Questions

Questions for Chapter 4 Strategies

Review questions

Q-4.1 Explain why analytical work depends on the strategy of the decision maker.
Q-4.2 Explain how attitudes, emotions and skills come into play in financial analysis.
Q-4.3 Is the assumption of going concern usually a starting point of analysis? Should it always be?
Q-4.4 Why is financial analysis put often in the hands of accountants? Should it be?

Q-4A1.1 Do subcontractors of large manufacturing firms and suppliers for a diverse clientele have the same approach to analysis of their clients?
Q-4A1.2 What is the name given to the technique of screening a large number of prospects on the basis of a single ratio?
Q-4A1.3 Why would a company request a credit evaluating agency to have itself investigated?
Q-4A1.4 Is the cost of bad debt imbedded in the price charged to good customers? How?
Q-4A1.5 Why would some firms accept all customers on open account but refuse to sell to those that have been late paying in the past?
Q-4A1.6 What is the schedule used by credit department to monitor accounts receivables?
Q-4A1.7 What steps are taken by most companies when a clients fails to pay?

Q-4A2.1 What firms can do if they want to avoid having a credit and collections department?
Q-4A2.2 List the five functions of a factor.
Q-4A2.3 What is the range of fees for factoring?
Q-4A2.4 What is the name given to factoring arrangement that allows the factor to collect from the supplier if the purchaser does not pay?
Q- 4A2.5What are the advantages of factoring for the vendor?
Q-4A2.6 In which industries is factoring common in the United States? How can this be explained?

Q-4B1.1 What are three possible reasons for rejection of a bank loan application at the initial interview?
Q-4B1.2 What documents are normally requested with a loan application?
Q-4B1.3 When are personal financial statements asked by a loan officer?
Q-4b1.4 Why is the initial interview of great importance for the decision to approve a bank loan?
Q-4B1.5 List the five C's of banking.
Q-4B1.6 Which financial aspects a loan officer is most concerned with?
Q-4B1.7 When is visit to a loan applicant's premises necessary?
Q-4B1.8 Why should a larger loan require higher management approval?
Q-4B1.9 What are the elements that affect the determination of loan risk?
Q-4B1.10 What does a given bank's matrix of risk grade points reflect? Explain.
Q-4B1.11 Why would long term loan be preferred by banks? Why would short term loans be preferred by banks?
Q- 4B1.12What instruments are available to banks to deal with their maturity and interest rate exposures?
Q-4B1.13 Tell how the Savings and Loans Associations crisis illustrates a lack of skill in dealing with interest rate risk?

Q-4B2.1 What is the name of the group of people responsible for approval of large bank loans?
Q-4B2.2 What does the credit committee do that is not done by a loan officer?

Q-4B3.1 What is the role of the credit review department?
Q-4B3.2 Why should loan portfolios be reviewed periodically?
Q-4B3.3 What three aspects of the portfolio review will affect bank strategy in the future?
Q-4B3.4 Can banks make mistakes in financial analysis of loan applications? Is there a historical clear example of this?
Q-4B3.5 Why is monitoring of loans crucial to reduce loan losses?
Q-4B3.6 What actions can be taken if a loan problem is spotted?

Q-4C.1 List the three ways equipment financing differs from a short term loan?
Q-4C.2 Show the alternatives for equipment financing.
Q-4C.3 How are potential lessees in financial leases evaluated?
Q-4C.4 How are potential lessees in operating leases evaluated?
Q-4C.5 Explain why tax considerations play a determining role in leasing?

Q-4D.1 What is the name of a bond that pays no interest?
Q-4D.2 List and explain three forms of additional benefits some bonds provide.
Q-4D.3 List and explain forms of protection for bondholders in some bonds.
Q-4D.4 What are the three most common bond strategies?

Q-4D1.1 What type of investors hold a large proportion of bonds?
Q-4D1.2 What is the quality of the bonds that institutional investors are allowed to hold?
Q-4D1.3 What is a major cause of bond price changes?
Q-4D1.4 Why and how is interest forecasting at the heart of bond trading strategy?
Q-4D1.5 What is the name given to a strategy that guarantees a target rate of return over a planned investment horizon?
Q-4D1.6 How is immunization carried out?
Q-4D1.7 What is the name given to a weighed average of the number of years it takes to collect all cash flows from a bond?
Q-4D1.8 Give formula for duration.
Q-4D1.9 Is duration shorter than maturity? When?
Q-4D1.10 What are the practical difficulties of immunizing a bond portfolio?

Q-4D2.1 What is the name given to the strategy based on the difference of yields on short and long maturities?
Q-4D2.2 What bonds should one buy if rates are expected to go down?
Q-4D2.3 What bonds should one buy if rates are expected to go up?
Q-4D2.4 What bond trading strategy is based on business cycles?

Q-4D3.1 How can anticipation of rating change announcements be the source of a profitable bond strategy?
Q-4D3.2 What are turn-around situations? How can a bond strategy be based on them?
Q-4D3.3 List some of the elements of corporate bonds rating used at Standard & Poor.

