Directions:
***Answer all 12 question in 4-5 sentences***
***If there are any references please cite***
1.) Financial theory (and the narrative in your textbook) indicates that NPV is the theoretically correct method to use to evaluate capital investments. Yet, surveys of financial managers consistently indicate that IRR is the most widely used technique by practitioners. Why do you suppose this discrepancy exists?
2.) Capital budgeting decisions are usually made by teams of executives from various divisions within a corporation. Departmental managers, when presenting their capital budgeting proposals to the executives, are sometimes tempted to inflate the estimates of returns to be earned from their proposals, in order to increase the likelihood that the proposals will be accepted. If you were CFO of a corporation, what steps could you take to prevent this from happening?
3.) Several methods were described in your textbook to deal with the issue of differing levels of project risk. These include risk adjusted discount rates, simulation analysis, scenario analysis, and break-even analysis. Which of these would you favor if you were CFO of a corporation? Why? Which of the techniques seems like it would yield the most accurate results? Which would be easiest to implement?
4.) A corporation’s policy manual states: “Our company’s policy is to use 12%, which is our cost of capital, as the discount rate for NPV calculations on all projects considered for investment.“ What is wrong with this policy? In what types of projects will this company overinvest? In what types of projects will it underinvest?
5.) The recent Great Recession of 2008-2009 has had significant impact on a wide range of corporate performance. What impact would you predict it had on leverage? Would financial leverage have increased, decreased, or remained the same? What about operating leverage? Why?
6.) What do you think is the relationship between a firm’s operating leverage and its financial leverage? Do you think the two measures are positively correlated, negatively correlated, or unrelated? Explain your answer.
7.) Are dividends relevant in determining share values? Identify one factor that indicates they are, and one that indicates they are not. Give your opinion on this question and why you hold it.
8.) Select one of the following theories and provide an argument about why it might hold and why it might not. Once you have done this, give your personal opinion on its relevance to explaining overall corporate dividend behavior.
*Residual theory of dividends
*”Bird-in-the-hand“ argument
*Informational content of dividends
*Investor preference for steady dividend payments
9.) During the Great Recession of 2008-2009, corporate cash conversion cycles typically increased in length by a significant amount. Why might this have occurred? Was it a good decision by corporate CFOs to allow this to happen? Explain.
10.) In the economic environment of 2010-2014, the United States experienced a slow-growing economy with record low interest rates. In what ways does this type of economic environment diminish the importance of working capital management to the firm? In what ways is working capital management still important in this environment?
