公司理财全书课后答案及人大金融考研(4)

1. Internal financing

2. External financing (new long-term borrowing, equity)

· What factors influence a firm's choices of external versus internal equity financing? 1. The general economic environment, specifically, business cycles. 2. The level of stock prices

3. The availability of positive NPV projects.

· What pecking order can be observed in the historical patterns of long-term financing? The first form of financing is internally generated funds, then external financing; debt is used before equity.

13.5 · What are three implications of the efficient-market hypothesis for corporate finance? 1. The prices of stocks and bonds cannot be affected by the company's choice of accounting method.

2. Financial managers cannot time issues of stocks and bonds.

3. A firm can sell as many stocks and bonds as it wants without depressing prices.

CONCEPT QUESTIONS - CHAPTER 14

14.1· What is a company's book value?

It is the sum of the par value, capital surplus and accumulated retained earnings.

· What rights do stockholders have? 1. Voting rights for board members 2. Proxy rights

3. Asset Participation in case of liquidation 4. Voting rights for mergers and acquisitions 5. Preemptive rights to new shares issued.

· What is a proxy?

It is the grant of authority by a shareholder to someone else to vote his or her shares.

14.2· What is corporate debt? Describe its general features.

Corporate debt is a security issued by corporations as a result of borrowing money and represents something that must be repaid. Its main features are: 1. It does not represent ownership interest in the firm.

2. Payment of interest on debt is tax deductible because it is considered a cost of doing business.

3. Unpaid debt is a liability of the firm.

CONCEPT QUESTIONS - CHAPTER 15

15.1 · What 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 and equity slices.

15.2 · Why should financial managers choose the capital structure that maximizes the value of the firm.

Because this capital structure also maximizes the value of equity.

15.3 · 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 its capital structure.

· How can a shareholder of Trans Am undo the company's financial leverage?

By selling shares of Trans Am and bung bonds or investing the proceeds in another company's debt.

15.4 · 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 leverage? Rs = ro + (ro – rb) (B/S)

· How are market-value balance sheets set up?

They are set up the same way as accounting balance sheets with assets on the left side and liabilities on the right side. However, instead of valuing assets in terms of historical values, market values are used.

15.5 · What is the quirk in the tax code making a levered firm more valuable than an otherwise-identical unlevered firm?

Interest payments are tax deductible and dividend payments are not.

· What is MM Proposition under corporate taxes? VL = VU + TCB

· What MM Proposition II under corporate taxes? rs = p + (B/S)(1-Tc)(p-rB)

CONCEPT QUESTIONS - CHAPTER 16

16.1 · What does risk-neutrality mean?

Investors are indifferent to the presence of risk.

· Can one have bankruptcy risk without bankruptcy costs?

Yes. When a firm takes on debt the risk of bankruptcy is always present but bankruptcy cost may not be.

· Why do we say that stockholders bear bankruptcy costs?

Because in the presence of bankruptcy costs, bondholders would pay less for any debt issued. This then will reduce the value of potential future dividends.

16.2· What is the main direct cost of financial distress? Legal and administrative costs of liquidation or reorganization.

· What are the indirect costs of financial distress?

Those that arise because of an impaired ability to conduct business.

· Who pays the costs of selfish strategies? Ultimately, the stockholders.

16.4 · List all the claims to the firm's assets.

Payments to stockholders and bondholders, payments to the government, payments to lawyers, and payments to any al all other claimants to the cash flows of the firm.

· Describe marketed claims and nonmarketed claims.

Marketed claims are claims that can be sold or bought in capital markets. Nonmarketed claims are claims that cannot be sold in capital markets.

· How can a firm maximize the value of its marketed claims? By minimizing the value of nonmarketed claims such as taxes.

16.5 · What are agency costs?

Costs that arise from conflicts of interest between managers bondholders and stockholders.

· Why are shirking and perquisites considered an agency cost of equity?

Because managers will act in their own best interests rather than those of shareholders.

· How do agency costs of equity affect the firm's debt-equity ratio?

The optimal debt-equity ratio is higher in a world with agency costs than in a world without such costs.

· What is the Free Cash Flow Hypothesis?

We might expect to see more wasteful activity in a firm capable of generating large cash flows.

16.6hWhat is the pecking-order theory?

This theory states that when a firm seeks new capital it faces 'timing' issues of new stock.

h What are the problems of issuing equity according to this theory?

The theory implies that only overvalued firms have an incentive to issue equity and given market reactions to a stock issue, virtually no firm will issue equity. The model results in firms being financed virtually entirely by debt. Moderating the pure theory and we would predict that debt should be issued before equity.

h What is financial slack?

If a firm expects to fund a profitable project in the future it will start to accumulate a cash reservoir today, thus avoiding the need to go to the capital markets.

16.7 · How do growth opportunities decrease the advantage of debt financing?

Growth implies significant equity financing, even in a world with low bankruptcy costs. To eliminate the potential increasing tax liability resulting from growing EBIT, the firm would want to issue enough debt so that interest equals EBIT. Any further increase in debt would, however, lower the value of the firm in a world with bankruptcy costs.

16.9· List the empirical regularities we observe for corporate capital structure? 1. Most corporations have low debt ratios. 2. Changes in financial leverage affect firm value.

3. There are differences in the capital structure of different industries.

· What are the factors to consider in establishing a debt-equity ratio? 1. Taxes

2. Financial distress costs

3. Pecking order and financial slack.

CONCEPT QUESTIONS - CHAPTER 17

17.1· How is the APV method applied?

APV is equal to the NPV of the project (i.e. the value of the project for an unlevered firm) plus the NPV of financing side effects.

· What additional information beyond NPV does one need to calculate A|PV? NPV of financing side effects (NPVF)>

17.2 · How is the FTE Method applied?

FTE calls for the discounting of the cash flows of a project to the equity holder at the cost of equity capital.

· What information is needed to calculate FTE? Levered cash flow and the cost of equity capital.

17.3· How is the WACC method applied?

WACC calls for the discounting of unlevered cash flows of a project (UCF) at the weighted average cost of capital, WACC.

17.4· What is the main difference between AAPV and WACC?

WACC is based upon a target debt rate and APV is based upon the level of debt.

· What is the main difference between the FTE approach and the two other approaches? FTE uses levered cash flow and other methods use unlevered cash flow.

· When should the APV method be used?

When the level of debt is known in each future period.

· When should the FTE and WACC approaches be used? When the target debt ratio is known.

CONCEPT QUESTIONS - CHAPTER 18

18.2 · Describe the procedure of a dividend payment.

1. Dividends are declared: The board of directors passes a resolution to pay dividends. 2. Date of record: Preparation of the list of shareholders entitled to dividends.

3. Ex-Dividend date: A date before the date of record when the brokerage firm entitles stockholders to receive the dividend if they buy before this date. 4. Date of payment: Dividend checks are sent to stockholders.

· Why should the price of a stock change when it goes ex-dividend?

Because in essence the firm is reducing its value by the amount paid out in cash for the dividend.

18.3 · How can an investor make homemade dividends? By selling shares of the stock.

· Are dividends irrelevant?

If we consider a perfect capital market, dividend policy, and therefore the timing of dividend payout, should be irrelevant.

· What assumptions are needed to show that dividend policy is irrelevant? 1. Perfect markets exist.

2. Investors have homogeneous expectations 3. This investment policy of the firm is fixed.

18.5 · Why does a stock repurchase make more sense than pang dividends?

When the capital gain tax rate is lower than the ordinary income (on dividends), stockholders should prefer a repurchase to a dividend. In addition, stock repurchase is associated with a

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