1. What is the goal of the firm and, therefore, of all managers and employees? Discuss how
one measures achievement of this goal. What is risk? Why must risk as well as return be
considered by the financial manager who is evaluating a decision alternative or action.
2. How can the firm structure management compensation to minimize agency problems?
What is the current view with regard to the execution of many compensation plans? How
do market forces—both shareholder activism and the threat of takeover—act to prevent or
minimize the agency problem? What role do institutional investors play in shareholder
activism?
3. As chief financial officer, it is your responsibility to weigh the financial pros and cons of
the many investment opportunities developed by your company’s research and
development division. You are currently evaluating two competing 15-year projects that
differ in several ways. Relative to your firm’s current EPS, the first project is expected to
generate above-average EPS during the first 5 years, average EPS during the second five
years, and then below-average EPS during the last 5 years. The second project is expected
to generate below-average EPS during the first 5 years, average EPS during the second 5
years, and then well-above-average EPS during the last 5 years.
Is the choice obvious if you expect that the second investment will result in a larger overall
earnings increase? Given the goal of the firm, what issues will you consider before making
a final decision.
4. Explain why a firm whose stock is actively traded in the securities markets need not
concern itself with diversification. Despite this reason, how is the risk of capital budgeting
projects frequently measured? Why?
5. Why is profit maximisation considered incomplete as the definition of what most
businesses seek to achieve? Is exploitation of customers by a monopoly supplier, who
charges very high prices, consistent with the objective of maximising shareholders’ wealth?
Explain your response.
6. (A). Why is ratio analysis of financial statements considered to be so useful? Why is a
careful reading of the statements not enough?
(B) The payback period method of assessing potential investment projects is badly flawed,
but it is widely used nonetheless. Why is it so widely used?
7 (A). Evidence shows that many businesses use more than one of the four methods of
investment appraisal found in practice. What could be the reason for this?
(B). What is the fundamental flaw of using the internal rate of return method? Is it a
problem in practice.
8(a) Depreciation is taken into account when deducing profit (in the income statement),
but ignored in NPV assessments. If both accounting profit and NPV are meant to be
decision-making tools, is this illogical?
(b) Is it logical to include interest payments on cash borrowed to finance a project as
cash outflows of the project in an NPV assessment? Explain your answer.
9. Financial ratio analysis is conducted by three main groups of analysts: credit
analysts, stock analysts, and managers. What is the primary emphasis of each group,
and how would that emphasis affect the ratios they focus on?
10. Suppose you were comparing a discount merchandiser with a high-end merchandiser. Suppose
further that both companies had identical ROEs. If you applied the DuPont equation to both firms,
would you expect the three components to be the same for each company? If not, explain what
balance sheet and income statement items might lead to the component differences.
11. Why should the cost of capital be calculated as a weighted average of the various types of
funds that a firm generally uses, not as the cost of the specific type of capital used during a given
year? Why is the after-tax cost of debt rather than the before-tax cost used to calculate the WACC?
12. Would a firm that has many good investment opportunities be likely to have a higher or a lower
dividend payout ratio than a firm with few good investment opportunities? Explain. Why is the
cost of capital sometimes referred to as a “hurdle rate”?
13. How should firms evaluate projects with different risks? Should all divisions within the same
firm use the firm’s composite WACC for evaluating all capital budgeting projects? Explain.
14. Assume that the risk-free rate increases. What impact would this have on the cost of debt?
What impact would it have on the cost of equity? How should the capital structure weights used
to calculate the WACC be determined?
15. (a) Suppose a firm estimates its WACC to be 10%. Should the WACC be used to evaluate all
of its potential projects, even if they vary in risk? If not, what might be “reasonable” costs of capital
for average-, high-, and low-risk projects?
(b) Motors has a target capital structure of 40% debt and 60% common equity, with no preferred
stock. The yield to maturity on the company’s outstanding bonds is 9%, and its tax rate is 40%.
Percy’s CFO estimates that the company’s WACC is 9.96%. What is Percy’s cost of common
equity?
16. The WACC is a weighted average of the costs of debt, preferred stock, and common equity.
Would the WACC be different if the equity for the coming year came solely in the form of retained
earnings versus some equity from the sale of new common stock? Would the calculated WACC
depend in any way on the size of the capital budget? How might dividend policy affect the WACC?
17. What is the crossover rate, and how does its value relative to the cost of capital determine
whether a conflict exists between NPV and IRR? What two characteristics can lead to conflicts
between the NPV and the IRR when evaluating mutually exclusive projects?
