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Draft a response to each of the bulleted questions below. Each question must have its own response and have a minimum of 50 words.
- How do you define working capital? What may happen if an organization neglected to manage its working capital? What techniques do you recommend for your organization? Why?
- How would you handle calculating the cost of capital if a firm were planning to issue two different classes of common stock?
- Suppose your firm wanted to expand into a new line of business quickly, and that management anticipated that the new line of business would constitute over 80 percent of your firm’s operations within three years. If the expansion was going to be financed partially with debt, would it still make sense to use the firm’s existing cost of debt, or should you compute a new rate of return for debt based on the new line of business?
- Explain why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division.
- If you had two mutually exclusive, normal-cash-flow projects whose NPV profiles crossed at all points, for which range of interest rates would IRR give the right accept/reject answer?
- Suppose that your company used “APV,” or “All-the-Present Value-Except-CF0,” to analyze capital budgeting projects. What would this rule’s benchmark value be?
- What purpose does a discount on credit terms serve? What is the cost of such a discount to the offering firm?
- Everything else held constant, will an increase in the amount of inventory on hand increase or decrease the firm’s profitability? Explain.
- If asset-backed loans are cheaper than unsecured loans, what is the disadvantage to the firm in using an asset-backed loan?