10 Corporate Finance Questions on Corporate Finance that discuss issues like Cost of Capital, Credit Policy, Working Capital Financing, Dividend payments, Capital Structure, Impact of write off of non performing assets

1. A company has a debt ratio greater than the industry average. How would an investor evaluate the implications of this higher debt ratio in making an investment decision in this company's common stock?

2. In your opinion, what are the major factors determining the kind of financing for working capital a company can secure?

3. A company has three capital budget projects for the upcoming fiscal year all of equal risk, and having equal NPV, Pay Back Period and IRR which is above the firm's current cost of capital. Only two can be funded from the current capital structure and funds available. The third project must be funded by raising more debt at a cost that will increase the overall cost of capital. Should the company raise the additional funds? YES NO Explain your answer.

4 In the last few years, many large corporations, such as General Motors, [and now Quest and Lucent] have written off large amounts of their non-performing (or poorly performing) assets as they have shrunk their operations [and recognized decreased value]. What is the impact of these asset impairment write-offs on the future return on assets, future return on common equity, and future financial leverage ratios? What impact would you expect these write-offs to have on the market value of the firm's equity securities? Why?

5. Your company wants to increase sales by extending credit to customers with less than a top credit rating. How would you evaluate this decision?

6. You are evaluating two capital investment proposals. One is a new product line that requires an investment of $500,000. The second is a cost saving new machine that requires an investment of $375,000. If you only had funds to do one or the other, explain how capital budgeting concepts would assist you in making the decision.

7. Why is Net Present Value (NPV) used for investment decisions?

8. You are a board member for a company considering cutting the quarterly dividend payment to shareholders. What are your concerns for the company and shareholders?

9. A company has a cost of capital greater than the industry average. What are several of the most significant reasons for this?

10. What are the major considerations for an established, and already public company, in its efforts to raise additional equity capital?

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...crease the overall cost of capital. Should the company raise the additional funds? YES NO Explain your answer.

Yes the company should raise additional funds. The idea behind capital budgeting is to increase the value of the company and not to minimize the cost of capital. As long as positive NPV project is there it should be funded as it will increase the value of the company.

4 In the last few years, many large corporations, such as General Motors, [and now Quest and Lucent] have written off large amounts of their non-performing (or poorly performing) assets as they have shrunk their operations [and recognized decreased value]. What is the impact of these asset impairment write-offs on the future return on assets, future return on common equity, and future financial leverage ratios? What impact would you expect these write-offs to have on the market value of the firm's equity securities? Why?

Write offs may increase future return on assets , future return on common equity and (as the denominator in the ratio ie assets and common equity decreases provided the earnings do not fall substantially). The future financial leverage ratios may decrease as the level of debt may decrease as the operations are shrunk.
The market value of firm's equity securities may rise in the long run if as a result of these write offs the firm makes more efficient use of its assets.

5. Your company wants to increase sales by extending credit to customers with less than a top credit rating. How would you evaluate this decision?

A reasonable credit policy is based on three principles:
1 maximize expected profits, and do not minimize the number of bad accounts.
2 concentrate efforts on those accounts most likely to pose a threat to the financial welfare of the firm, ( either because of size or because of doubtful paying ability)
3 factor repeat orders into the overall decision because they have a bearing on long-run sales and production.

Thus while evaluating the decision to ...