PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 32, Problem 11PS
a)
Summary Introduction
To determine: Whether the statement is true or false.
b)
Summary Introduction
To determine: Whether the statement is true or false.
c)
Summary Introduction
To determine: Whether the statement is true or false.
d)
Summary Introduction
To determine: Whether the statement is true or false.
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Analysts and investors often use return on equity (ROE) to compare profitability of a company with other firms in the industry. ROE is considered a very important measure, and managers strive to make the company’s ROE numbers look good.
A) If a firm takes steps that increase its expected future ROE, its stock price will increase.
B) Based on your understanding of the uses and limitations of ROE, which of the following projects will a manager likely choose if his or her bonus is solely based on the ROE of the next project?
Project Y, with 40% ROE and a small investment, generating low expected cash flows
Project X, with 35% ROE and a large investment, generating high expected cash flows
C) Suppose you are trying to decide whether to invest in a company that generates a high expected ROE, and you want to conduct further analysis on the company’s performance. If you wanted to conduct a comparative analysis for the current year, you would:
Compare the…
The globalization of markets, even for services, has increased the number of competitors and often lowered their cost of sales. The high rate of technological change in many industries has created new sources of value for customers, but not necessarily led to increases in profit for the producers. Still, those companies that have the capability to create and implement strategies that take account of these changes are well rewarded for their efforts.
True or False?
If competition causes all companies to have similar ROEs in the long run, wouldcompanies with high turnovers tend to have high or low profit margins? Explainyour answer.
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- Market-based bonus schemes may be considered more appropriate from a PAT perspective in industries in which: successful strategies will not be reflected in accounting profits for a number of periods. the price/earnings ratio is commonly greater than 12. profits may be the subject of manipulation by managers. capital investment is not an important strategic decision.arrow_forwardWhich of the following micro events that can be eliminated by diversification? a. all of them b.labor strikes c.fire d.none of them e.sales of a companyarrow_forwardCan Retained Earnings grow too large? If so, what strategies might management take to reduce it?arrow_forward
- 7. More on ratio analysis Analysts and investors often use return on equity (ROE) to compare profitability of a company with other firms in the industry. ROE is considered a very important measure, and managers strive to make the company's ROE numbers look good. If a firm takes steps that increase its expected future ROE, its stock price will increase. Based on your understanding of the uses and limitations of ROE, which of the following projects will a manager likely choose if his or her bonus is solely based on the ROE of the next project? O Project Y, with 40% ROE and a small investment, generating low expected cash flows O Project X, with 35% ROE and a large investment, generating high expected cash flows Suppose you are trying to decide whether to invest in a company that generates a high expected ROE, and you want to conduct further analysis on the company's performance. If you wanted to conduct a trend analysis, you would: O Analyze the firm's financial ratios over time Compare…arrow_forwardEfficiency in adding value to an asset that is less valued is key to creating wealth. In what instance is this model not applicable? O when incidental restrictions require it so O when the organization redirects goals for higher productivity O when possibility of a shift spells provision of growth O when the organization is raking high percentage of returnarrow_forwardRestructuring the liabilities might positively influence the ROE, but will negativelyinfluence the service level of the company. - it depends on… answer The Statement is true if… The Statement is not true if… Definition key wordsarrow_forward
- From a strategic management perspective, the primary reason a firm performs CVP analysis is to find the level of sales that: Multiple Choice Promises a satisfactory growth in revenue. Produces a desired (or targeted) level of profit for the firm. Reduces the threat of bankruptcy. Will allow the firm to compete in a market place. Will just cover all fixed costs.arrow_forwardSuppose that as the economy moves through a business cycle, risk premiums also change. For example, in a recession, when people are concerned about their jobs, risk tolerance might be lower and risk premiums might be higher. In a booming economy, tolerance for risk might be higher and premiums lower.a. Would a predictably shifting risk premium such as described here be a violation of the efficient market hypothesis?b. How might a cycle of increasing and decreasing risk premiums create an appearance that stock prices “overreact,” first falling excessively and then seeming to recover?arrow_forwardExplain intuitively how a manager could tweak the salvage value of machinery to benefit from an expected reduction in the corporate tax rate taking place towards the end of an investment. What are the shortcomings of the payback period criterion? Which of these shortcomings are accounted for in the dynamic payback period criterion? Which are not? “If a stock had high returns so far, it will have low returns in the future”. Discuss whether this statement is true or false, based on the knowledge of the different theories and models out there.arrow_forward
- Which one of the following actions by a financial manager creates an agency problem? Lowering selling prices that will result in increased firm value Agreeing to expand the company at the expense of stockholders' value Borrowing money when doing so creates value for the firm Agreeing to pay management bonuses based on the market value of the firm's stockarrow_forwardOperating leverage exists when: small percentage changes in revenue produce large percentage changes in profit. management buys enough of the company’s shares of stock to take control of the corporation. the organization makes purchases on credit instead of paying cash. the organization avoids all fixed costs in its operationsarrow_forwardWhich of the following is/are true regarding payout policy to shareholders? A. Most of the time that firms announce an increase in dividends, the market reacts negatively, as this is an admission that the firm has few good investment opportunities going forward. B. Large, mature firms should return a lot of cash to shareholders because there aren’t enough good investment opportunities out there for them. C. Flexibility is one key reason why we have seen much more use of share repurchases to return cash to shareholders in the last 3 decades. D. The primary value driver for the firm is how cash is paid out, not cash generation. E. (A) and (B) F. (B) and (C) G. (C) and (D)arrow_forward
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