Questions and Answers of Financial Markets Institutions

Calculate the different annual yields on a discounted, money market security.
Determine if a change in credit policy will generate increased earnings.
Determine the maximum inventory, the average inventory, and the minimum inventory using the EOQ model.
Explain how the operating cycle leads to fluctuations in the need for current assets.
Define working capital, net working capital, and working capital policy.
Explain the purpose of the cash budget.
Explain how dividend policy affects the need for external financing.
Illustrate the percent of sales method of forecasting.
Identify the assets and liabilities that spontaneously vary with the level of sales.
Illustrate how certainty equivalents and beta coefficients may be used to adjust for risk when applying NPV and IRR.
Adjust the firm’s cost of capital for difference in risk associated with long-term investments.
Explain how cash inflows may be adjusted for the probability of their occurrence.
Differentiate stand-alone and portfolio risk.
Define mutually exclusive investments and be able to select among them.
Describe the reinvestment assumption employed by NPV and IRR methods of capital budgeting.
Determine if an investment should be made, using NPV and IRR.
Calculate an investment’s net present value and internal rate of return.
Distinguish between an investment’s earnings and its cash flows.
Explain the relationship between the optimal capital structure and the value of a firm’s stock.
Distinguish between the average and marginal cost of funds.
Determine the firm’s optimal capital structure.
Explain why a firm’s cost of capital changes with changes in its capital structure.
Differentiate among the factors that affect the cost of debt, the cost of preferred stock, and the cost of common stock.
Identify the components of a firm’s capital structure.
Contrast debt and preferred stock as a source of financial leverage.
Determine the cost of debt.
Explain how the use of financial leverage affects the return on equity.
Illustrate the impact of substituting fixed for variable cost on the volatility of earnings.
Explain the impact of leverage on operating income and net income.
Determine the sources of operating and financial leverage.
Enumerate several weaknesses associated with the payback period as a method for selecting long-term investments.
Determine an investment’s payback period.
Identify a potential use for break-even analysis.
Calculate the break-even level of output.
Differentiate fixed from variable costs.
Calculate the amount of taxes owed given an amount of taxable income.
Enumerate the differences and similarities among the forms of business.
Identify the features that differentiate exchange-traded funds and other investment companies.
Identify several considerations when selecting an investment company for possible inclusion in your portfolio.
Explain why mutual fund returns over time tend to track the market as a whole.
Differentiate mutual funds based on their portfolios.
List several costs associated with investing in a mutual fund.
Contrast a closed-end investment company’s discount or premium.
The Internet is a major source of information concerning mutual funds.General sources include:American Association of Individual Investors: www.aaii.com Bloomberg Financial
Determine a fund’s net asset value.
Many mutual funds are part of a family of funds under the umbrella of a fund sponsor. Select four of these fund sponsors and answer the following questions.American Century:
Differentiate closed-end and open-end investment companies.
Distinguish between an investor’s return and historical returns.
Compare aggregate returns on different classes of assets.
Differentiate the holding period and the annualized rate of return.
Determine what affects the return on an investment in a convertible.
Explain why a convertible security is always callable and when a company may call the security.
Describe the premiums paid for a convertible bond.
Calculate the value of a convertible security as debt.
Calculate the value of a convertible security as stock.
Isolate the relationship between changes in interest rates and the price of a preferred stock.
Determine the value of a preferred stock.
Calculate earnings per share, earnings per preferred share, and timespreferred-dividend-earned.
List the features of preferred stock.
Explain why the realized return on an investment in a bond may not equal the yield to maturity.
Demonstrate when the current yield exceeds (or is less than) the yield to maturity.
Differentiate the current yield from the yield to maturity.
Calculate the yield to maturity.
Explain the relationship between changes in interest rates and bond prices.
Determine the price of a bond.
Differentiate the types of federal government debt.
Differentiate the types of corporate bonds.
Explain the roles of the trustee and credit ratings.
Identify the general characteristics of bonds.
Use multiplier models such as the price/earnings (P/E) ratio to value common stock.
Illustrate the impact of changes in the dividend, the growth rate, the expected return on the market, and the beta on the value of a stock.
If you went to more than one site, did each site provide the same information? Were the numerical values of the data equal? If they were different, are there any obvious explanations for the
Using the previous sites, locate each stock’s growth rate and beta coefficient. Apply the dividend-growth model to the firms you have selected. (In order to make the model applicable, you will have
Go to a site that provides price-to-earnings, price-to-sales, and priceto-book ratios and compare four firms in the same industry, such as telecommunications, retailing, or pharmaceuticals. Compare
Calculate the value of a common stock using the dividend-growth model to determine if the stock is over- or undervalued.
List the advantages associated with dividend reinvestment plans and stock repurchases.
Compare the impact of a cash dividend, stock dividend, and stock split on a firm’s balance sheet.
Identify the important dates for the distribution of a cash dividend.
Explain why brokerage commissions and capital gains taxation may affect an investor’s preference for the distribution or the retention of earnings.
Contrast the impact of retaining earnings versus paying cash dividends on a corporation’s balance sheet.
Explain why cumulative voting may give minority stockholders representation on a firm’s board of directors.
While stock splits may not increase the wealth of stockholders, many companies do split their stock. You may obtain a calendar of stock splits through Google by searching for “stock splits.”
You may obtain information on dividend reinvestment plans from DRIP Investor (www.dripinvestor.com), DRIP Central (www.dripcentral.com), and ShareBuilder (www.sharebuilder.com). What are the features
Differentiate among assets, liabilities, revenues, expenses, income, cash, and retained earnings.
Use an Internet source and compare the profitability and leverage ratios for the following retail firms:1. Gap, Inc. (GPS)2. L Brands, Inc. (LB)3. Pier 1 Imports (PIR)4. Target Corp. (TGT)5. Wal-Mart
Define the basic components of a firm’s balance sheet, income statement, and statement of cash flows.
Illustrate the relationship between beta and the required return.
Compute the required return specified in the capital asset pricing model.
Explain what condition must be met for diversification to occur.
Explain why larger standard deviations and higher beta coefficients indicate increased risk.
Differentiate the standard deviation and the beta coefficient as measures of risk.
Beta coefficients change over time. Exhibit 8.1 illustrates beta coefficients obtained through Yahoo! Update these beta coefficients. Have they changed, and what are the implications of any changes
Describe the expected, required, and realized returns.
Explain why the present value of an annuity of $100 for ten years is less than the future value of the same annuity.
Differentiate deficits and surpluses in the merchandise trade balance.
Describe the components of a nation’s balance of payments.
Differentiate devaluations and revaluations and their impact on the demand for foreign goods and services.
Explain why the demand for one currency implies the supplying of another currency.
Express the value of a currency in terms of another currency.
Define inflation, deflation, and recession; explain how each is measured and why inflation is associated with higher interest rates.

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