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1、 - 1What are the three basic questions of corporate finance?a. Investment decision (capital budgeting): What long-term investment strategyshould a firm adopt?b. Financing decision (capital structure): How much cash must be raised for therequired investments?c. Short-term finance decision (working ca
2、pital): How much short-term cashflow does company need to pay its bills. List three reasons why value creation is difficult.Value creation is difficult because it is not easy to observe cash flows directly.The reasons are:a. Cash flows are sometimes difficult to identify.b. The timing of cash flows
3、is difficult to determine.c. Cash flows are uncertain and therefore risky. - 2 What is the balance-sheet equation?Assets = Liabilities + Stockholders equity What three things should be kept in mind when looking at a balance sheet?Accounting liquidity, debt vs. equity, and value vs. cost. What is the
4、 income statement equation?Revenue - expenses = IncomeWhat are the three things to keep in mind when looking at an income statement?Generally Accepted Accounting Principles (GAAP), noncash items, and time andcosts. What are noncash expenses?Noncash expenses are items included as expenses but which d
5、o not directly affectcash flow. The most important one is depreciation. What is net working capital?It is the difference between current assets and current liabilities.What is the change in net working capital?To determine changes in net working capital you subtract uses of net workingcapital from s
6、ources of net working capital. How is cash flow different from changes in net working capital?The difference between cash flow and changes in new working capital is thatsome transactions affect cash flow and not net working capital. The acquisitionof inventories with cash is a good example of a chan
7、ge in working capitalrequirements. What is the difference between operating cash flow and total cash flow of the to firm?The main difference between the two is capital spending and additions toworking capital, that is, investment in fixed assets and investment in workingcapital. - 3Define future val
8、ue and present value.Future value is the value of a sum after investing over one or more periods.Present value is the value today of cash flows to be received in the future. How does one use net present value when making an investment decision?One determines the present value of future cash flows an
9、d then subtracts thecost of the investment. If this value is positive, the investment should beundertaken. If the NPV is negative, then the investment should be rejected. What is the formula for the net present value of a project?TNPV = -C + C /(1+I)t0t What is the relationship between the stated an
10、nual interest rate and theeffective annual interest rate?Effective annual interest rate = (1 + (r/m) ) - 1.mDefine continuous compounding.Continuous compounding compounds investments every instant. What are the formulas for perpetuity, growing-perpetuity, annuity, andgrowing annuity?Perpetuity: PV =
11、 C/rGrowing Perpetuity: PV = C/(r-g)Annuity: PV = (C/r) 1-1/(1+r) TGrowing Annuity: PV = C/(r-g) 1-(1+g) / (1+r) TWhat are three important points concerning the growing perpetuity formula?1.2.3.The numerator.The interest rate and the growth rate.The timing assumption. 4 Define pure discount bonds, l
12、evel-coupon bonds, and consols.A pure discount bond is one that makes no intervening interest payments. Onereceives a single lump sum payment at maturity. A level-coupon bond is acombination of an annuity and a lump sum at maturity. A consol is a bond thatmakes interest payments forever. to Contrast
13、 the state interest rate and the effective annual interest rate for bondspaying semi-annual interest.Effective annual interest rate on a bond takes into account two periods ofcompounding per year received on the coupon payments. The state rate does nottake this into account.What is the relationship
14、between interest rates and bond prices?There is an inverse relationship. When one goes up, the other goesdown. How does one calculate the yield to maturity on a bond?One finds the discount rate that equates the promised future cash flows with theprice of the bond. How to calculate the value of a sto
15、ck with a dividend-growth (1)zerogrowth;(2)constant growth (3)differential(1)p=Div/r (2)p=Div/r-g (3)p=(Div t+1 /r-g )/(1+r)TWhat are the three factors determining a firms P/E ratio?Todays expectations of future growth opportunities.The discount rte.1.2.3.The accounting method. How dose one estimate
16、 the dividend growth rate g?CONCEPT QUESTIONS - Appendix to Chapter 5What is the pie model of capital structure?It is a model in which the value of the firm is pictured as a pie cut into debt andequity slices.Why should financial managers choose the capital structure that maximizes thevalue of the f
17、irm.Because this capital structure also maximizes the value of equity. Calculate the EPS of an unlevered company and a levered company.Describe financial leverage.It is the extent to which a company relies on debt in its capital structure.What is levered equity?The equity of a firm that has debt in
18、its capital structure.Why does the expected return on equity risk with firm leverage?Because increasing leverage raises the risk of equity.What is the exact relationship between the expected return on equity and firm to leverage?R = r + (r r ) (B/S)soobHow are market-value balance sheets set up?They
19、 are set up the same way as accounting balance sheets with assets on the leftside and liabilities on the right side. However, instead of valuing assets in termsof historical values, market values are used.What is the quirk in the tax code making a levered firm more valuable than anotherwise-identica
20、l unlevered firm?Interest payments are tax deductible and dividend payments are not.What is MM Proposition under corporate taxes?V = V + T BLUCWhat MM Proposition II under corporate taxes?r = p + (B/S)(1-T )(p-r )scBCONCEPT QUESTIONS - CHAPTER 6What is a merger? How does a merger differ from other f
21、orms of acquisition?A merger is the absorption of one firm by another, where the acquiring firmretains its identity and the acquired firm ceases to exist. It differs from otherforms of acquisition in that no new firm is created, and there is no need ofbuying the individual assets of the acquired fir
22、m or its stock.What is a takeover?It is the transference of control of a firm from one group of shareholders toanother by means of a majority vote of the board of directors. Explain the source of synergy from acquisitions.(1)revenue enhancement (2)cost reduction (3)lower taxes (4)lower cost of capital. What are the advantages and disadvantages to using a
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