Finance Questions

1. What would you define as Business Ethics?
2. How do stock options provide incentive for managers to act unethically? Use instances from either Enron, The Smartest Guys in the Room, or the American Greed episode on Bernie Ebbers and WorldCom.
3. Explain the difference between a levered beta and an unlevered beta. In what situations should you calculate an unlevered beta?
4. Calculate the Unlevered Beta’s for the following Companies.

Company         Beta      Debt       Equity
Home Depot    1.18    $2,476    $3,232
Lowes               1.01    $578       $2,876
Ace                   1.45    $5400    $22,500
Menards            0.85    $1800    $30,000

Estimate the beta of a private company with a debt-equity ratio of 65% and a tax rate of 39%.
5. How do investment banks and investment analysts serve as monitors for corporate governance? What are the conflicts of interest that may arise when investment banks and investment analysts serve as monitors?
6. What is Sarbanes Oxley? Summarize three of the major changes in corporate governance and monitoring that was brought about by Sarbanes Oxley.
7. Compare and contrast the financial environment prior to the Great Depression and the Financial Crisis of 2008. What are some similarities? What are some differences?
8. What are the five ways that the Dodd-Frank Act created greater transparency and accountability in the derivatives market?
9. Johnson and Johnson has three divisions and three divisional betas.

Division                  Market Value      Beta    Debt       Book Equity
Consumer Health    4.2 billion          1.23   1.2 billion    2.4 billion
Medical Devices      2.5 billion          1.07   250 million 1.75 billion
Pharmaceuticals      5.1 billion          1.38   2.6 billion    2.0 billion
Total 11.8 billion

a. What is the unlevered beta of the company? Assume the firm’s tax rate is 36%. (Note the division betas are unlevered betas.)
b. If the Treasury bond rate is 4.5% and the market risk premium is 6.5%, use the CAPM to estimate the cost of equity for Johnson and Johnson.
c. What are the required return for equity for each division? First find each division’s levered beta if the ones given are unlevered (which they are for part a)
d. What the required returns for each division:
e. Assuming the before tax cost of debt 5.5% and is the same for all of Johnson and Johnsons divisions calculate each divisions Weighted Average Cost of Capital.
f. Explain why it might be important for firms to know their divisional WACC’s. There are two camps.
regarding the use Division vs. Firm WACC. One camp considers the use of divisional WACC to be the best practice while the other camp considers the use of total firm WACC to be the best practice in evaluating capital projects. What are the advantages and disadvantages of both camps?
10. What are some of the key differences in financial management for not-for-profit organizations and for forprofit corporations?

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1. Ethics are behavioral standards that individuals and organizations apply and generally adhere to as acceptable. Without these standards, there can be numerous confusing variables used to determine if something is right or wrong, good or bad. Generally, individuals know whether something is right or wrong. Although, there are times that ethical decisions will require additional consideration, or sometimes assistance to make the appropriate choice. Thus, business organization worldwide developed a standardized internal policies widely known code of ethics, a framework for dealing ethical dilemmas within and outside the organization. These standards provide common operating practices that are used to define the limits of acceptable behavior.
On the other hand, there are always business considerations that might entail temptations for personal gain that might compromise ethical standards. Ethical standards are normally defined and developed by family, religious beliefs, friends, and societal practices...