18. What information does the payback convey that is absent from the other capital budgeting
decision methods? What three flaws does the regular payback have? Does the discounted payback
correct all of these flaws? Explain.
19. Why is the NPV of a relatively long-term project (one for which a high percentage of its cash
flows occurs in the distant future) more sensitive to changes in the WACC than that of a short-term
project? What is a mutually exclusive project? How should managers rank mutually exclusive
projects?
20. If two mutually exclusive projects were being compared, would a high cost of capital favor the
longer-term or the shorter-term project? Why? If the cost of capital declined, would that lead firms
to invest more in longer-term projects or shorter-term projects? Would a decline (or an increase)
in the WACC cause changes in the IRR ranking of mutually exclusive projects?
21. Discuss the following statement: If a firm has only independent projects, a constant WACC,
and projects with normal cash flows, the NPV and IRR methods will always lead to identical
capital budgeting decisions. What does this imply about the choice between IRR and NPV? If each
of the assumptions were changed (one by one), how would your answer change?
22(a)Why might it be rational for a small firm that does not have access to the capital markets to
use the payback method rather than the NPV method?
(b) What reinvestment rate assumptions are built into the NPV, IRR, and MIRR methods? Give an
explanation (other than “because the text says so”) for your answer.
23. Explain why sunk costs should not be included in a capital budgeting analysis but opportunity
costs and externalities should be included. Give an example of each. Explain why working capital
is included in a capital budgeting analysis and how it is recovered at the end of a project’s life.
24. (a) Why are interest charges not deducted when a project’s cash flows for use in a capital
budgeting analysis are calculated?
(b) Most firms generate cash inflows every day, not just once at the end of the year. In capital
budgeting, should we recognize this fact by estimating daily project cash flows and then using
them in the analysis? If we do not, are our results biased? If so, would the NPV be biased up or
down? Explain.
25. (a) Distinguish among beta (or market) risk, within-firm (or corporate) risk, and stand-alone
risk for a project being considered for inclusion in a firm’s capital budget.
(b) In theory, market risk should be the only “relevant” risk. However, companies focus as much
on stand-alone risk as on market risk. What are the reasons for the focus on stand-alone risk?
26.(a) How would a reduction in the cash conversion cycle increase profitability? What are some
actions a firm can take to shorten its cash conversion cycle?
(b) Define days sales outstanding (DSO). What can be learned from it, and how is it affected by
seasonal sales fluctuations?
27. (a) In what ways might projected financial statements help a business that is growing fast?
(b)‘The future is uncertain and so projected financial statements will almost certainly prove to be
inaccurate. It is, therefore, a waste of time to prepare them.’ Comment.
28(a) Why is the sales forecast normally critical to the preparation of projected financial
statements?
(b) Some businesses operate on a low operating profit margin (an example might be a supermarket chain). Does this mean that the return on capital employed from the business will also be
low?
29(a)What potential problems arise for the external analyst from the use of statement of financial
position figures in the calculation of financial ratios?
(b) Identify and discuss three reasons why the P/E ratio of two businesses operating in the same
industry may differ.
30. (a) When managers are making decisions involving capital investments, what should the
decision seek to achieve?
(b) Why would we see $100 to be received in a year’s time as not equal in value to $100 to be
paid immediately?
31. (a) Research indicates that the IRR method is extremely popular even though it has
shortcomings when compared with the NPV method. Why might managers prefer to use IRR
rather than NPV when carrying out discounted cash flow evaluations?
(b) Why are cash flows rather than profit flows used in the IRR, NPV and PP methods of
investment appraisal?
32. Some businesses fail to take account of inflation in investment decisions. Does it matter
given that, in recent years, the level of inflation has been low? What would be the effect of
dealing with inflation incorrectly on NPV calculations (that is, would NPV be overstated or
understated) by (a) discounting cash flows that include inflation at real discount rates and (b)
discounting real cash flows at market discount rates that include inflation?
33. (a) What is risk and to what extent can it be diversified away when making investment
decisions?
(b) What adverse consequences might result from incorrectly calculating the cost of capital?
34(a) Why might investors interpret an announcement to increase borrowing as an indication of
managers’ confidence in the future?
(b) Should the specific cost of raising finance for a particular project be used as the appropriate
discount rate for investment appraisal purposes? Why?
