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Questions and Answers of
Corporate Finance
Is the home likely to be a good investment? Explain.
What are the significant characteristics of a mortgage?
Why is the home often a better investment than renting? Under what circumstances would renting be preferred?
Why is a home a good inflation hedge? Should a home be included as an asset if its occupants aren't sure they could sell it? Explain.
Compare and contrast the value in owning a home versus investing in real estate investment trusts (REITs)?
In what cause would you to suggest direct ownership over private partnership? Why?
If you had to select one method of valuation for real estate, which would it be? Why?
What is involved in establishing the cap rate?
Jack purchases a house for $90,000 and spends $15,000 to renovate it. He holds the house for 35 years and then sells it in middle of a real estate bubble for $400,000. On how much of that amount does
Mary purchased a home for $200,000. By living in the home, she saved $18,000 annually because she did not have to pay rent. She had to pay $3000 annually for upkeep of the home. By the end of the
Josh earns $80,000 a year. He would like to purchase a home and applies for a mortgage from the bank. The bank requires that the debt not exceed 28 percent of his annual income. With the current down
Harry decides to purchase an apartment building as an investment. He pays $6,000,000 for the building. The building has a net income of $150,000, annual depreciation $150,000, annual taxes of
1. Calculate the projected return on the house for the next year and give your recommendation.2. Finish the nonfinancial investments section of this case, which includes the topics described in the
Explain why under CAPM company risk can be diversified away?
What kinds of investments are best suited to saving for the down payment on a house to be made in three years?
What types of investments are suited to retirement planning at age 67 assuming the person is 55 and has an average risk tolerance?
What are the advantages of a passive approach to investing?
How has mutual fund performance compared with overall indexes? Why do you think that is the case?
How are income taxes determined for mutual funds?
Stock A and stock B have no correlation. Does that mean we don't have to include correlation in calculating portfolio return? Explain.
Stocks C and D move in opposite directions. Does that mean they have no correlation? Explain.
Under the EMH, can you outperform the market?
Under the weak form of the EMH, if you are given the following recent day price performance:Is the likely future performance higher than nine? Why?
Under the semi-strong form of the EMH, should you read an annual report? Why?
Investing abroad has substantial individual asset risk. Why invest in it then?
Why can real estate be an attractive portfolio holding?
What are the strengths of mutual funds?
What are the weaknesses of mutual funds?
What types of investments are most appropriate for short-term needs?
Gennaro purchased a stock for $24 that paid $2.00 at the end of each year in dividends (dividends remained level over time). He sold it four years later for $28 at the time of the last dividend
A stock has an expected rate of return of 9 percent and the risk-free rate is 3 percent. What is the risk premium?
"Stock prices adjust rapidly to the release of all new public information." This statement is an expression of which one of the following ideas? a. Random walk hypothesis. b. Arbitrage pricing
If the client needs to accumulate wealth but is risk-averse, which of the following is the most crucial action the planner must take to have the client achieve the goal of wealth accumulation? Advise
If the market risk premium were to increase, the value of common stock (everything else being equal) would a. Not change because this does not affect stock values. b. Increase in order to compensate
Which of the following are non-diversifiable risks? 1. Business risk. 2. Management risk. 3. Company or industry risk. 4. Market risk. a. 1 and 3 only b. 1 and 4 only. c. 2 and 4 only. d. 4 only. e.
Modern "asset allocation" is based upon the model developed by Harry Markowitz. Which of the following statements is/are correctly identified with this model? 1. The risk, return, and covariance of
A client has a $1,200,000 portfolio consisting of the following four stocks:1. $300,000 ABC @ 1.1 beta.2. $225,000 RTR @ 0.7 beta.3. $405,000 XYZ @ 0.3 beta.4. $270,000 PDQ @ 1.3 beta.What is the
A young, single client approaches a CFP® professional with $5,000 stating that he would like to develop a financial plan and invest in the market. This is his first experience investing and he like
1. What do you think of the Richard and Monica argument? 2. Using the asset allocation alternatives listed in this chapter as a guide, what should their asset allocation be? Why? 3. What do you think
Define risk management?
How can insurance modify portfolio risk?
What are the significant factors in selecting an insurance company?
List the types of risks to human assets and briefly explain how to reduce them?
How is whole life insurance able to maintain a flat payment?
Describe the insurance needs approach?
Assuming continuing payments, will the cash value of whole life always go up over a life cycle? Why?
Why can term insurance be deducted from whole life to determine the return on the whole life policy?
Contrast variable and universal life insurance?
Julian was considering whole life and term insurance for his 20-year need. Which one should he select?
Name three strengths and weaknesses of whole life and term insurance?
How does portfolio management enter into the risk management process?
What is indexed universal life insurance and how is it different from the other whole life policies?
Identify the three parts of an insurance policy?
