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explain these two briefly
1. MANAGEMENT RISK - Decisions made by a firm's management and board of directors materially affect the risk faced by investors. Areas affected by these decisions range from product innovation and production methods (business risk) and financing (financial risk) to acquisitions.
2. FINANCIAL RISK - The firm's capital structure or sources of financing determine financial risk. If the firm is all-equity financed, any variability in operating income is passed directly to net income on an equal percentage basis.
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- Select all that is true about the role of financial managers and the types of financial decisions they make. Select one or more: a. Capital structure describes the mix of short-term liabilities a firm uses to finance its short-term assets. b. The optimal financial management strategy of a financial manager is to reduce the overall risk level of the firm. c. The duties of the financial manager includes determining the capital structure and which projects the firm should undertake. Od. Size and timing of cash flows is unimportant in a capital budgeting decision. e. Capital Budgeting function involves planning and determining the firm's short term investments. Of. Determining the appropriate level of inventory is a working capital management function. ZA do W X LThe business risk of a firm refers to the ____. a. results from using fixed-cost sources of funds b. influence of government regulations on business earnings c. variability in the firm's operating earnings over time d. variability in the price of a firm's securities1. Explain the concept of of Principle no. 2 of Financial Management "There is risk-Return Trade Off2.Give examples of financial decisions faced by companies and individuals
- 5. Financial management decisions and their effect on firm value Financial managers make a variety of decisions that can affect a firm's value. These include capital budgeting, capital structure, and dividend policy decisions. A financial manager's decisions and actions are evaluated against the criterion of their effect on the price of the firm's common stock. Good decisions result in increasing share prices and increasing shareholder wealth, while poor decisions achieve the opposite result. Many of the financial decisions that affect shareholder value fall into one of three basic categories. Identify the types of managerial finance decisions described in the following table. Descriptions Should Amalgamated Football League Inc. Issue new bonds? How much of Tampa Trucking Company's current earnings should be paid out as dividends, as opposed to being retained by the firm? Should European Satellite Corporation purchase a new delivery truck, or should it simply repair the truck it…The level of financial risk to which a firm is exposed is dependent on the firm's:(a) tax rate(b) debt-equity ratio(c) return on assets(d) level of earnings before interest and taxes(e) operational level of riskThe business risk of a company is most accurately measured by the company's: a. Debt-to-equity ratio b. Efficiency in using assets to generate sales c. Operating leverage and level of uncertainly about demand output prices and competition
- The business risk of a company is most accurately measured by the company's: a. Debt-to-equity ratio B. Efficiency in using assets to generate sales c. Operating leverage and level of uncertainty about demand, output prices and competitionWhich of the following statements is true? a. Determining how day-to-day financial matters should be managed is not a function of financial managers. B. The goal of the firm is to maximize market share. C. Working capital management refers to identifying productive long-term assets the firm could acquire to maximize net benefits. D. Capital budgeting refers to identifying productive long-term assets the firm could acquire to maximize net benefits.Multiple Choice Questions 1. The following are the factors to be considered in Suitability, except A. Environment B. Capabilities C. Expectations D. Scenarios 2. The ____________ for a firm is the internal rate of return on existing investments, based on real cash flows. A. cash flow return on investment (CFROI) B. Economic Value Added (EVA) C. Total Shareholders Return D. Return on Investment 3. The elements that must be considered in using EVA are as follows, except ___________. A. Reasonableness of earnings B. Appropriate cost of Capital C. Volatility of the market D. None of the above
- match the correct description with the correct term. Descriptions Terms The level and nature of risk attributable to a firm’s activities and operations, and ignoring the risks associated with the firm’s capital structure. Asymmetric information The situation in which outsiders, such as external shareholders, credits, suppliers, and customers have less and inferior information about a firm’s past, current, and future conditions and prospects, compared to the firm’s managers. Business risk The extent to which a firm’s cost structure contains a large proportion of fixed costs, which raises its level of business risk if the firm’s sales decline. Capital structure This practice of employing a large proportion of fixed-cost sources of financing, such as debt securities and preferred stock, exposes a firm’s stockholders to more business risk. EPS indifference point The ability of a firm to borrow money at a reasonable cost when good investment opportunities arise…Indicate whether its TRUE or FALSE. Then provide a complete explanation! Financial risk is reflected in the variability in the returns a company may generate on its assets and is mainly driven by the risks inherent in the industry that the company operates in. Introducing leverage into a firm’s capital structure may increase the expected returns for shareholders but the impact on share price may still be uncertain.What comment can be made on this or what can be added? The Weighted Average Cost of Capital (WACC) is a financial analytical tool that is essentially a calculation utilizing a company's market value of equity, debt, and tax rate. This allows both the company and investors an estimated net value of the company and can give indications of the value of the company moving forward. The WACC is especially important for a company to understand because the WACC is a good indication of the success or failure of a company's current investment strategy and if favorable, can assist a company when it comes to purchases of sales or other acquisitions