Finance In A Nutshell A No Nonsense Companion To The Tools And Techniques Of Finance 1st Edition Javier Estrada - Solutions

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35. Explain how a decrease in the discount rate affects credit availability and the money supply.
34. Suppose the Federal Reserve instructs the Trading Desk to purchase $1 billion of securities. Show the result of this transaction on the balance sheets of the Federal Reserve System and commercial banks.
33. What are the tools used by the Federal Reserve to implement monetary policy?
32. How did the boom in the housing market in the early and mid-2000s exacerbate FIs’ transition away from their role as specialists in risk measurement and management?
31. What events resulted in banks’ shift from the traditional banking model of “originate and hold” to a model of “originate and distribute”?
30. What reasons have been given for the growth of investment companies at the expense of “traditional” banks and insurance companies?
29. How do regulations regarding barriers to entry and the scope of permitted activities affect the charter value of financial institutions?
28. What legislation has been passed specifically to protect investors who use investment banks directly or indirectly to purchase securities? Give some examples of the types of abuses for which protection is provided.
27. What is the purpose of the Home Mortgage Disclosure Act? What are the social benefits desired from the legislation? How does the implementation of this legislation create a net regulatory burden on financial institutions?
26. What are some examples of credit allocation regulation? How can this attempt to create social benefits create costs to a private institution?
25. In the transmission of monetary policy, what is the difference between inside money and outside money? How does the Federal Reserve try to control the amount of inside money? How can this regulatory position create a cost for depository institutions?
24. What forms of protection and regulation do the regulators of FIs impose to ensure their safety and soundness?
23. Why are FIs among the most regulated sectors in the world? When is the net regulatory burden positive?
22. If financial markets operated perfectly and costlessly, would there be a need for financial institutions?
21. What is negative externality? In what ways do the existence of negative externalities justify the extra regulatory attention received by financial institutions?
20. What is denomination intermediation? How do FIs assist in this process?
19. What are two of the most important payment services provided by financial institutions? To what extent do these services efficiently provide benefits to the economy?
18. Which intermediaries best fulfill the intergenerational wealth transfer function? What is this wealth transfer process?
17. What is meant by credit allocation regulation? What social benefit is this type of regulation intended to provide?
16. How do depository institutions such as commercial banks assist in the implementation and transmission of monetary policy?
15. What are five areas of institution-specific FI specialness and which types of institutions are most likely to be the service providers?
14. What is maturity intermediation? What are some of the ways the risks of maturity intermediation are managed by financial institutions?
13. How can individual savers use financial institutions to reduce the transaction costs of investing in financial assets?
12. How can financial institutions invest in high-risk assets with funding provided by low-risk liabilities from savers?
11. How do financial institutions help individual savers diversify their portfolio risks? Which type of financial institution is best able to achieve this goal?
10. How do FIs alleviate the problem of liquidity risk faced by investors who wish to buy securities issued by corporations?
9. How do large FIs solve the problem of high information collection costs for lenders, borrowers, and financial markets?
8. What are agency costs? How do FIs solve the information and related agency costs experienced when household savers invest directly in securities issued by corporations?
7. What are five general areas of FI specialness that are caused by providing various services to sectors of the economy?
6. Explain how financial institutions act as delegated monitors. What secondary benefits often accrue to the entire financial system because of this monitoring process?
5. In what sense are the financial claims of FIs considered secondary securities, while the financial claims of commercial corporations are considered primary securities? How does the transformation process, or intermediation, reduce the risk, or economic disincentives, to savers?
4. Identify and explain the two functions FIs perform that would enable the smooth flow of funds from household savers to corporate users.
3. Identify and explain three economic disincentives that would dampen the flow of funds between household savers of funds and corporate users of funds in an economic world without financial institutions.
2. Explain how economic transactions between household savers of funds and corporate users of funds would occur in a world without financial institutions.
1. What are risks common to all financial institutions?
3. What six major types of regulation do FIs face?
2. Define the concept of net regulatory burden.
1. Why should more regulation be imposed on FIs than on other types of private corporations?
4. What is the link between asset diversification and the liquidity of deposit contracts?
3. What are primary securities and secondary securities?
2. What are two major differences between brokers (such as security brokers) and depository institutions (such as commercial banks)?
