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financial accounting

Questions and Answers of Financial Accounting

Explain how venture capital (VC) funds finance private businesses, as well as how they exit from the participation.
Explain the dilemma of stock analysts that work for securities firms and assign ratings to large corporations. Why might they prefer not to assign low ratings to weak but large corporations?
Businesses valued at less than $50 million or so rarely go public. Explain the limitations to such businesses if they did go public.
Explain the incentive for private equity funds to invest in a firm and improve its operations.
Venture capital firms commonly attempt to cash out as soon as is possible following IPOs. Describe the likely effect that would have on the stock price at the time of lockup expiration. Would the
Explain why some public firms decided to go private in response to the passage of the Sarbanes-Oxley (SOX) Act.
Why do firms engage in IPOs? What is the amount of fees that the lead underwriter and its syndicate charge a firm that is going public? Why are there many IPOs in some periods and few IPOs in other
Describe the dilemma of securities firms that served as underwriters for Facebook's IPOs, when attempting to satisfy Facebook and the institutional investors that invested in Facebook's stock. Do you
What are some possible disadvantages to investors who invest in stocks listed on a private stock market?
Explain why private equity funds use a very high degree of financial leverage, and how this affects their risk and potential return on investment.
Explain how underwriters use the overallotment option in IPOs.
Describe the role of the designated market maker on the New York Stock Exchange.
Explain the difference between obtaining funds from a venture capital firm and engaging in an IPO. Explain how the IPO may serve as a means by which the venture capital firm can cash out.
Explain the use of a prospectus developed before an IPO. Why does a firm do a road show before its IPO? What factors influence the offer price of stock at the time of the IPO?
Describe the process of bookbuilding. Why is bookbuilding sometimes criticized as a means of setting the offer price?
Describe a lockup provision and explain why it is required by the lead underwriter.
What is the meaning of an initial return for an IPO? Were initial returns of Internet IPOs in the late 1990s higher or lower than normal? Why?
What does it mean to "flip" shares? Why would investors want to flip shares?
Write a short essay on why there is so much uncertainty surrounding the valuation of a firm that is engaged in an IPO. Why do you think some investors overvalue firms at the time of their IPO?
a. If Carson issued stock now, it would have the flexibility to obtain more debt and would also be able to reduce its cost of financing with debt. Why? b. Why would an IPO result in heightened
a. "The recent wave of IPOs is an attempt by many small firms to capitalize on the recent run-up in stock prices." b. "IPOs transfer wealth from unsophisticated investors to large institutional
Explain the use of the price-earnings (PE) ratio for valuing a stock. Why might investors derive different valuations for a stock when using the price-earnings method? Why might investors derive an
Why can expectations of an acquisition affect the value of the target's stock?
What are the risks of investing in stocks in emerging markets?
Explain how stock volatility changed during the credit crisis.
Identify the factors that affect a stock portfolio's volatility and explain their effects.
Explain how to estimate the beta of a stock. Explain why beta serves as a measure of the stock's risk.
In the movie Wall Street, Bud Fox is a broker who conducts trades for Gordon Gekko's firm. Gekko purchases shares of firms he believes are undervalued. Various scenes in the movie offer excellent
Explain the difference between weak-form, semistrong-form, and strong-form efficiency. Which of these forms of efficiency is most difficult to test? Which is most likely to be refuted? Explain how to
A consulting firm was hired to determine whether a particular trading strategy could generate abnormal returns. The strategy involved taking positions based on recent historical movements in stock
Describe the value-at-risk method for measuring risk.
Explain the meaning and use of implied volatility.
Describe the dividend discount valuation model. What are some limitations of the dividend discount model?
At the time a management group of RJR Nabisco initially considered engaging in a leveraged buyout, RJR's stock price was less than $70 per share. Ultimately, RJR was acquired by the firm Kohlberg,
Consider the prevailing conditions that could affect the demand for stocks, including inflation, the economy, the budget deficit, and the Fed's monetary policy, political conditions, and the general
Explain (using intuition instead of math) why stock prices may decrease in response to a higher risk-free rate according to the CAPM. In some periods, the risk-free rate rises in response to higher
Use a stock valuation framework to explain why the Sarbanes-Oxley Act (SOX) could improve the valuation of a stock. Why might SOX cause a reduction in the valuation of a stock?
