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Explain LBO? Describe risks for the equity investors and also describe potential rewards? A leveraged buyout is purchase of publicly owned corporation through a small group of investors by using a la
Give two instances of types of companies which would be best able to handle high debt levels.Companies which handle local telephone service and those which handle natural gas delivery to consumers wou
Give two instances of types of companies likely to contain high operating leverage. Give examples. Long distance telephone companies & electricity generating companies are likely to contain opera
Describe the financial leverage effect and what causes it? Explain the potential benefits and negative consequences of high financial leverage? Financial leverage is the additional volatility of over
Does high operating leverage for all time mean high business risk? Describe. High operating leverage does not for all time mean high business risk. If the company's sales are fairly stable then the
Define operating leverage effect and what causes it? Describe potential benefits and negative consequences of high operating leverage? The operating leverage effect is the phenomenon where a small ch
Why is the replacement value of assets method not used generally to value complete businesses?The replacement value of assets method is not frequently applied to complete business valuations since it
Describe the adjustments essential to translate enterprise value to the net present value of common equity.To get the value of the company's common stock, add up the value of the firm's present assets
Describe the term "present value of the firm's operations" (also known as Enterprise Value). What does this number expose? The current value of the company's free cash flows reveals the market value
Describe the terminal value calculation at the ending of the forecast period. Why is it crucial? The firm which business operation is being valued is not accepted to suddenly cease operating at the e
Describe "free cash flows?" It represents the total cash flows from business operations which are obtainable to be distributed to the suppliers of a firm's capital each year either within the form of
Compare and contrast the book value & liquidation value per share for common stock. Is one method more reliable? Describe.The Book Value of a firm's common stock is found by subtracting the value
Describe the P/E valuation method. Under what conditions a stock should be valued by using this method?The P/E ratio denotes how much investors are keen to pay for each dollar of a stock's earnings.
Describe two patterns of cash flows for a share of common stock. How does the market find out the value of the most common cash flow pattern for common stock?Cash flows for share of common stock conta
Describe usual pattern of cash flows for share of preferred stock? How does the market fidn out the value of a share of preferred stock, given these promised cash flows?Preferred stock contains no mat
All other things held constant, how would the market price of a bond be influenced if coupon interest payments were made semiannually rather than annually?Most of bonds issued in the United States pay
Describe relationship among a bond's market price and its promised yield to maturity? Describe.A bond's market price based on its yield to maturity (YTM). While a bond has YTM greater than its coupo
How does the market find out the fair value of a bond?The fair value of bond is the present value of the bond's coupon interest payments plus the present value of the face value payment at maturity, d
How are financing costs incorporated generally into the capital budgeting analysis procedure? Usually financing costs are captured in the discount or hurdle rate while doing NPV or IRR analysis. Usua
How do opportunity costs influence the capital budgeting decision-making procedure? Opportunity costs reflect the foregone benefits of alternative not selected when a capital budgeting project is chos
How and why does working capital influence the incremental cash flow estimation for a proposed large capital budgeting project? Describe. Several large projects need additional working capital. This
What kind of role does depreciation play in estimating incremental cash flows? Depreciation expense is a tax deductible expense and therefore affects cash flow through its effect on taxes. Depreciati
How do we estimate expected incremental cash flows for proposed capital budgeting project? We estimate expected incremental cash flows for proposed project through estimating the changes in sales and
Describe sunk cost? Is it relevant while evaluating a proposed capital budgeting project? Describe. A sunk cost is a cash flow which has already occurred, or that will take place, whether a project
Why do we focus on cash flows rather than profits while evaluating proposed capital budgeting projects? We targeted on cash flows instead of profits while evaluating proposed capital budgeting project