CORPORATE FINANCE-ACCESS >CUSTOM<
CORPORATE FINANCE-ACCESS >CUSTOM<
11th Edition
ISBN: 9781260170016
Author: Ross
Publisher: MCG CUSTOM
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Chapter 7, Problem 4CQ

Break-Even Point As a shareholder of a firm that is contemplating a new project, would you be more concerned with the accounting break-even point the cash break-even point (the point at which operating cash flow is zero), or the financial break-even point? Why?

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(a) Identify and briefly describe two phases of the capital budgeting process. (b) Would saving time by skipping one of these phases in the capital budgeting process make sense financially?   Financially, why would a company: (a) increase its dividend; (b) buy back some of its common stock shares; (c) pay down some of its debt; (d) increase its use of internal financing; (e) take the public firm private?   Explain how a company could: (a) avoid a backlog of orders when sales exceed expectations; (b) avoid product defects on new products; (c) offer more credit to its customers when it already has a bad debt problem; (d) improve its credit rating with suppliers after paying some late; (e) lower its cost of financing when the market interest rate has increased.   FE5 Describe a business practice that would help a company manage each of the following financial risks: (a) liquidity risk; (b) interest rate risk; c) credit risk.
What does it mean when a company’s free cash flow is negative in one or more years? Do negative values of free cash flow in any way alter or invalidate the notion that a company’s fair market value equals the present value of its free cash flows discounted at the company’s weighted-average cost of capital? Suppose a company’s free cash flows were expected to be negative in all future periods. Can you conceive of any reasons for buying the company’s stock?
A discounted cash flow approach to valuing a firm, using the weighted average cost of capital as a discount rate, makes sense to use when:     a. Financial structure and risk of the investment are relatively stable over time.     b. The risk of bankruptcy is high.     c. A firm is expected to go through a transition that calls for a high use of debt that will be paid down over a few years.     d. Non-GAAP accounting is being used.     e. All of the above.
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Dividend explained; Author: The Finance Storyteller;https://www.youtube.com/watch?v=Wy7R-Gqfb6c;License: Standard Youtube License