GF 530 Purdue University Global Unit 6 Financial Reporting and Analysis Questions 11.5 Nondiversifiable and Diversifiable Risk Factors. Identify the types

GF 530 Purdue University Global Unit 6 Financial Reporting and Analysis Questions 11.5 Nondiversifiable and Diversifiable Risk Factors. Identify the types of firm-specific factors that increase a firm’s nondiversifiable risk (systematic risk). Identify the types of firm-specific factors that increase a firm’s diversifiable risk (nonsystematic risk). Why do expected returns models include no expected return premia for diversifiable risk? 11.6 Debt and the Weighted-Average Cost of Capital. Why do investors typically accept a lower risk-adjusted rate of return on debt capital than equity capital? Suppose a stable, financially healthy, profitable, tax-paying firm that has been financed with all equity now decides to add a reasonable amount of debt to its capital structure. What effect will the change in capital structure likely have on the firm’s weighted-average cost of capital? Chapter 12 12.2 Free-Cash-Flows-Based Valuation Approaches. Explain the theory behind the free-cash-flows valuation approaches. Why are free cash flows value-relevant to common equity shareholders when they are not cash flows to those shareholders but rather are cash flows into the firm? 12.6 Valuation When Free Cash Flows Are Negative. Suppose you are valuing a healthy, growing, profitable firm and you project that the firm will generate negative free cash flows for equity shareholders in each of the next five years. Can you use a free-cash-flows-based valuation approach when cash flows are negative? If so, explain how a free-cash-flows approach can produce positive valuations of firms when they are expected to generate negative free cash flows over the next five years. Chapter 13 13.2 Required Income. Explain required income. What does required income represent? How is required income conceptually analogous to interest expense? 13.6 Interpreting Residual Income. If a firm’s residual income for a particular year is positive, does that mean the firm was profitable? Explain. If a firm’s residual income for a particular year is negative, does that mean the firm necessarily reported a loss on the income statement? Explain. What does it mean when a firm’s residual income is zero?