Explain how capital adequacy requirements may affect a commercial bank’s dividend payout and growth potential. If the bank anticipates a decrease in its capital adequacy ratio (capital to total asset ratio), what options are available to prevent the decline? What risks, if any, are there in each strategy... Banks’ managers do not want to mmaintain much capital because they do not bear fully the costs of their failure. In addition to this reason others claim that banks’ managers do not want to maintain higher levels of capital because higher levels of capital attract greater scrutiny from bank regulators. Comment on this claim. The two most pressing demands for liquidity from a bank come from, first, customers withdrawing their deposits. Identify and discuss the second demand on the bank for liquidity.

Companies have the opportunity to use varying amounts of different sources of financing, including internal and external sources, to acquire their assets, debt (borrowed) funds, and equity funds. A) Which of the following is considered a financially leveraged firm?   A company that uses debt to finance some of its assets   A company that uses only equity to finance its assets     B) Which of the following is true about the leveraging effect?   Under economic growth conditions, firms with relatively more leverage will have higher expected returns.   Under economic growth conditions, firms with relatively low leverage will have higher expected returns.     C) Blue Sky Drone Company has a total asset turnover ratio of 8.50x, net annual sales of $40 million, and operating expenses of $18 million (including depreciation and amortization). On its balance sheet and income statement, respectively, it reported total debt of $1.75 million on which it pays a 7%…

The market for capital Firms require capital to invest in productive opportunities. The best firms with the most profitable opportunities can attract capital away from inefficient firms with less profitable opportunities. Investors supply firms with capital at a cost called the interest rate. The interest rate that investors require is determined by several factors, including the availability of production opportunities, the time preference for current consumption, risk, and inflation. Suppose the Federal Reserve (the Fed) decides to tighten credit by contracting the money supply. Use the following graph by moving the black X to show what happens to the equilibrium level of borrowing and the new equilibrium interest rate. Q1. Which tend to be more volatile, short- or long-term interest rates? Long-term interest rates      2. Short-term interest rates Q2. If the inflation rate was 3.20% and the nominal interest rate was 4.20% over the last year, what was the real rate of interest over…

2. If the value of the financial sector is in terms of reducing the individual risk in the economy, how could you measure the value of the financial sector without using information on loan payments (broadly construed to include any interest payment necessary to measure an interest rate or any payment that looks like a return on an investmemt)? If we think of the amount of individual risk remaining after individuals buy portfolios is a measure of the ineffectiveness of the financial sector [or its imperfections], what do you think accounts for these imperfections?

Leverage and the Capital Structure.  Why is the use of debt financing referred to as financial “leverage?”  What is the basic goal of financial management with regard to the capital structure?  Is there an easily identifiable debt-equity ratio that will maximize the value of a firm?  Why or why not?

Cash flows from operations may not be sufficient for a firm to keep up with growth-related financing needs, or the firm may not be able to always generate enough cash flow to maintain a surplus of cash. Firms prefer to borrow now to fulfill their capital requirements through means of short-term financing or long-term financing. Both methods have their advantages and disadvantages. The following statement identifies a possible characteristic of short-term financing. Consider this case: Short-term loans usually have a lower cost than long-term loans.   Identify whether the preceding statement is true or false. This statement is true and an advantage of short-term financing.   This statement is false and a disadvantage of short-term financing.     Firms use a variety of short-term financing sources to support working capital. Use the descriptions in the following table to identify the short-term financing source. Description Short-Term Financing Source…

We learned interest rates differ across firms, and it varies with a firm's investment horizons because investors (or lenders) consider borrower's risk. But how do they decide or evaluate the borrower's risk? Could you explain it combined with concepts or principles we have learned? (Hint: the opportunity cost of capital, but not limited to.)

If a firm has a relatively aggressive current asset financing policy vis-á-vis other firms in its industry, then its current ratio will probably be relatively high. Is this true? Why or why not?

In a few sentences, answer the following question as completely as you can. Why should financial decision makers obtain a good estimate of a firm’s cost of capital? What are the consequences of using a discount rate that is higher or lower than a firm’s true required return?