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FIN 534 Discussion Questions Week 1-11 Solution

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FIN 534 Week 1-11 Discussion Questions Solved
Week 1 DQ 1
Discussion 1: An Overview of Financial Management.
A. In your judgment, what were the principal causes of the recent financial crisis
and Great Recession? Would you include Government policies that encouraged
housing purchases for those who could not afford them, artificially low interest
rates implemented by the Federal Reserve, banks and mortgage brokers who
were greedy, the failure of Government regulators to provide proper oversight to
the banks and other financial institutions, individuals who borrowed and spent
more than they should have, or some other causes?
.
B. From the e-Activity, examine ethical behavior within firms in relation to financial
management. Provide at least two (2) recent (in the last 5 years) examples (other than
Enron, WorldCom, and Bernie Madoff) of companies that have been guilty of ethics-based
malfeasance related to financial management. What were the specific sanctions that were
imposed and explain why the sanctions and penalties were appropriate?
.

C. From the scenario (Scenario Topic: The primary objective of the corporation is value
maximization), what are at least two (2) actions that Trevose Fitness Center (TFC) could take
in order to raise capital that will, in turn, enable it to achieve its expansion goals? How can
you defend your response? Support your observations with at least two (2) recent and realworld examples of implementations of these same actions?

Week 2 DQ 1
The annual report is agood place to for managers to start in the assessment of
the companys future and future oopertions. The annual reports usuallly
includes the income statement, balance sheet, statement of cash flow and
statement of strockholder equity. The actual data shows what happened to the
company from a financial standpoint. The interpretion of the the financial
data can show why the things happened they way it did. Combining the
written and quantitative data will give the people in charge insight as to which
moves to carry out next. Analysis of financial data is an art so not everyone's
picture of the company's health will match exactly. The read of the staements
must be accurate enough to give the right impression to the stakeholders.

Brgham, E. and Ehrhardt, M. (2014). Financial Management 14th edition.


Question 2
One Partnerships are nadvantage of a partnership as opposed to a corporation
is that partnerships themselves are not taxed. Partneships are know as pass
through entities. The taxes owed are incorporated into the owner's personal
income taxes. taxes for corporationscan be very complicated since the corp. is
an entity all its own subject to the rules of the particular state of origin so
filing taxes can become a monumental task. In addition to having a favorable
edge in simplicity, the taxes are less for partneships because corporations are
taxed twice. The corportion itself is taxed on the income generated. The
profits earned by the corporation are divided among stockholders as dividends
who are taxed again on their personal income taxes.
SBA.gov

Week 3 DQ 1
Discussion 1: Time Value of Money and Bond Valuation
.
A. Please respond to the following:
Starting with your current situation, what must you do to ensure an annual retirement income
of $60,000 starting at age 65? Make sure that you submit calculations that support the
conclusions (you may use the Excel retirement calculators that are provided, online retirement
calculators, or develop you own Excel solution).
.
B. What are the advantages and disadvantages of a call provision from the viewpoints of both
a firm and its bondholders? If you were the CEO of a firm, would you recommend a call
provision for a new bond issue? Why or why not? Can you identify a recent bond issue that
has a call provision fund?
.
C. From the Scenario and e-Activity, recommend two (2) bonds that you believe TFC should
invest in, and provide rationale for your recommendations? Make sure that you identify the
issuers of the bonds, the coupon rates, the maturity dates, the yields to maturity, the present
prices of the bonds, etc.?

1 Intro TVM Retirement Calculators 0713.docx


2 Basic Retirement Estimator 012012.xlsx
3 Retirement Estimator PB 012012.xlsx
4 Basic Retirement Estimator Inflation 012713.xlsx

Week 4 DQ 1
A. Assume that you own a sizeable investment portfolio that is invested exclusively in a
broad-based stock market index fund. Assume also that you contemplate adding a sizeable
investment in the stock of the company that you have elected to use for Assignment 1 (which
is due at the end of Week 9). What will happen to the overall riskiness of the portfolio, and
why, with the addition of the new investment? What specific indicators support your
conclusion? Should you make the additional investment why or why not?
.