Explain why participants in the stock market monitor the VIX index. What does a decline in VIX imply about a change in expected volatility by market participants?
Explain how economic growth affects the valuation of a stock.
How are the interest rate, the required rate of return on a stock, and the valuation of a stock related?
Assume that the expected inflation rate has just been revised upward by the market. Would the required return by investors who invest in the stocks be affected? Explain.
Explain how the value of the dollar affects stock valuations.
Explain why investor sentiment can affect stock prices.
Describe the January effect.
The credit crisis that occurred in the 2008-2009 period could also be called an equity crisis due to systemic risk. Write a short essay to explain the impact of the credit markets on the equity
a. "The stock market's recent climb has been driven by falling interest rates."b. "Future stock prices are dependent on the Fed's policy meeting next week."c. "Given a recent climb in stocks that
a. You have noticed that investors tend to invest more heavily in stocks after interest rates have declined. You are considering this strategy as well. Is it rational to invest more heavily in stocks
a. At the present time, the price-earnings (PE) ratio (stock price per share divided by earnings per share) of other firms in Carson's industry is relatively low but should rise in the future. Why
Assume the following information over a five-year period.• Average risk-free rate = 6%• Average return for Crane stock = 11%• Average return for Load stock = 14%•Standard deviation of Crane
You are considering investing in a stock that has an expected return of 13 percent. If the risk-free rate is 5 percent and the market risk premium is 7 percent, what must the beta of this stock be?
Suppose you bought a stock at the beginning of the year for $76.50. During the year, the stock paid a dividend of $0.70 per share and had an ending share price of $99.25. What is the total percentage
Using the information from Problem 12, suppose that you instead decide to invest $20,000 in IBM, $30,000 in LUV and $50,000 in ODP. What is the beta of your portfolio now?
a. When computing the price of the stock with the dividend discount model, how would the price of a stock be affected if the required rate of return is increased. Explain the logic of this
a. When using the CAPM, how would the required rate of return on a stock be affected if the risk-free rate were lower?b. When using the CAPM, how would the required rate of return on a stock be
a. How is the maximum expected loss on a stock affected by an increase in the volatility (standard deviation), based on a 95 percent confidence interval?b. Determine how the maximum expected loss on
You found that Verto Stock is expected to generate earnings of $4.38 per share this year, and that the mean PE ratio for its industry is 27.195. Use the PE valuation method to determine the value of
Micro, Inc. will pay a dividend of $2.30 per share next year. If the company plans to increase its dividend by 9 percent per year indefinitely, and you require a 12 percent return on your investment,
Suppose you know that a company just paid a dividend of $1.75 per share on its stock and that the dividend will continue to grow at a rate of 8 percent per year. If the required return on this stock
The next expected dividend for Sun, Inc., will be $1.20 per share and analysts expect the dividend to grow at a rate of 7 percent indefinitely. If Sun stock currently sells for $22 per share, what is
A share of common stock currently sells for $110. Current dividends are $8 per share, and are expected to grow at 6 percent per year indefinitely. What is the rate of return required by investors in
A stock has a beta of 2.2, the risk-free rate is 6 percent, and the expected return on the market is 12 percent. Using the CAPM, what would you expect the required rate of return on this stock to
What alternative sources of information about a firm should investors rely on if they cannot rely on financial statements?
Should investors have confidence in ratings by analysts who are affiliated with securities firms that provide consulting services to firms? Explain.
Does an analyst employed by a securities firm to rate firms face a conflict of interest? If so, can the conflict be resolved?
How might a firm's board of directors discourage its managers from attempting to manipulate financial statements to create a temporarily high stock price?
