Financial Analysis and Risk Management

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  1. If you are a major shareholder or an owner of a company, what could you do to make sure that your hired top managers are working in your interest?

 

  1. If a firm is growing at its internal growth rate forever, what will happen to its capital structure or debt equity ratio? And why?

 

  1. If you want to start a business, what long-term investments do you plan to choose and what assumptions and methods do you use to estimate your sales growth rates?

 

 

  1. What are some of the difficulties that might come up in actual applications of the various criteria we discussed in Capital Budgeting?

 

  1. Given the goal of maximization of firm value and shareholder wealth, we have stressed the importance of NPV. And yet, many financial decision-makers at some of the most prominent firms in the world continue to use less desirable measures such as the payback period and average accounting return (AAR). Why do you think this is the case?

 

  1. Discuss the relationship between NPV and IRR and explain the limitations of IRR

 

 

  1. Assume you are the manager of a $100 million portfolio of corporate bonds and you believe interest rates will fall. What adjustments should you make to your portfolio based on your beliefs?

 

  1. In the current economic environment, if you want to invest in bonds, in what types of bonds would you invest your money, long-term bond or short-term bond or high coupon bond or zero coupon bond and why?

 

 

  1. Discuss the limitations of Dividend Growth Model and the challenges you may find when you apply this model to real world stock valuation.

 

 

  1. Have you done any stock investments? Which stocks would you pick for your long-term investment, which ones for your short-term investment, and why?

 

  1. Stocks versus Gambling: Critically evaluate the following statement: playing the stock market is like gambling. Such speculative investing has no social value, other than the pleasure people get from this form of gambling.

 

  1. Discuss the limitations and challenges of CAPM when you apply this model to the real-world stock markets.

 

  1. Suppose you are hired by Tom the CEO of a large company to determine the firm’s cost of capital. Tom told you that his company’s stock sells for $50 per share and the dividend will be about $5 per share. He argues that the cost of equity is equal to 10% (=$5/50) because it costs $5 to use stockholders’ money. Is Tom statement correct and why?

 

  1. List three MM assumptions and in a world without taxes. Are these assumptions reasonable in the real world?

 

  1. According to MM with taxes, the value of the firm is maximized by taking on as much debt as possible. Can you find a real-world company (excluding financial institutions) with 100% or more debt financing? What are the challenges you may face when you run a company in the real world?