1. What are the three major risks to household savers from direct security purchases?
Estimate a linear regression model in which mean returns are explained by both volatility and beta.(a) What do you make out of the R2 of this regression?(b) Interpret the three coefficients estimated and test their significance. Do volatility and beta seem to be good variables to jointly explain
Estimate a linear regression model in which mean returns are solely explained by beta.(a) What do you make out of the R2 of this regression?(b) Interpret the two coefficients estimated and test their significance.Does beta seem to be a good variable to explain the variability in mean returns across
companies in Table 30.5, all calculated over the 1999–2003 period. The companies in the list are those that make up the Dow Jones Industrial Average after its latest change of composition on April 8, 2004.(a) Estimate a linear regression model in which mean returns are solely explained by
Consider the mean monthly returns (MR), monthly standard deviation of returns (SD), and beta with respect to the market (the S&P500) of the
Go back to the distribution of continuously compounded annual returns of the Dow during the period 1954–2003 in Table 29.2. As we have already discussed, these returns are normally distributed, with a mean of 7.2% and a standard deviation of 15.9% (which implies that the simple returns are
Consider the same returns of US Treasury bills during the 1980s and 90s reported in panel A of Table 28.2, in the previous chapter. Using these returns, compute:(a) The coefficient of skewness by using the ‘skew’ command.(b) The coefficient of excess kurtosis by using the ‘kurt’ command.(c)
Considering the returns of US Treasury bills during the 1980s and 1990s reported in panel A of Table 28.2, fill in the blanks of panel B by calculating the absolute and relative frequencies for the ranges indicated. Then make a histogram depicting both ranges and absolute frequencies. Do the
For the sake of completeness, also compute both the variance and standard deviation of returns of each market with respect to T – 1. Are these two numbers very different from their respective numbers with respect to T? Why?
Table 27.4 reports the returns of the stock markets of Argentina and Brazil during the 1994–2003 period. The behavior of these markets is summarized here by the MSCI index of each market, measured in dollars and accounting for both capital gains and dividends. Given these returns, compute:(a) The
Suppose we start from an absolute PPP equilibrium in which the dollar/euro exchange rate is 1.5, and that over the next year prices in the US are expected to increase by 6% and in Europe by 3%. Real interest rates across all countries are roughly 3%.(a) What do you think will happen to the
Consider a flat-screen TV that sells in the US for $5,000 and in Europe for i6,000 at a time when the dollar/euro exchange rate is 0.833.
Consider the same $4 million equity portfolio but assume now that its beta with respect to the Dow is 1.2. Again, calculate the value of all the relevant variables (the empty cells). Can you obtain a perfect hedge in this case?
Consider the information in Table 25.2. The situation is similar to the one considered in the text, where we need to hedge the value of an equity portfolio using futures contracts on the Dow. Consider first the case in which the beta of a $4 million equity portfolio with respect to the Dow is 0.8
Take a good look at all the numbers you calculated in the previous three questions. Do the qualitative relationships in Table 24.1 hold?
Beginning from the numbers in the base case (those in the previous two questions and in parentheses in the table, except for the price of the call and the put that you must calculate yourself), recalculate the price of the call and the put for the parameters in Table 24.3.TABLE 24.3 S ($45) X ($45)
How much would you pay for a put option on the same stock, knowing that it has an exercise price of $45 and is nine months away from maturity?
Consider a call option with an exercise price of $45 and nine months away from maturity. The call is written on a stock that is currently trading at $45 a share and has a historical annual volatility of 20%. The annual risk-free rate is 5%. How much would you pay for this call?
Which industries created value during 2003? Which industries destroyed value during that year?
Recalculate the residual income (RI) of each industry using equation(23.3) in the text. Are the RIs calculated the same (industry by industry) as those calculated in the previous question. Why?
Calculate the residual income (RI) of each industry using equation(23.2) in the text.
Consider the return on capital (ROC), cost of capital (COC), and book value of capital for the year 2003 of the five industries displayed in Table 23.2. Calculate the NOPAT of each industry implied by the ROCs and capital levels in the table.TABLE 23.2 Industry ROC COC Capital NOPAT RI(%) (%) ($bn)
Assume now that the company can delay for one year its decision on the project. In this case, the initial investment remains the same but the project will deliver cash flows for only nine years.(a) Calculate the project’s NPV at the end of the first year based on its cash flows if the exchange
Consider the same mining project we discussed above but with different numbers. Assume that the project will deliver $20 million a year if the exchange rate is low and $40 million a year if the exchange rate is high, in both cases during the ten years. Also assume that the initial investment
Go back to project E and consider it in isolation. Also, instead of a constant discount rate of 10%, assume that the company will gradually increase its leverage and therefore its discount rate. In fact, the company expects that over the next five years its discount rate will be DR1 = 20%, DR2 =
If the company had to choose between projects A and E, which one should it choose? Why? Do the NPV and IRR approaches lead the company to the same decision? Why?
Should the company go ahead with project C? Why? Do the NPV and IRR approaches lead the company to the same decision? Why?
Should the company go ahead with project B? Why? Do the NPV and IRR approaches lead the company to the same decision? Why?
Should the company go ahead with project A? Why?
Consider the projects in Table 21.2. The company that needs to evaluate them uses a discount rate of 10% in all its projects.(a) Compute the NPV of all projects.(b) Compute the IRR of all projects.
Calculate the percentage change in the price of each bond when discount rates change from those of the base case to those in the‘SADR-2’ and ‘SADR-3’ rows. Are these changes in price similar to those predicted by the modified duration of each bond? Why?
Calculate the modified duration of each of the four bonds in the base case. What is the sensitivity of each bond with respect to changes in interest rates?