35(a) What are the reasons for holding inventories? Are these reasons different from the reasons
for holding cash?
(b) Tariq is the credit manager of Heltex plc. He is concerned that the pattern of monthly cash
receipts from credit sales shows that credit collection is poor compared with budget. Heltex’s
sales director believes that Tariq is to blame for this situation, but Tariq insists that he is not.
Why might Tariq not be to blame for the deterioration in the credit collection period?
36. Many firms have devised defenses that make it more difficult or costly for other firms to take
them over. How might such defenses affect the firm’s agency problems? Are managers of firms
with formidable takeover defenses more or less likely to act in the shareholders’ interests rather
than their own? What would you expect to happen to the share price when management proposes
to institute such defenses?
37. Ms. Espinoza is retired and depends on her investments for her income. Mr. Liu is a young
executive who wants to save for the future. Both are stockholders in Scaled Composites, LLC,
which is building SpaceShipOne to take commercial passengers into space. This investment’s
payoff is many years away. Assume it has a positive NPV for Mr. Liu. Explain why this
investment also makes sense for Ms. Espinoza.
38. When appraising mutually exclusive investments in plant and equipment, financial managers
calculate the investments’ equivalent annual costs and rank the investments on this basis. Why is
this necessary? Why not just compare the investments’ NPVs? Explain briefly.
39.(a) Many investment projects are exposed to diversifiable risks. What does “diversifiable”
mean in this context? How should diversifiable risks be accounted for in project valuation?
Should they be ignored completely?
(b) Suppose a firm uses its company cost of capital to evaluate all projects. Will it underestimate
or overestimate the value of high-risk projects?
40. Visions Ltd. is a renowned multiplex operator in Myanmar. Presently, it owns 234 screens in
45 properties at 20 locations in the country. Considering the fact that the there is a growing
trend among the people to spend more of their disposable income on entertainment, two
years back the company had decided to add more screens to its existing set up and increase
facilities to enhance leisure, food chains etc. It had then floated an initial public offer of
equity shares in order to raise the desired capital. The issue was fully subscribed and paid.
Over the years, the sales and profits of the company have increased tremendously and it has
been declaring higher dividend and the market price of its shares has increased manifolds.
In context of the above case:
a. Name the different kinds of financial decisions taken by the company by quoting lines from
the paragraph.
b. Do you think the financial management team of the company has been able to achieve its
prime objective? Why or why not? Give a reason in support of your answer.
41. Su Su, after acquiring a degree in Hotel Management and Business Administration, took over
her family food processing company of manufacturing pickles, jams and squashes. The business
had been established by her great grandmother and was doing reasonably well. However, the fixed
operating costs of the business were high and the cash flow position was weak. She wanted to
undertake modernisation of the existing business to introduce the latest manufacturing processes
and diversify into the market of chocolates and candies. She was very enthusiastic and approached
a finance consultant, who told her that approximately ? 50 lakh would be required for undertaking
the modernisation and expansion programme. He also informed her that the stock market was
going through a bullish phase.
a. Keeping the above considerations in mind, name the source of finance Su Su should not choose
for financing the modernisation and expansion of her food processing business. Give one reason
in support of your answer.
b. Explain any two other factors, apart from those stated in the above situation, which Su Su should
keep in mind while taking this decision.
42. Loren Seguara and Dale Johnson both work for Sports Products, Inc., a major producer of
boating equipment and accessories. Loren works as a clerical assistant in the Accounting
Department, and Dale works as a packager in the Shipping Department. During their lunch break
one day, they began talking about the company. Dale complained that he had always worked hard
trying not to waste packing materials and efficiently and cost-effectively performing his job. In
spite of his efforts and those of his co-workers in the department, the firm’s stock price had
declined nearly $2 per share over the past 9 months. Loren indicated that she shared Dale’s
frustration, particularly because the firm’s profits had been rising. Neither could understand why
the firm’s stock price was falling as profits rose.
Loren indicated that she had seen documents describing the firm’s profit-sharing plan under which
all managers were partially compensated on the basis of the firm’s profits. She suggested that
maybe it was profit that was important to management, because it directly affected their pay. Dale
said, “That doesn’t make sense, because the stockholders own the firm. Shouldn’t management do
what’s best for stockholders? Something’s wrong!” Loren responded, “Well, maybe that explains
why the company hasn’t concerned itself with the stock price. Look, the only profits that
stockholders receive are in the form of cash dividends, and this firm has never paid dividends
during its 20-year history. We as stockholders therefore don’t directly benefit from profits. The
only way we benefit is for the stock price to rise.” Dale chimed in, “That probably explains why
the firm is being sued by state and federal environmental officials for dumping pollutants in the
adjacent stream. Why spend money for pollution control? It increases costs, lowers profits, and
therefore lowers management’s earnings!” Loren and Dale realized that the lunch break had ended
and they must quickly return to work. Before leaving, they decided to meet the next day to continue
their discussion.