B. Using the company that you have selected for Assignment No. 1 Financial Research
Project (due at the end of Week 9), value a share of the companys stock using both the (1)
constant growth dividend discount model, and (2) a discounted free cash flow model, and
compare those values to the current trading price of a share of the stock? Is the stock
undervalued or overvalued? Carefully explain the assumptions used in the valuations and the
rationale for your response? (You may usehttp://www.valuepro.net for the discounted free
cash flow valuation model.)

Week 5 DQ 1
A. What are several ways to use stocks and options to create a risk-free hedged portfolio?
Support your answer by providing examples of specific stocks and options that are used to
create the portfolio (i.e., what specific instruments are used)?
Obtaining Information About Specific Options
The Discussion 1 this week requires using specific stocks and specific options to create
hedged portfolios. This information may help you to obtain the necessary information:
The CBOE (Chicago Board Options Exchange) is a convenient source of information about
stock options. It is very easy to obtain the option chain (listing of all options on a particular
stock) by entering the Ticker Symbol of the underlying stock.
The information about options can be obtained at:
http://www.cboe.com/delayedquote/quotetable.aspx

B. From the scenario, create an estimate of TFCs weighted average cost of capital (WACC)
and its required rate of return? Should the company expand or not expand; how do you
defend your position including specific information from TFCs financial statements?

Week 6 DQ 1
A. Describe a capital budgeting project (i.e., an investment in fixed assets) that might be
undertaken by the company that you have selected for Assignment 1. Make sure that the
project has an initial investment in Year 0, followed by a series of annual cash flows for at
least seven (7) years. In addition, determine the discount rate, or hurdle rate, that is
appropriate for this project and explain the determination of that rate.
Develop your own Excel spreadsheet model that can be used to determine the Net Present
Value (NPV), Internal Rate of Return (IRR), Modified Internal Rate of Return (MIRR), and
Profitability Index (PI)?
The Excel spreadsheet that you develop must use Excels automated financial functions for
determining the NPV, IRR and MIRR.
Following the completion of the spreadsheet analysis, explain whether, or not, the project
should be implemented? Also, discuss what the various indicators (i.e., NPV, IRR, MIRR and
PR) mean?
For this question, it is necessary to develop your own Excel spreadsheet. .
.

B. From the scenario, suggest whether TFC should expand to the West Coast first. Provide a
rationale (reasons) for your response in which you cite at least two (2) capital budgeting
techniques (e.g., NPV, IRR, MIRR, Payback Period, etc.) that caused you to arrive at your
decision.
WK 6 Student Scenario Capital Budget Analysis.xlsx

Week 7 DQ 1
A. From the scenario, cite your forecasting conclusions (financial data from TFCs financial
statements and forecasted statements) that support TFCs to expand to the West Coast
market. Note: the response has to include specific operational, financial, and forecasted data
that support the conclusions.
Speculate as to whether or not the agency conflicts discussed in the scenario could become a
roadblock to your conclusions. What are the reasons for your response?

B. What are two (two) desired characteristics of a board of directors? Provide support for
your response by explaining how these characteristics usually lead to effective corporate
governance.

Week 8 DQ 1
Discussion 1: Distributions to Shareholders and Capital Structure Decisions
A. Examining the company you selected for Assignment 1, how should it should use its free
cash flow for dividend distributions to shareholders or repurchasing of stock?
What theories and policies seem to best explain the shareholder distributions being
implemented by the company? What actual financial data support this observation?
PRINCIPAL DIVIDEND THEORIES
Remember the key question Does dividend policy affect stock price?
Dividend Irrelevance (Miller and Modigliani)
1. Investors are concerned about total return, and therefore dont care if returns
come from dividends or stock price appreciation.
2. Investors have the choice of Homemade Dividends or cash from selling shares;
or, the investor could reinvest a dividend in more shares. Either strategy confounds
the dividend decisions.
Dividend Relevance
Bird-In-Hand Theory (Gordon and Lintner)
1. Presumes that investors believe that dividends are more certain than capital gains
management can control dividends, but cant directly control a stocks price.
2. Assumes that investors value a dollar of dividends more highly than a dollar of capital
gains since discount rate for stock paying dividends is lower (less risky).
Tax Differential Theory
1. The after-tax return to investors is what matters and this is maximized if tax payments can
be lowered or deferred.
2. The tax changes in 2003 reduced the tax rate for dividends through 2010 (extended for
two more years), so that advantage is nullified as it is the same as the long-term capital gains
rate, 15%.
Other Perspectives
Residual Dividend Theory 1. Flotation costs eliminate the indifference between financing new projects with internally
generated funds compared to new external financing (that has flotation costs).