Calculate the duration of each of the four bonds in the base case.(Recall that Excel requires you to input the annual discount rate, so make sure you remember to double the magnitudes in the ‘SADR-1’row.) Are these durations longer or shorter than the 6-year maturity of these bonds? Why? Are
Consider the same four bonds we considered in the Challenge Section of Chapters 18 and 19, namely, a US Treasury note, and corporate bonds from Berkshire Hathaway (BH), Motorola, and Delta Airlines.Relevant information about these bonds is displayed in Table 20.5.(a) Calculate the price of each
Are default risk and market risk positively correlated in the sense that bonds that have a higher default risk also have a higher market risk?Why?
Consider the percentage change in the price of each bond in Table 19.6 when discount rates change from those in the base case (‘SADR-1’ row)to those in the ‘SADR-2’ and ‘SADR-3’ rows. Which of the four bonds is the most sensitive to changes in interest rates? Which is the least
Let’s go back to the same four bonds we considered in the Challenge section of the previous chapter, namely, a US Treasury note, and corporate bonds from Berkshire Hathaway (BH), Motorola, and Delta Airlines. Relevant information about these bonds is displayed in Table 19.6.
Calculate the semiannual yield to maturity of each bond in Table 18.1 assuming that you are at the date indicated in the ‘You are’ row and given the price indicated in the ‘Actual price’ row. Then calculate both the annual yield and the effective annual yield of each bond. Are these last
Let’s consider the four bonds for which data is displayed in Table 18.1.The first is a US Treasury note and the other three are corporate bonds from Berkshire Hathaway (BH), Motorola, and Delta Airlines. We will consider these four bonds at somewhat different points in time so that all of them
Using the information provided in the previous question, but now assuming a long-term growth of free cash flows of 6%, at what annual rate would Yahoo’s free cash flows need to grow over the years 2001 to 2005 to justify its market valuation?
Let’s use reverse valuation to assess the value of Yahoo! just one year after we did in the text. During the year 2000, Yahoo! generated free cash flows of $394.4 million. At the end of that year, Yahoo! remained unlevered and therefore equity free cash flows were the same as capital free cash
Are the estimates that follow from these two models similar? Why? Are they in turn similar to the value you estimated using the WACC model in the previous chapter? Why?
Using the same information, estimate the intrinsic value of a share of Oracle using the APV model.
Consider all the information about Oracle provided in the Challenge section of the previous chapter and estimate the intrinsic value of a share of Oracle using the FTE model.
Given your estimate and the market price, what would be your advice on Oracle stock? To buy? To sell? To hold?
Using the WACC model, estimate the intrinsic value of a share of Oracle.
Using the information in Table 14.8, calculate Oracle’s cost of capital.
Assuming that Oracles’s CFCF will increase at the annual rate of 10%over the next five years, at the annual rate of 8% over the following five years, and at 6% a year from that point on, calculate Oracle’s expected CFCFs.
In 2003, Oracle delivered a profit of $2.7 billion on revenues of $10.2 billion. On May 30, 2004, when Oracles’s fiscal year 2003 concluded, the company’s market cap was $58.9 billion and its stock price $11.40.At the same time, Oracle’s earnings per share (EPS) and price/earnings(P/E) ratio
Assume that Coca-Cola will grow its dividend at 10% a year over the next five years. Assume, also, that five years down the road Coca-Cola’s P/E will remain at its current 29, and that its EPS will grow over the next five years at the 10% annual rate expected by analysts. How much would you then
In 2003, Coca-Cola delivered a profit of $4.3 billion on revenues of $21 billion. Its market cap at the end of the year was $124 billion and its stock price $50.75. Its EPS and DPS were $1.77 and $0.88, respectively, giving it a P/E ratio of almost 29 and a DPR of almost 50%. At the end of 2003,
years. Then calculate:(a) The probability of turning the initial $1,000 into at least $1,500.(b) The amount of money such that the probability of obtaining at least that amount is 50%.
Consider an initial investment of $1,000 and investment horizons of 1, 5, 10, 15, 20, 25, and
Between 1970 and 2003, the distribution of annual continuously compounded returns of the European market had an arithmetic mean return of 10.9% with a standard deviation of 17.0%. The distribution of annual simple returns, on the other hand, had an arithmetic mean return of 13.4%, a geometric mean
must apply.)(a) Find the minimum variance portfolio (MVP).(b) Find the portfolio with the lowest risk given a target return of 15%.(c) Find the portfolio with the highest expected return given a target risk of 26%.(d) Find the portfolio with the highest risk-adjusted return.
Go back to panel A of Table 5.2 containing the annual returns of Disney and Microsoft between 1994 and 2003 and calculate the relevant covariance. Then, using the portfolio-optimization program discussed in the Excel section, and a risk-free rate of 5%, for each of the questions below find the set
Consider Table 11.2, which contains annual summary statistics for four emerging markets, Argentina, Brazil, Chile, and Mexico (all summarized by MSCI indices, in dollars, and accounting for both capital gains and dividends) between 1988 and 2003. Panel A reports the mean return (AM), standard
After having ranked these seven countries on the basis of different measures of risk-adjusted returns, in which one country would you invest? Why?
Do the rankings based on different measures of risk-adjusted returns concur? Why?

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