Financial Risk

1. Complete questions:
   Define each of the following terms:
   a. Operating plan; financial plan
   b. Spontaneous liabilities; profit margin; payout ratio
   c. Additional funds needed (AFN); AFN equation; capital intensity ratio; self-supporting growth rate.
   d. Forecasted financial statement approach using percentage of sales.
   e. Excess capacity; lumpy assets; economies of scale
   f. Full capacity sales; target fixed assets to sales ratio; required level of fixed assets.
2. Complete problem: Premium for Financial Risk
   XYZ, Inc. has an unlevered beta of 1.0. They are financed with 50% debt and has a levered beta of 1.6. If the risk-free rate is 5.5% and the market risk premium is 6%, how much is the additional premium that XYZ, Inc. shareholders require to be compensated for financial risk? Show your work.

Sample Solution