Chapter 1: Corporate Finance and the Financial Manager (стр. 6 )

Corporate taxes make it costly for a firm to retain excess cash. When the firm receives interest from its investment in financial securities, it owes taxes on the interest. Thus, cash is equivalent to negative leverage, and the tax advantage of leverage implies a tax disadvantage to holding cash.

9. What possible signals does a firm give when it cuts its dividend?

According to the dividend signaling hypothesis, when a firm cuts the dividend it gives a negative signal to investors that the firm does not expect that earnings will rebound in the near-term and it needs to reduce the dividend to save cash. Also, a firm might cut its dividend to exploit new positive-NPV investment opportunities. In this case, the dividend decrease might lead to a positive stock price reaction.

10. Would managers be more likely to repurchase shares if they believe the stock is under - or overvalued?

If managers believe the stock is currently undervalued, a share repurchase is a positive-NPV investment. Managers will clearly be more likely to repurchase shares if they believe the stock to be undervalued.

11. What is the difference between a stock dividend and a stock split?

There is not a substantial difference between a stock split and a stock dividend. Stock splits typically are stock dividends 50% or higher.

12. What are some advantages of a spin-off as opposed to selling the dividend and distributing the cash?

The advantage of the spin-off is that the firm avoids transaction costs associated with the sale and investors are not subjected to an immediate tax effect of a special dividend.

Chapter 18: Financing Modeling and Pro Forma Analysis

1. How does long-term financial planning fit into the goal of the financial manager?

Long-term financial planning is a tool to help financial managers maximize the value of the stockholders’ stake in the firm.

2. What are the three main things that the financial manager can accomplish by building a long-term financial model of the firm?

Building a long-term financial model of the firm allows the financial manager to (1) identify important linkages among the components of the firm’s financial statements, (2) analyze the impact of a potential business plan, and (3) plan for future funding needs.

3. What is the basic idea behind the percent of sales method for forecasting?

The basic idea behind the percent of sales forecasting method is that as sales grow many income statement and balance sheet items will grow, remaining the same percentage of sales.

4. How does the pro forma balance sheet help the financial manager forecast net new financing?

An imbalance on the pro forma balance sheet will show the amount of net new financing that is needed to fund the firm’s growth.

5. What is the advantage of forecasting capital expenditures, working capital, and financing events directly?

Fast growth often requires “lumpy” investments in new capacity, rather than in the smooth manner that the percent of sales forecasting method assumes. Forecasting these items directly allows for the assumption that the firm will make large investments in capacity and will need new funding in large, infrequent financing rounds.

6. What role does minimum required cash play in working capital?

The minimum required cash is the amount of cash a firm needs to keep the business running smoothly, given variations in the timing of income and expenses. Because these cash balances seldom earn interest, there is an opportunity cost of holding the cash balances. Due to the opportunity cost of holding the cash balance, the minimum required cash is included as working capital.

7. What is the difference between the internal growth rate and the sustainable growth rate?

The internal growth rate identifies how much growth a firm can support using only its retained earnings. The sustainable growth rate tells us how fast the firm can grow by reinvesting retained earnings and issuing debt in an amount that maintains the firm’s debt/equity ratio.

8. If a firm grows faster than its sustainable growth rate, is that growth value decreasing?

No, growing faster than the sustainable growth rate is not necessarily value decreasing. If a company grows at a rate faster than the sustainable growth rate, it must incur flotation and issuance costs associated with the new financing. As long as the benefit of the growth is enough to cover these issuance costs, the growth can be value-enhancing.

9. What is the multiples approach to continuation value?

Distant cash flows are difficult to estimate; therefore, a multiples approach is often petition among firms within an industry will lead to long-term expectations of multiples to be the same across firms. Therefore, a long-term estimate of a valuation multiple for the industry is often used to estimate the continuation value of a firm.

10. How does forecasting help the financial manager decide whether to implement a new business plan?

Forecasting gives the financial manager the variables needed to value the firm with the expansion and without the expansion.