Required
a. What should the management of Sports Products, Inc., pursue as its overriding goal? Why?
b. Does the firm appear to have an agency problem? Explain.
c. Evaluate the firm’s approach to pollution control. Does it seem to be ethical?
Why might incurring the expense to control pollution be in the best interests of the firm’s owners
in spite of its negative impact on profits?
d. On the basis of the information provided, what specific recommendations would you offer the
firm?
43. Comment upon the statement "The goal of capital management is the maximization of longrun earning to present shareholders".
44. As a financial consultant, will you advise your client to have term deposits in a commercial
bank which pay 8% interest compounded semi-annually or 8% interest commercial bank which
pay 8% interest compounded semi-annually or 8% interest compounded annually? Why?
compounded annually? Why?
45. In most years new issues of stock are a tiny fraction of total stock market trading. In other
words, secondary market volume is much greater than primary market volume. Does the fact that
firms only occasionally sell new shares mean that the stock market is largely irrelevant to the
financial manager? Explain.
46. We claim that the goal of the firm is to maximize stock price. Are the following actions
necessarily consistent with that goal?
a. The firm donates $3 million to the local art museum.
b. The firm reduces its dividend payment, choosing to reinvest more of earnings in the
business.
c. The firm buys a corporate jet for its executives.
47. Sometimes lawyers work on a contingency basis. They collect a percentage of their client’s
settlement instead of receiving a fixed fee. Why might clients prefer this arrangement? Would this
sort of arrangement be more appropriate for clients that use lawyers regularly or infrequently?
Explain.
48. Explain why each of the following may not be appropriate corporate goals:
a. Increase market share
b. Minimize costs
c. Underprice any competitors
d. Expand profits
49. If agency problems can be mitigated by tying the manager’s compensation to the fortunes of
the firm, why don’t firms compensate managers exclusively with shares in the firm?
50. Many firms have devised defenses that make it much more costly or difficult for other firms
to take them over. How might such takeover defenses affect the firm’s agency problems? Are
managers of firms with formidable takeover defenses more or less likely to act in the firm’s
interests rather than their own? Explain.
51. Discuss which of the following forms of compensation is most likely to align the interests of
managers and shareholders:
a. A fixed salary
b. A salary linked to company profits
c. A salary that is paid partly in the form of the company’s shares
d. An option to buy the company’s shares at an attractive price
52. When a company’s stock is widely held, it may not pay an individual shareholder to spend
time monitoring the manager’s performance and trying to replace poor management. Explain
why. Do you think that a bank that has made a large loan to the company is in a different
position?
53. Corporations are now required to make public the amount and form of compensation (e.g.,
stock options versus salary versus performance bonuses) received by their top executives. Of what
use would that information be to a potential investor in the firm?
54. Without knowing anything about the personal ethics of the owners, which company would you
better trust to keep its word in a business deal?
a. Harry’s Hardware has been in business for 50 years. Harry’s grandchildren, now almost
adults, plan to take over and operate the business. Hardware stores require considerable
investment in customer relations to become established.
b. Victor’s Videos just opened for business. It rents a storefront in a strip mall and has
financed its inventory with a bank loan. Victor has little of his own money invested in the
business. Video shops usually command little customer loyalty.
55. Suppose that the firm is prevented by bond covenants from issuing more debt. It is committed
to increasing assets by 10 percent to support the forecast increase in sales, and it strongly believes
that a dividend payment of $180 is in the best interests of the firm. What must be the balancing
item? What is the implication for the firm’s financing activities in the next year?
56. Which of the following questions will a financial plan help to answer?
a. Is the firm’s assumption for asset growth consistent with its plans for debt and equity issues and
dividend policy?
b. Will accounts receivable increase in direct proportion to sales?
c. Will the contemplated debt-equity mix maximize the value of the firm?
57. Corporate financial plans are often used as a basis for judging subsequent performance. What
can be learned from such comparisons? What problems might arise and how might you cope with
such problems?
