Review Questions for First Exam in Advanced Topics
- What are the three conditions applicable to stock valuation?
- What is the accepted procedure for valuing any asset?
- What is the EMH and what conclusion should investors reach if the theory is correct?
- If a security’s expected return is smaller than its required return, what should happen to the price of the security?
- What is the purpose of a preemptive right?
- Why is external equity capital more costly than retained earnings?
- What is the benefit derived from cumulative voting procedures for common stockholders?
- How is preferred stock valued?
- What happens to the capital gains yield on the stock of a company experiencing supernormal growth as the growth rate declines toward a normal (constant)
growth rate?
- Of what value is it to know your weighted average cost of capital?
- Identify and compare three different methods for determining the cost of equity capital.
- Why are market values more appropriate than book values in determining a firm’s weighted average cost of capital?
- Describe, compare, and contrast the decision rules used in the capital budgeting process.
- Under what circumstances does one utilize either the replacement chain or the equivalent annual annuity approach?
- Some firms employ capital rationing on occasion. What does this entail and what is the justification?
- How is the market value of the equity determined for a publicly traded firm?
- Illustrate the relationship of the WMCC and the IOS schedule. Why must the investment decision and the financing decision be made simultaneously?
- What is financial leverage and how can you identify if a firm is using it successfully?
- Why is the after-tax cost of debt used in cost of capital development?
- Why develop Net Present Value Profiles for mutually exclusive investments?
- If you were responsible for the capital budgeting function in your firm, what
do you feel would be your biggest challenge? Why?
- What are breakpoints in the marginal cost of capital, and what causes them?
- How is the optimal capital budget determined?
- In a perfectly competitive environment, what happens to project NPV?
Problems:
Valuing both preferred and common stock
Cost of Capital, Weighted Average Cost of Capital
Application of capital budgeting decision rules.
Unequal lives
Abandonment Decisions
Graphing Aspects of:
Net Present Value Profiles
Weighted Marginal Cost of Capital and Investment Opportunity Schedule