busi 408 concept Questions & Answers
Yes, they are. Such entities generally need to allocate available capital
Are the capital budgeting criteria we
efficiently, just as for-profits do. However, it is frequently the case that the
discussed applicable to not-for-profit
"revenues" from not-for-profit ventures are intangible. For example,
corporations? How should such
charitable giving has real opportunity costs, but the benefits are generally
entities make capital budgeting
hard to measure. To the extent that benefits are measurable, the question
decisions? What about the U.S.
of an appropriate required return remains. Payback rules are commonly
government? Should it evaluate
used in such cases. Finally, realistic cost/benefit analysis along the lines
spending proposals using these
indicated should definitely be used by the U.S. government and would go
techniques?
a long way toward balancing the budget!
As a financial manager, how could Comparing a firm to its peers allows the financial manager to evaluate
you use the results of peer group whether some aspects of the firm's operations, finances, or investment
analysis to evaluate the performance activities are out of line with the norm, thereby providing some guidance
of your firm? on appropriate actions to take to adjust these ratios, if appropriate.
As you increase the length of time Future values grow (assuming a positive rate of return); present values
involved, what happens to future shrink.
values? What happens to
present values?
, busi 408 concept Questions & Answers
As you increase the length of time Assuming positive cash flows and a positive interest rate, both the present
involved, what happens to the and the future value will rise.
present value of an annuity? What
happens to the future value?
An argument can be made either way. At one extreme, we could argue
can our goal of maximizing the value that in a market economy, all of these things are priced. This implies an
of the stock conflict w other goals, optimal level of ethical and/or illegal behavior and the framework of stock
such as avoiding unethical or illegal valuation explicitly includes these. At the other extreme, we could argue
behavior? Do u think subjects such as that these are non-economic phenomena and are best handled through
customer and employee safety, the the political process. The following is a classic (and highly relevant)
environment, and the general good thought question that illustrates this debate: "A firm has estimated that the
of society fit in this framework, or are cost of improving the safety of one of its products is $30 million. However,
essentially ignored the firm believes that improving the safety of the product will only save
$20 million in product liability claims. What should the firm do
tells us the dollar amount investment in assets needed to generate one
capital intensity ratio
dollar in sales.
ratio represents the ability of the firm to completely pay off its current
cash ratio
liabilities balance with its most liquid asset (cash).
, busi 408 concept Questions & Answers
Corporate ownership varies around We would expect agency problems to be less severe in other countries,
the world. Historically, individuals primarily due to the relatively small percentage of individual ownership.
have owned the majority of shares in Fewer individual owners should reduce the number of diverse opinions
public corporations in the United concerning corporate goals. The high percentage of institutional
States. In Germany and Japan, ownership might lead to a higher degree of agreement between owners
however, banks, other large financial and managers on decisions concerning risky projects. In addition,
institutions, and other companies own institutions may be able to implement more effective monitoring
most of the stock in public mechanisms than can individual owners, given institutions' deeper
corporations. Do you think agency resources and experiences with their own management. The increase in
problems are likely to be more or less institutional ownership of stock in the United States and the growing
severe in Germany and Japan thai in activism of these large shareholder groups may lead to a reduction in
the United States? Why? In recent agency problems for U.S. corporations and a more efficient market for
years, large financial institutions such corporate control.
as mutual funds and pension funds
have become the dominant owners of
stock in the United States, and these
institutions are becoming more active
in corporate affairs. What are the
implications of this trend for agency
problems and corporate control?
Could a company's cash flow to If a company raises more money from selling stock than it pays in
stockholders be negative in a given dividends in a particular period, its cash flow to stockholders will be
year? (Hint: Yes.) Explain how this negative. If a company borrows more than it pays in interest, its cash flow
might come about. What about cash to creditors will be negative.
flow to creditors?
, busi 408 concept Questions & Answers
For example, if a company were to become more efficient in inventory
Could a company's change in
management, the amount of inventory needed would decline. The same
NWC be negative in a given year?
might be true if it becomes better at collecting its receivables. In general,
(Hint: Yes.) Explain how this might
anything that leads to a decline in ending NWC relative to beginning NWC
come about. What about net capital
would have this effect. Negative net capital spending would mean more
spending?
long-lived assets were liquidated than purchased.
A co-worker claims that looking at all It is true that if average revenue is less than average cost, the firm is losing
this marginal this and incremental that money. This much of the statement is therefore correct. At the margin,
is a bunch of nonsense and states: however, accepting a project with marginal revenue in excess of its
"Listen, if our average revenue doesn't marginal cost clearly acts to increase operating cash flow. At the margin,
exceed our average cost, then we will even if a firm is losing money, if marginal revenue exceeds marginal cost,
have a negative cash flow, and we will the firm will lose less than it would without the new project.
go broke!" How do you respond?