58. Percentage of sales models usually assume that costs, fixed assets, and working capital all
increase at the same rate as sales. When do you think that these assumptions do not make sense?
Would you feel happier using a percentage of sales model for short-term or long-term planning?
59. Comebaq Computers is aiming to increase its market share by slashing the price of its new
range of personal computers. Are costs and assets likely to increase or decrease as a proportion of
sales? Explain.
60. Managers sometimes state a target growth rate for sales or earnings per share. Do you think
that either makes sense as a corporate goal? If not, why do you think that managers focus on them?
61. What is the difference between market and book value? Why does accounting income differ
from cash flow?
62. A firm repays $10 million par value of outstanding debt and issues $10 million of new debt
with a lower rate of interest. What happens to its long-term debt ratio? What happens to its times
interest earned and cash coverage ratios?
63. a. Sappy Syrup has a profit margin below the industry average, but its ROA equals the industry
average. How is this possible?
b. Sappy Syrup’s ROA equals the industry average, but its ROE exceeds the industry average.
How is this possible?
64. (a)Why do firms need to invest in net working capital?
(b) Would this be a good or bad investment for IBM? Can’t say. But from the ultimate investors’
viewpoint this is not a risky investment. Explain why.
65. How does long-term financing policy affect short-term financing requirements?
66. How does the firm’s sources and uses of cash relate to its need for short-term borrowing?
67. How do firms develop a short-term financing plan that meets their need for cash?
68. A new computer system allows your firm to more accurately monitor inventory and anticipate
future inventory shortfalls. As a result, the firm feels more able to pare down its inventory levels.
What effect will the new system have on working capital and on the cash conversion cycle?
69. An investor is currently fully invested in gold mining stocks. Which action would do more to
reduce portfolio risk: diversification into silver mining stocks or into automotive stocks? Why?
70. Imagine a laboratory at IBM, late at night. One scientist speaks to another. “You’re right,
Watson, I admit this experiment will consume all the rest of this year’s budget. I don’t know what
we’ll do if it fails. But if this yttrium–magnoosium alloy superconducts, the patents will be worth
millions.”
71. How can one estimate the opportunity cost of capital for an “average-risk” project? Why does
diversification reduce risk? What is the difference between unique risk, which can be diversified
away, and market risk, which cannot?
72. How is the company’s tax bill affected by depreciation and how does this affect project value?
How do changes in working capital affect project cash flows?
73. How can you measure and interpret the market risk, or beta, of a security? What is the
relationship between the market risk of a security and the rate of return that investors demand of
that security? How can a manager calculate the opportunity cost of capital for a project?
74. In light of what you’ve learned about market versus diversifiable (unique) risks, explain why
an insurance company has no problem in selling life insurance to individuals but is reluctant to
issue policies insuring against flood damage to residents of coastal areas. Why don’t the insurance
companies simply charge coastal residents a premium that reflects the actuarial probability of
damage from hurricanes and other storms?
75. Jo Ann Cox’s boss has pointed out that Geothermal proposes to finance its expansion entirely
by borrowing at an interest rate of 8 percent. He argues that this is therefore the appropriate
discount rate for the project’s cash flows. Is he right?
76. Why do firms compute weighted-average costs of capital? What about projects that are not
average?
77.How do firms compute weighted-average costs of capital? How are the costs of debt and equity
calculated?
78. What happens when capital structure changes? Should WACC be adjusted for the costs of
issuing securities to finance a project? Explain.
79.A financial analyst at Dawn Chemical notes that the firm’s total interest payments this year
were $10 million while total debt outstanding was $80 million, and he concludes that the cost of
debt was 12.5 percent. What is wrong with this conclusion?
80. “The after-tax cost of debt is lower when the firm’s tax rate is higher; therefore, the WACC
falls when the tax rate rises. Thus, with a lower discount rate, the firm must be worth more if its
tax rate is higher.” Explain why this argument is wrong.
81. An analyst at Dawn Chemical notes that its cost of debt is far below that of equity. He concludes
that it is important for the firm to maintain the ability to increase its borrowing because if it cannot
borrow, it will be forced to use more expensive equity to finance some projects. This might lead it
to reject some projects that would have seemed attractive if evaluated at the lower cost of debt.
Comment on this reasoning.
82. What are some of the practical problems of capital budgeting in large corporations? In what
ways do companies change the composition of their ownership or management?
