Discussion 1

• Assume that you recently received your MBA and now work as
an assistant to the CFO of a large corporation. Your boss has asked you to
prepare a financial forecast for the coming year. Address the following
questions:

• How would you set up the model to be presented to the
executives? How many scenarios would you choose? What other information would
you provide? What would you not include and why?

• What are the pros and cons of being able to examine the
results of changing dividend policy and capital structure policy?

• What are the values of financial forecasting? What is your
opinion of the most important points to keep in mind when creating financial
forecasts?

Discussion 2

• Why is the NPV method for budgeting accepted as the most
valuable budgeting tool? If you were not allowed to use NPV for a budget you
were developing, what other method(s) would you use? Explain your choices.

• Project S has a cost of $10,000 and is expected to produce
cash flows of $3,000 per year for 5 years. Project L costs $25,000 and is
expected to generate cash flows of $7,400 per year for 5 years.

• What is the NPV, IRR, MIRR, and PI for each project,
assuming a 12 percent cost of capital?

• Which project would you select, assuming they are mutually
exclusive, using each ranking? Why? Which project should you actually choose?
Why?

• How do simulation analysis and scenario analysis differ in
the way they treat very bad and very good outcomes? What does this imply about
using each technique to evaluate risk?

Discussion 3

Franco Modigliani and Merton Miller are considered the
architects of capital structure theory. They had many ideas regarding capital
structure and the implications of that structure on a firm’s performance. Since
their first article was published in 1958, many financial theorists have
attempted to test the validity of existing capital theories. This assignment
will allow you to take a look at some major capital structure theories and how
they influence finance.

• What does the following statement mean to you? “One
type of leverage affects both EBIT and EPS. The other type affects only
EPS.”

• What conclusions did Modigliani and Miller draw regarding
the effect of capital structure on a firm’s value and cost of capital, assuming
no corporate taxes?

• How do their conclusions change when each introduces
corporate taxes? Explain.

• If a firm’s managers thought that Modigliani and Miller
were exactly right, what capital structure would they choose to maximize their
firm’s value? Why?

• Choose two criticisms of the MM models of capital
structure. Write an argument positing that those criticisms do not outweigh the
benefits of those theories.

Discussion 4

• Have you ever wanted to go into business for yourself? Why
or why not?

• What tradeoffs does the entrepreneur face?

• Why is entrepreneurship so important in a market economy?

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