Yes, they are. Such entities generally need to allocate available capital
Are the capital budgeting criteria we
efficiently, just as for-profits do. However, it is frequently the case that the
discussed applicable to not-for-profit
"revenues" from not-for-profit ventures are intangible. For example,
corporations? How should such
charitable giving has real opportunity costs, but the benefits are generally
entities make capital budgeting
hard to measure. To the extent that benefits are measurable, the question
decisions? What about the U.S.
of an appropriate required return remains. Payback rules are commonly
government? Should it evaluate
used in such cases. Finally, realistic cost/benefit analysis along the lines
spending proposals using these
indicated should definitely be used by the U.S. government and would go
techniques?
a long way toward balancing the budget!
As a financial manager, how could Comparing a firm to its peers allows the financial manager to evaluate
you use the results of peer group whether some aspects of the firm's operations, finances, or investment
analysis to evaluate the performance activities are out of line with the norm, thereby providing some guidance
of your firm? on appropriate actions to take to adjust these ratios, if appropriate.
As you increase the length of time Future values grow (assuming a positive rate of return); present values
involved, what happens to future shrink.
values? What happens to
present values?
, busi 408 concept Questions & Answers
As you increase the length of time Assuming positive cash flows and a positive interest rate, both the present
involved, what happens to the and the future value will rise.
present value of an annuity? What
happens to the future value?
An argument can be made either way. At one extreme, we could argue
can our goal of maximizing the value that in a market economy, all of these things are priced. This implies an
of the stock conflict w other goals, optimal level of ethical and/or illegal behavior and the framework of stock
such as avoiding unethical or illegal valuation explicitly includes these. At the other extreme, we could argue
behavior? Do u think subjects such as that these are non-economic phenomena and are best handled through
customer and employee safety, the the political process. The following is a classic (and highly relevant)
environment, and the general good thought question that illustrates this debate: "A firm has estimated that the
of society fit in this framework, or are cost of improving the safety of one of its products is $30 million. However,
essentially ignored the firm believes that improving the safety of the product will only save
$20 million in product liability claims. What should the firm do
tells us the dollar amount investment in assets needed to generate one
capital intensity ratio
dollar in sales.
ratio represents the ability of the firm to completely pay off its current
cash ratio
liabilities balance with its most liquid asset (cash).
, busi 408 concept Questions & Answers
Corporate ownership varies around We would expect agency problems to be less severe in other countries,
the world. Historically, individuals primarily due to the relatively small percentage of individual ownership.
have owned the majority of shares in Fewer individual owners should reduce the number of diverse opinions
public corporations in the United concerning corporate goals. The high percentage of institutional
States. In Germany and Japan, ownership might lead to a higher degree of agreement between owners
however, banks, other large financial and managers on decisions concerning risky projects. In addition,
institutions, and other companies own institutions may be able to implement more effective monitoring
most of the stock in public mechanisms than can individual owners, given institutions' deeper
corporations. Do you think agency resources and experiences with their own management. The increase in
problems are likely to be more or less institutional ownership of stock in the United States and the growing
severe in Germany and Japan thai in activism of these large shareholder groups may lead to a reduction in
the United States? Why? In recent agency problems for U.S. corporations and a more efficient market for
years, large financial institutions such corporate control.
as mutual funds and pension funds
have become the dominant owners of
stock in the United States, and these
institutions are becoming more active
in corporate affairs. What are the
implications of this trend for agency
problems and corporate control?
Could a company's cash flow to If a company raises more money from selling stock than it pays in
stockholders be negative in a given dividends in a particular period, its cash flow to stockholders will be
year? (Hint: Yes.) Explain how this negative. If a company borrows more than it pays in interest, its cash flow
might come about. What about cash to creditors will be negative.
flow to creditors?
, busi 408 concept Questions & Answers
For example, if a company were to become more efficient in inventory
Could a company's change in
management, the amount of inventory needed would decline. The same
NWC be negative in a given year?
might be true if it becomes better at collecting its receivables. In general,
(Hint: Yes.) Explain how this might
anything that leads to a decline in ending NWC relative to beginning NWC
come about. What about net capital
would have this effect. Negative net capital spending would mean more
spending?
long-lived assets were liquidated than purchased.
A co-worker claims that looking at all It is true that if average revenue is less than average cost, the firm is losing
this marginal this and incremental that money. This much of the statement is therefore correct. At the margin,
is a bunch of nonsense and states: however, accepting a project with marginal revenue in excess of its
"Listen, if our average revenue doesn't marginal cost clearly acts to increase operating cash flow. At the margin,
exceed our average cost, then we will even if a firm is losing money, if marginal revenue exceeds marginal cost,
have a negative cash flow, and we will the firm will lose less than it would without the new project.
go broke!" How do you respond?
