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Importance of financial managers

1. Identify one of the principal responsibilities of each of the following financial managers: (a) Chief Financial Officer (CF0), (b) Treasurer, and (c) Controller. How important is that these financial managers are: (d) ethical; (e) efficient? Explain.

2. (a) Identify three market variables whose value affects the financial market value of a company. (b) State whether an increase in the value of each variable would increase or decrease the financial market value of the firm. (c) Is it efficient for financial managers to adjust their business practices to important changes in market conditions? Explain.

3. Assuming zero taxes, calculate the future value of a $1,000 lump-sum contribution to a savings plan, compounded annually, at the end of: (a) five years, using a 2% rate of return; (b) thirty years, using a 12% rate of return.

4. A firm has the opportunity to invest in a project that is expected to pay an end-of-year annual return of $1.5 million for each of the next twenty years after taxes and expenses. The current cost of the project would be $7 million. Assuming a discount rate of 12%, as the required rate of return and (opportunity) cost of capital
(i.e., economic costs of capital): (a) Calculate the present value of the project to the firm. (b) Calculate the net present value of the project. (c) Using the net present value principle, determine whether or not the firm should make the investment. (d) Using the internal rate of return principle, determine whether or not the firm should make the investment. (e) Using the equilibrium market value of the firm principle, determine whether or not the value of the firm would increase if the firm decided to undertake this investment project.

5. (a) Define the quick ratio (i.e., acid-test ratio) and return on equity ratio, and state what these financial ratios measure.
(b) State what financial management problem each of these financial ratios could be used to identify. (c) Could the optimal value of a financial ratio for a firm be different in different years? Explain.

6. Calculate the present value of a bond that pays a coupon rate of 4%
per year for 15 years, and matures in 15 years at its face value of $1000, using each of the following current market interest rates as the discount rate:(a) 2%;(b) 4%; (c) 7%. Show your calculations.

7. Explain why buying common stocks based on each of the following financial ratios would or would not be a good investment strategy: (a) a low price/sales (P/S) ratio; (b) a high dividend yield;
(c) a high risk premium, based on Treynor's measure.

8. Briefly describe each of the following phases of the capital budgeting process: (a) identification phase; (b) evaluation phase; (c) control phase; and (d) and audit phase. (e) Would saving time by skipping one of the phases in the capital budgeting process be a costly financial mistake? Explain.

9. (a) Provide three factors that favor leasing some type of capital equipment, rather than buying it. (b) State two advantages of buying some capital goods, rather than leasing them.

10. In answering the following questions, it is given that the potential investment has the following range of possible outcomes and probabilities: 15% probability of a -20% return, 20% probability of a 10% return, 30% probability of a 20% return,
20% probability of a 40%, and 15% probability of a 70% return.
(a) Calculate the weighted mean of the probability distribution;
(b) Calculate the variance of the probability distribution; (c) Calculate the standard deviation of the probability distribution. (d) Calculate the coefficient of variation of the probability distribution. (e) Would another investment having a coefficient of variation of 0.25 have less risk per unit of expected return?

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Solution Summary

The importance of financial managers are examined.