83. In 1988 RJR Nabisco, the food and tobacco giant, had $5 billion of A-rated debt outstanding.
In that year the company was taken over, and $19 billion of debt was issued and used to buy back
equity. The debt ratio skyrocketed, and the debt was downgraded to a BB rating. The holders of
the previously issued debt were furious, and one filed a lawsuit claiming that RJR had violated an
implicit obligation not to undertake major financing changes at the expense of existing
bondholders. Why did these bondholders believe they had been harmed by the massive issue of
new debt? What type of explicit restriction would you have wanted if you had been one of the
original bondholders?
84. “Since internal funds provide the bulk of industry’s needs for capital, the securities markets
serve little function.” Does the speaker have a point? Explain.
85. In what ways do companies change the composition of their ownership or management? Why
is the goal of financial management to maximize the current value of the company’s stock? In
other words, why isn’t the goal to maximize the future value?
86. Evaluate the following statement: Managers should not focus on the current stock value
because doing so will lead to an overemphasis on short-term profits at the expense of long-term
profits.
87. Corporate ownership varies around the world. Historically, individuals have owned the
majority of shares in public corporations in the United States. In Germany and Japan, however,
banks, other large financial institutions, and other companies own most of the stock in public
corporations. Do you think agency problems are likely to be more or less severe in Germany and
Japan than in the United States?
88. Could a company’s change in net working capital be negative in a given year? Explain how
this might come about. What about net capital spending? Could a company’s cash flow to
stockholders be negative in a given year? Explain how this might come about. What about cash
flow to creditors?
89. Why do you think most long-term financial planning begins with sales forecasts? Put
differently, why are future sales the key input? Both ROA and ROE measure profitability. Which
one is more useful for comparing two companies? Why?
90. Broslofski Co. maintains a positive retention ratio and keeps its debt–equity ratio constant
every year. When sales grow by 20 percent, the firm has a negative projected EFN. What does this
tell you about the firm’s sustainable growth rate? Do you know, with certainty, if the internal
growth rate is greater than or less than 20 percent? Why? What happens to the projected EFN if
the retention ratio is increased? What if the retention ratio is decreased? What if the retention ratio
is zero?
91. Assume that the managers of a business are considering only one option. Could projected
financial statements still help them? Explain. Can you think why cash is so important to a business?
92. Why might calculating working capital as a fixed percentage of sales provide a reasonable
simplifying assumption? Why do you think managers are normally reluctant to make projected
financial statements publicly available?
93. What types of industries are likely to have high operating gearing? When managers are making
decisions involving capital investments, what should the decision seek to achieve?
94.Explain the capital asset pricing model (CAPM), its relationship to the security market line
(SML), and the major forces causing shifts in the SML. Understand the risk and return
characteristics of a portfolio in terms of correlation and diversification and the impact of
international assets on a portfolio.
95. Review the two types of risk and the derivation and role of beta in measuring the relevant risk
of both a security and a portfolio. Determine the cost of long-term debt, and explain why the aftertax cost of debt is the relevant cost of debt.
96. Describe the logic underlying the use of target weights to calculate the WACC, and compare
and contrast this approach with the use of historical weights. What is the preferred weighting
scheme?
97. Discuss the importance of recognizing risk in the analysis of capital budgeting projects, and
discuss risk and cash flows, scenario analysis, and simulation as behavioral approaches for dealing
with risk.
98. What are working capital management, net working capital, and the related trade-off between
profitability and risk. Describe the cash conversion cycle, its funding requirements, and the key
strategies for managing it.
99. As an investor, do you think that some managers are paid too much? Do their rewards come at
your expense? How does the notion of risk and reward govern the behavior of financial managers?
What is corporate governance? What role does a corporation’s board of directors play in corporate
governance?
100. Why do most audited financial reports to the shareholders include a statement of cash flows
in addition to the balance sheet and income statement? Why might some managers actually prefer
to work with a flow of funds statement rather than the cash flow statement?
101. Why is it important to use marginal weights in calculating a weighted average cost of capital?
Under what circumstances is it appropriate to use the weighted average cost of capital as an
acceptance criterion? Do the funds provided by sources such as accounts payable and accruals
have a cost of capital? Explain.
102. Instead of using the expected return on the market portfolio and the risk-free rate in a CAPM
approach to estimating the required return on equity, how would one use the firm’s debt cost in a
CAPM-type approach to estimate the firm’s required return on equity? Should companies in the
same industry have approximately the same required rates of return on investment projects? Why
or why not?