2. Suggests that dividends are paid only if profits are not used entirely for investment
purposes that is, when there are residual earnings after financing new projects.
Clientele Effect
1. Due to transaction costs, investors may not want to create homemade dividends or buy
additional stock.
2. Investors sort themselves out by their preferences for dividends or capital gains.
3. That is, firms draw a clientele which has a preference for the firms existing or stated
dividend policy.
Information Effect
1. Investors may use a change in dividend policy as a signal about the firms financial
condition.
2. A larger than expected dividend could signal the likelihood of improved earnings; a lower
than expected dividend may be a signal that earnings may decline.
Agency Costs
1. Stock price of a firm controlled by investors who are separate from management may be
lower than the stock price of a closely-held firm; this difference in price is the result of agency
costs.
2. Dividend policy may be a tool to reduce agency costs; if dividends are paid, management
has to replace the capital with new equity, which will result in closer monitoring by financial
markets, auditors, regulators, etc.
Expectations Theory
1. Investors form expectations about the amount of forthcoming dividend payments.
2. Then, investors compare actual dividend to their expected dividend; if there is a difference,
investors will use the difference as a clue about future earnings and there will be either an
increase, or decrease, in the stock price.
B. Analyze the approaches to capital structure decisions and determine which theory is the
most applicable across the widest number of firms. Explain your rationale.
Explain which theory of optimal capital structure seems to best explain how the company that
you selected for the Writing Assignment maintains its capital structure? How do actual
financial data support your conclusions?
Note: The traditional capital structure theories that are examined in your textbook include: (1)
Static Tradeoff Theory, (2) Signaling Theory, (3) Reserve Borrowing Capacity, (4) Pecking
Order Theory, (5) Using Debt to Constrain Managers, and (6) Windows of Opportunity.
C. From the scenario, examine the dividend rate that TFC is paying in order to determine if
the company should implement a rate adjustment. Suggest whether TFCs dividends should
either (1) stay the same; (2) be increased; (3) or go down. Provide a rationale for your
response by providing specific financial information about TFC?

Week 9 DQ 1
A. Why might a business not want to hold too much or too little working capital? (Remember,
working capital is current assets, not working capital minus current assets.)
Explain if the company that you selected for Assignment 1 has too much, too little, or just the
right amount of working capital? How did you make this determination?
B. What are two (2) practical actions that the firm you selected for Assignment 1 can take to
shorten its cash conversion cycle? Does the company need to shorten its cash conversion
cycle and how do you know that (calculate the cash conversion cycle using the attached
model)?

C. What working capital financing strategy is used by the company that you selected for
Assignment 1. What actual financial data support the conclusion? Make sure that you
complete the analysis using the attached Excel model that examines a firms working capital
financing strategy.
CashConversionCycle0509.xls
2 Examining Working Capital Financing 0814.xlsx

Week 10 DQ 1
"Multinational Financial Management" Please respond to the
following:
A. Using the company that you have selected for Assignment 1, review its Form 10K report
and identify risks that it considers to be associated with its international operations? Which
three risks, in your judgment, are the most important and what should the company do about
them? (Note: If the company you selected does not have international operations, select
another company that does have international operations for this analysis.)
B. From the scenario, select two (2) potential international markets in which TFC may wish to
do business. Examine the reasons why TFC might want to consider international expansion
and the reasons why it might not want to expand internationally?

Week 11 DQ 1
A. Rate the three (3) most important concepts that you learned in this course in order of
importance (one (1) being the most important; three (3), the least). Explain the reasons for
your ratings.

B. What are two (2) applications of knowledge that you have learned in this course that apply
to your current position or a future position?

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