What is longevity risk and explain the two different scenarios that exist?
Why is diversification important in risk management?
What are the functions of a risk manager?
Contrast business and personal risk and separate the household's risk exposure into one or the other?
Which type of insurance might be more susceptible to moral hazard: term or whole life? Why?
A person who trades in his 15-year-old automobile and purchases a new car with disk brakes is practicing which method of managing risk?
How would you decide whether to transfer risk or share risk?
Indicate what type of life insurance you would recommend for someone who is scheduled to be financially independent in eight years. Why?
Randy had two term policies to compare, with costs as shown below. Calculate the NPV at a 6 percent after-tax discount rate and the IRR. Which one should she select and why?Years ___________ A
Given the following information:Find the return on the whole life insurance policy when the cost of term is included. Which would you select if you can invest the difference between the term and
Regarding the characteristics of insurance, which of the following is/are fundamental? 1. Probability (possibility and predictability of a loss). 2. Law of large numbers. 3. Transfer of risk from
What is the main responsibility of the underwriting department of a life insurance company? a. To guard against adverse selection. b. To set a limit on the amount of insurance issued. c. To set
Veronica recently purchased a car for $1,500 for her 16-year-old child. Which of the following risk management techniques would be most appropriate for handling the collision exposure of this
Which of the following best describes the difference between a variable life policy and a universal life policy? a. Variable life has a variable death benefit and universal life has a fixed death
In our meeting, it became apparent that Richard's investment loss was not a solitary act. Richard was very indulgent and paid little attention to his health. He went out on shopping sprees that he
Define adverse selection and give an example of it?
Contrast an HMO and a PPO?
John was young and Lisa elderly. Discuss potential provider preferences?
Why is an own occupation definition for disability so valuable?
Explain why life insurance is so much more popular than disability insurance?
For what type of retired individuals is long-term care insurance particularly appropriate?
Identify and briefly explain the principal types of social insurance?
Why are insurable interest and indemnity basic insurance beliefs?
Gerald wanted to purchase a medical policy with 100 percent coverage. The best he could get was $200 deductible and 80 percent co-insurance. Why wouldn't companies provide fuller coverage?
Why are group policies often cheaper than individual ones?
Distinguish between an HO-3 and an HO-4 property policy?
Marisa has a policy with replacement cost coverage and has a loss of $100,000 on a house. Total policy coverage is $300,000 and replacement cost is $400,000. Because the loss is less than the
Erin purchases disability insurance from her employer. Will any payments she receives be taxable?
Contrast the traditional tort system and no-fault auto insurance?
Why should a family have umbrella insurance?
Jeremy lost a wing of his house in a storm, which resulted in an outlay of $250,000 to replace it. The replacement cost on the house was $900,000, and he had $500,000 of insurance. His policy had an
Paulette, a trial attorney for a corporation, was forced to leave the field due to an injury to her vocal cords. She switched careers and became a lower-paying author. Fortunately, she had three
Bob, age 47, has worked for XYZ Company the past 12 years. XYZ Company has lost a major contract and must begin downsizing immediately. Bob was laid off yesterday. What should Bob do first?a. File
Ignoring cost-of-living adjustments or any possible Social Security benefits, calculate Joanna's net-of-tax monthly disability benefit if Joanna pays the disability premium and Joanna's tax bracket
Conditions that increase either the frequency or severity of loss are called a. Subrogation b. Risks c. Hazards d. Perils e. Extenuating circumstances
A client recently purchased a new home from a builder for $150,000, including the lot valued at $40,000. How much insurance would you recommend that your client purchase to cover full replacement of
A successful architect wants to purchase disability income insurance. She is concerned about becoming totally disabled, but also about a reduction in income if she is obliged to reduce her workload
Terry Underwood purchased a 15-year-old compact car with 10,000 miles for his teenage son who recently received his license. Which of the following auto insurance coverage's should be included in the
Typically, when group long-term disability income insurance premiums are paid by a C corporation, all disability benefit amounts received by an employee are a. not includable in the income of the
Under the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985, an employer is required to extend medical plan coverage to eligible members of the employee's family if the employee 1.
Ginny is a sole proprietor. She wants to provide 60 percent of salary disability coverage to Joanna, her employee who is in a 35 percent combined tax bracket. Joanna's W-2 wages are $40,000 and
An HO-3 policy (Special form-"All risks of physical loss" except those specifically excluded) with no endorsements excludes which one of the following perils? a. Flood b. Fire c. Collapse d. Weight
When I examined Richard and Monica's insurance policies, I found the following: a. Medical coverage was adequate. b. Auto insurance was at the minimum level for the state of $50,000 to $100,000 per
Why is retirement perceived as so important to people?
What is longevity risk?
What are the similarities and differences between retirement needs and insurance?
How does investing for retirement differ from investing after retirement? Why?
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