Q-4E.1 For what two purposes do derivatives exist?
Q-4E.2 Define hedging. Give example.
Q-4E.3 Define speculation. Give example.
Q-4E.4 Define call option.
Q-4E.5 Define put option.
Q-4E.6 What are the expectations of the writer of a call option?
Q-4E.7 How does the writer of a call options earn an income? How can the writer lose?
Q-4E.8 How can the buyer of a put benefit? How can the buyer lose?
Q-4E.9 What is the name given to a strategy of issuing a put and call at the same time on the same stock?
Q-4E.10 What does the buyer of straddle expects?
Q-4E.11 What analytical work must the options trader do?
Q-4E.12 Why is the options trader mostly focused on the options market?
Q-4E.12 What alternative strategy(ies) can be used with a call option that is equivalent to holding a stock a purchasing a put option?
Q-4E.13 What is the name given to the equivalence between strategies based on call and put options? Explain how the strategies are equivalent.
Q-4E.14 Give the equation and justify the put-call parity.

Q-4F.1 Do most shareholders read all the information corporations send them? Why, or why not?
Q-4F.2 Is new information about a company quickly incorporated into stock price? How quickly?
Q-4F.3 Distinguish three radically different stock market strategies.

Q-4F1.1 What is the name given to a strategy in which decisions are made on the basis of past stock price behavior?
Q-4F1.2 State the assumptions that underlie technical analysis.
Q-4F1.3 Indicate the analytical process in technical analysis.
Q-4F1.4 Does technical analysis presuppose fundamental analysis?

Q-4F2.1 When are shares traded in a portfolio rebalancing strategy?
Q-4F2.2 Why is the portfolio rebalancing approach compatible with modern portfolio theory?
Q-4F2.3 What upsets mutual funds manager when it comes to conclusions of modern portfolio theory?
Q-4F2.4 Does a protfolio rebalancing strategy require a fundamental analysis of corporations?

Q-4F3.1 What is the assumption on which the mispriced security is based?
Q-4F3.2 Does a mispriced security approach compatible with fundamental analysis?
Q-4F3.3 Why are most financial analysts involved in work that serves mispriced security strategies?
Q-4F3.4 Is fundamental analysis and mispriced security incompatible with efficient market hypothesis?
Q-4F3.5 How are financial analysts interpreters of events taking place in corporations?
Q-4F3.6 List the type of firms that employ financial analysts for analysis of mispriced securities.
Q-4F3.7 How is the analysis of a financial analyst transferred to the market?
Q-4F3.8 What is the name given to investors who have privileged information?
Q-4F3.9 List different types of insiders.
Q-4F3.10 What requirements exist in the United States about insider's trading?
Q-4F3.11 Is insider trading information followed by other investors? How?

Q-4G.1 Is the strategy of all shareholders the same? How about shareholders with controlling interest?
Q-4G.2 Define small shareholder.
Q-4G.3 Define minority shareholder.
Q-4G.4 Define majority shareholder.
Q-4G.5 How do size of corporation and shareholder strategies affect the above definitions?

Q-4G1.1 How do small shareholder look at corporations?
Q-4G2.1 When would a minority shareholder look at the investment in the corporation as a fractional ownership?
Q-4G2.2 When does the minority shareholder have to mark down the fractional ownership in a corporation?
Q-4G2.3 Can a minority shareholder have real control over a corporation?

Q-4G3.1 Does a majority shareholder evaluates a corporation as if it owned it outright?
Q-4G3.2 What adjustment is made to the total value of a corporation to determine the interest of the majority shareholder?
Q-4G3.3 What decisions are delegated to affiliates and which are not?
Q-4G3.4 On what criteria are affiliates judged?

Q-4G4.1 What is the approach to evaluating a joint venture by its participating interests?

Q-4H.1 Do business combinations serve the interests of shareholders? Or can the shareholder achieve similar objectives in the stock market?
Q-4H.2 Give examples of justification of business combinations for corporate strategic goals.
Q-4H.3 What is the name given in the United States to a true merger?
Q-4H.4 List the phases of a desirable strategy for an acquiring firm.
Q-4H.5 What is the method of evaluation of a company considered for acquisition and what should be the discount rate used in the evaluation?
Q-4H.6 How are industry consideration incorporated in company acquisition projections?
Q-4H.7 What are the reasons for paying a premium over market capitalization to the existing shareholders of the acquired company?
Q-4H.8 Is it common for some assets to be disposed of after a company acquisition?
Q-4H.9 For what amount should assets expected to be sold included in cash flow projections?
Q-4H.10 In which case should the adjusted discounted cash flows of the acquired company be marked down?
Q-4H.11 Is the mark down for lack of stock marketability the same regardless of type and size of company? Give approximate range.

Q-4I.1 Why does a government want to know how businesses are doing in its region?
Q-4I1.2 Can comparing revenues and expenses of different companies reveal to the tax authorities the presence of tax evasion?
Q-4I1.3 Should a government agency evaluate companies that it seeks to attract to the region? Why?

Q-4I2.1 What can a government do if it determines that a company it partly owns is in financial difficulty and may not offer its services to the community?

Q-4I3.1 Do regulatory commissions seek to set rates of regulated companies as low as possible? How should the rates be set?
Q-4I3.2 What do analysts in rate cases look for?

Q-4I4.1 In which circumstance are companies owned outright by government?
Q-4I4.2 What are some financial characteristics of government owned businesses?

Q-4J.1 Outline and justify the sequence of strategic planning.
Q-4J.2 List the different documents prepared in context of strategic planning.
Q-4J.3 What are the functions of budgets?
Q-4J.4 Does management has its own special approach to financial analysis of its financial statements different from outside analysts?
Q-4J.5 Does a strategic plan have to started all over if financing is not available for what is planned, or are changes in one document sufficient?

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Last modified: Jun/01/01 Next: Exercises, Cases & Assignments