How can the compensation of a firm's board of directors be structured so that the board will not be tempted to allow accounting or other managerial decisions that could cause a superficially high
Why are trading halts sometimes imposed on particular stocks?
Explain how foreign stock exchanges have reduced transactions costs.
Your friend just told you about a penny stock he purchased, which increased in price from $0.10 to $0.50 per share. You start investigating penny stocks, and after conducting a large amount of
What are dark pools? How can they help investors accumulate shares without other investors knowing about the trades? Why are dark pools criticized by public stock exchanges? Explain the strategy used
Describe inside information as applied to the trading of stocks. Why is it illegal to trade based on inside information? Describe the evidence that suggests some investors use inside information.
Explain how the Galleon case led to stronger enforcement against insider trading.
Explain the strategy of high frequency trading firms. Describe the typical time horizon of an investment that is relevant to high frequency traders, and how that varies from other institutional
Describe the Flash Crash on May 6, 2010, and explain why it caused so much concern to investors and regulators.
Explain how some high frequency traders used a form of front running to capitalize on faster access to specific markets.
Explain how margin requirements can affect the potential return and risk from investing in a stock. What is the maintenance margin?
Explain how and why high frequency trading affects spreads.
Why did the SEC impose a temporary ban on short sales of specific stocks in 2008? Do you think a ban on short selling is effective?
Under what conditions might investors consider short selling a specific stock?
Describe the short selling process. Explain the short interest ratio. Investors can engage in short selling by selling a stock that they do not own. They must borrow the stock that they sell.
Describe the roles of market makers.
Briefly describe the structure and role of the Securities and Exchange Commission (SEC).
Explain how the Securities and Exchange Commission attempts to prevent violations of SEC regulations.
Explain how circuit breakers are used to reduce the likelihood of a large stock market crash.
Some critics argue that insider trading should not be regulated, because it allows market prices to more quickly reflect the inside information. Write a short essay that supports or refutes this
a. In some cases, a stock's price is too high or too low because of asymmetric information, information known by the firm but not by investors. How can Carson attempt to minimize asymmetric
As a portfolio manager, you commonly take short positions in stocks that have a high short interest margin. What is the advantage of focusing on these types of firms? What is a possible disadvantage?
a. "Individual investors who purchase stock on margin might as well go to Vegas." b. "During a major market downturn, market makers are suddenly not available." c. "The trading floor may become
Assume that Vogl stock is priced at $50 per share and pays a dividend of $1 per share. An investor purchases the stock on margin, paying $30 per share and borrowing the remainder from the brokerage
Assume that Duever stock is priced at $80 per share and pays a dividend of $2 per share. An investor purchases the stock on margin, paying $50 per share and borrowing the remainder from the brokerage
Suppose that you buy a stock for $48 by paying $25 and borrowing the remaining $23 from a brokerage firm at 8 percent annualized interest. The stock pays an annual dividend of $0.80 per share, and
How would the return on a stock be affected by a lower initial investment (and higher loan amount)? Explain the relationship between the proportion of funds borrowed and the return.
Describe the general characteristics of a futures contract. How does a clearinghouse facilitate the trading of financial futures contracts?
Explain the difference between a long hedge and a short hedge used by financial institutions. When is a long hedge more appropriate than a short hedge?
How might a savings and loan association use Treasury bond futures to hedge its fixed-rate mortgage portfolio (assuming that its main source of funds is short-term deposits)? Explain how prepayments
Describe stock index futures. How could they be used by a financial institution that is anticipating a jump in stock prices but does not yet have sufficient funds to purchase large amounts of stock?
Explain systemic risk as it relates to the futures market. Explain how the Financial Reform Act of 2010 attempts to monitor systemic risk in the futures market and other markets.
Explain the use of circuit breakers.
Elon Savings and Loan Association has a large number of 30-year mortgages with floating interest rates that adjust on an annual basis and obtains most of its funds by issuing five-year certificates
Blue Devil Savings and Loan Association has a large number of 10-year fixed-rate mortgages and obtains most of its funds from short-term deposits. It uses the yield curve to assess the market's

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