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Financing Corporate Growth, Dividend Policy and Agency Costs

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1. Compare and contrast plain growth, pure proposition of sales, economies-of-scale, industry-based and disaggregated forecasts. Provide some examples from your work setting for some or all of these types of forecasts.
2. Is there any evidence that there is an agency conflict between shareholders and managers when it comes to the payment of dividends? Justify your response.
3. Compare and contrast debt-hybrid, seasoned equity, and initial public offerings. Provide one example of each type of offering.
4. Managerial temptations can take many forms. Describe in depth an illegal financial temptation. Can corporate governance and business ethics reduce these managerial temptations? Why, or why not?

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1. Plain growth is the basic and measurable increase in an economy's ability to produce services and goods. The economic growth that is displayed by many countries around the world provides a vivid example of plain growth, especially when this growth is stable and consistent over a specified period of time.

Pure proposition of sales describes the clearly defined aspects of the goods and/or services that are offered by an individual or organization to another individual or organization. Pure proposition of sales distinctly spells out the terms of the given offer a proposition as well. An example of pure proposition of sales would be a car salesman selling a car based upon the specifics of the sales agreement.

Economies of scale spell out the advantages that are obtained by an organization in respect to costs, when this organization grows in scale and scope.(Welch,I.) An example of economy of scale would be the advantages obtained by China in respect to the cost of its products as the nation and its economy grows in scale and scope.

Industry-based forecasts provide information on the probable profits that would be obtained within a given industry during a specified period of time. An example of industry-based forecasts would be the forecast of the probable probability of the auto industry within the next year.

Aggregated forecasts forecast the projected profitability of a given industry, as well as the effect of supplementary economic factors on this increased profitability.
(Welch, I. (2009). ...

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Discussion 1
• Assume that you recently received your MBA and now work as an assistant to the CFO of a large corporation. Your boss has asked you to prepare a financial forecast for the coming year. Address the following questions:
• How would you set up the model to be presented to the executives? How many scenarios would you choose? What other information would you provide? What would you not include and why?
• What are the pros and cons of being able to examine the results of changing dividend policy and capital structure policy?
• What are the values of financial forecasting? What is your opinion of the most important points to keep in mind when creating financial forecasts?

Discussion 2
• Why is the NPV method for budgeting accepted as the most valuable budgeting tool? If you were not allowed to use NPV for a budget you were developing, what other method(s) would you use? Explain your choices.
• Project S has a cost of $10,000 and is expected to produce cash flows of $3,000 per year for 5 years. Project L costs $25,000 and is expected to generate cash flows of $7,400 per year for 5 years.
• What is the NPV, IRR, MIRR, and PI for each project, assuming a 12 percent cost of capital?
• Which project would you select, assuming they are mutually exclusive, using each ranking? Why? Which project should you actually choose? Why?
• How do simulation analysis and scenario analysis differ in the way they treat very bad and very good outcomes? What does this imply about using each technique to evaluate risk?

Discussion 3
Franco Modigliani and Merton Miller are considered the architects of capital structure theory. They had many ideas regarding capital structure and the implications of that structure on a firm's performance. Since their first article was published in 1958, many financial theorists have attempted to test the validity of existing capital theories. This assignment will allow you to take a look at some major capital structure theories and how they influence finance.
• What does the following statement mean to you? "One type of leverage affects both EBIT and EPS. The other type affects only EPS."
• What conclusions did Modigliani and Miller draw regarding the effect of capital structure on a firm's value and cost of capital, assuming no corporate taxes?
• How do their conclusions change when each introduces corporate taxes? Explain.
• If a firm's managers thought that Modigliani and Miller were exactly right, what capital structure would they choose to maximize their firm's value? Why?
• Choose two criticisms of the MM models of capital structure. Write an argument positing that those criticisms do not outweigh the benefits of those theories.

Discussion 4
• Have you ever wanted to go into business for yourself? Why or why not?
• What tradeoffs does the entrepreneur face?
• Why is entrepreneurship so important in a market economy?

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