Chapter 19: Working Capital Management

1. What is the difference between a firm’s cash cycle and operating cycle?

A firm’s cash cycle is the length of time between when the firm pays cash to purchase its inventory and when it receives cash from the sale of the output produced from the inventory. The operating cycle is the average length of time between when a firm originally purchases its inventory and when it receives the cash back from selling its products.

2. How does working capital impact a firm’s value?

Working capital impacts a firm’s value by affecting its free cash flows.

3. What does the term “2/10, net 30” mean?

The term “2/10, net 30” means that the buying firm will receive a 2% discount if it pays for the goods within 10 days; otherwise, the full amount is due in 30 days.

4. List three factors that determine collection float.

The three factors that determine collection float are the mail float, processing float, and the availability float. Mail float is how long it takes the firm to receive the check after the customer has mailed it.
The time it takes the firm to process the check and deposit it in the bank is called the processing float. Availability float is the time it takes before the bank gives the firm credit for the funds after the firm deposits a check.

5. Describe three steps in establishing a credit policy.

Establishing a credit policy involves three steps: establishing credit standards (whom the firm will extend credit to), establishing credit terms (the length of the period before payment must be made), and establishing a collection policy to deal with late payments.

6. What is the difference between accounts receivable days and an aging schedule?

Accounts receivable days are the average number of days that it takes a firm to collect on its sales. An aging schedule categorizes accounts by the number of days they have been on the firm’s books.

7. What is the optimal time for a firm to pay its accounts payable?

The optimal time for a firm to pay its accounts payable is on the latest day allowed. For example, if the terms are 2/10, net 30, and the firm is taking the discount, payment should be made on day 10. If the discount is not taken, then payment should be made on day 30. The firm should pay on day 10 and take the discount unless this is the cheapest source of funding for the firm.

8. What do the terms COD and CBD mean?

COD means cash on delivery and CBD means cash before delivery.

9. What are the direct costs of holding inventory?

The direct costs of holding inventory are acquisition costs, order costs, and carrying costs.

10. Describe “just-in-time” inventory management.

With “just-in-time” inventory management, the firm acquires inventory precisely when needed so that its inventory balance is always zero, or very close to it.

11. List three reasons why a firm holds cash.

A firm holds cash to meet its day-to-day needs, to compensate for the uncertainty associated with its cash flows, and to satisfy bank requirements.

12. What tradeoff does a firm face when choosing how to invest its cash?

When choosing how to invest its cash, a firm faces a risk-return tradeoff. In fact, the firm may choose from a variety of short-term securities that differ somewhat with regard to their default risk and liquidity risk: the greater the risk, the higher the expected return on the investment. The financial manager must decide how much risk she is willing to accept in return for a higher yield.

Chapter 20: Short-Term Financial Planning

1. How do we forecast the firm’s future cash requirements?

The first step in short-term financial planning is to forecast the company’s future cash flows. When we analyze the firm’s short-term cash financing needs, we typically examine its cash flows at quarterly intervals.

2. What is the effect of seasonalities on short-term cash flows?

Seasonal sales create large short-term cash flow deficits and surpluses. Therefore, firms need short-term financing to fund seasonal working capital requirements.

3. What is the matching principle?

The matching principle specifies that short-term needs for funds should be financed with short-term sources of funds and long-term needs with long-term sources of funds.

4. What is the difference between temporary and permanent working capital?

Permanent working capital is the amount that a firm must keep invested in its short-term assets to support its continuous operations. Temporary working capital is the difference between the actual level of investment in short-term assets and the permanent working capital investment.

5. What is the difference between an uncommitted line of credit and a committed line of credit?

An uncommitted line of credit is an informal agreement that does not legally bind the bank to provide the funds. A committed line of credit consists of a written, legally binding agreement that obligates the bank to provide the funds regardless of the financial condition of the firm (unless the firm is bankrupt) as long as the firm satisfies any restrictions in the agreement.