QUESTIONS OF THE DAY

What should the financial manager maximize?  Explain briefly why.

Or

“When different firms look at the same project, the value of the assets is the same for all firms.” True or false?  Explain briefly why.

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Why is it right for managers to follow the NPV rule?

“If there is no capital market, a cashflow of $500 at time 1 will have a PV today of $500.” True or false?  Explain briefly why.

Or

“When a firm takes a positive NPV project, most of the NPV goes to s/h in the form of a wealth increase.” True or false?  Explain briefly why.

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When should you compute PV using real cashflows  and real discount rates instead of nominal cashflows and nominal discount rates?

“If nominal cashflows are a growing annuity, starting at time 1 with a payment of $100, and growing at the inflation rate, the real cashflows will be constant at $100.” True or false?  Explain briefly why.

Or

“If the interest rate is 12% per year compounded quarterly, then the actual rate will be 1% each month.” True or false?  Explain briefly why.

Or

“A higher current ratio is not necessarily better than a lower one.” True or false?  Explain briefly why.

State two reasons why a firm’s market-to-book (MTB) ratio might increase over time.

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What is the possible downside of a high sales-to-assets ratio?  Explain briefly.

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Why should a s/h who plans to hold a stock only for 2 years compute stock price as the PV of all future dividends? Explain briefly.

“Higher values of debt burden imply that interest payments absorb a higher proportion of the money available for making interest payments.” True or false?  Explain briefly why.

Or

“Even for a non-constant growth stock (i.e. dividends don’t grow at a constant rate forever) we still use the growing perpetuity formula in coming up with the stock price.” True or false?  Explain briefly why.

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A firm invests retained earnings in zero NPV projects.  Does this result in growth?  If so, is the growth meaningful?  Explain briefly.

Describe briefly what a negative free cashflow indicates.

Or       

“Lower P/E ratios imply that the market believes you will be making more positive NPV investments in the future.” True or false?  Explain briefly why.

Or                   

         0           1              2              3

                 1,500     -800         -800         -800         

The IRR of these cashflows is 28%, which is greater than the required return of 15%.  However, this is not a project worth taking.  Explain why.

When comparing 2 projects, explain why the one with the higher IRR may not have the higher NPV.

Or       

If a set of cashflows turns out to have 2 IRRs, how do you figure out which NPV curve describes the project? (Graph is not necessary.)

Or       

In computing cashflows for capital budgeting, how do we treat interest expenses, and why?

Assets you bought 10 years ago for $125,000 are used for a project today, when their book value is $45,000.  How much do you charge the project for use of the land?  (No explanation necessary.)

Or                   

“the working capital you recover at the end of a project is sometimes more than the total amount invested over the life of the project, and sometimes less.” True or false?  (No explanation necessary.)

Or