•Tax rate: 35 Percent

How to calculate the Net Present of Value and utilized in conjugation with WACC of 5 Percent as reflect in the attached Week 5 Net Present of Value IRR. Does the coffee packaging project maximize the firm's value?

• Should the company undertake this project, the prior project, or both?

• What suggestion should I give to John Matthews and the board?

• How can I explain my evaluation?

• Should the second project be established?