Questions and Answers of Introduction Finance Markets

What do liquidity ratios indicate? Identify some basic liquidity ratios.
Which type or category of ratios relates stock market information to financial statement items?
Identify the types of ratios that are used to analyze a firm’s financial performance based on its income statements and balance sheets.
List some reasons why financial statement analysis is conducted. Identify some of the participants that analyze firms’ financial statements.
Assume that a corporation purchases a new piece of equipment for $90,000. The equipment qualifies for a three-year class life for depreciation purposes.a. What is the dollar amount of depreciation
Assume a corporation earns $75,000 in net income.a. Determine the firm’s income tax liability.b. Calculate the firm’s average income tax rate.
Find the annual depreciation expenses for the following items:a. Original cost is $35,000 for an asset in the three-year class.b. Original cost is $70,000 for an asset in the five-year class.
What would the tax obligation be for a corporation with pretax earnings of the following?a. $60,000b. $150,000c. $500,000?d. What would be the personal tax obligation of a person fi ling her taxes
Determine the marginal and average tax rates under the tax law for corporations with the following amounts of taxable income:a. $60,000b. $150,000c. $500,000.
What is meant by the statement that depreciation provides a tax shield? Explain how this works.
Corporate tax rates vary with the amount of taxable income. What is the range (lowest and highest) of corporate tax rates in the United States?
Why is it said that the personal income tax rate in the United States is progressive?
Using the financial statements below,a. Compute common-size financial statements.b. Put together a statement of cash flows of the firm. Where did the firm invest funds during the year? How did it
Use the following information to construct an income statement:Cost of goods sold...............................................$684,000Gross
Use your knowledge of income statements to fill in the missing items:SalesCost of goods sold.......................................$575,000Gross
Use your knowledge of balance sheets to fill in the missing amounts:AssetsCash.......................................................................$50,000Accounts
Use your knowledge of balance sheets to fill in the missing amounts:AssetsCash..................................................................$10,000Accounts
Briefly describe the financial responsibilities undertaken by a firm’s treasurer.
What are the responsibilities of a firm’s controller?
What are the two main solutions for reducing the adverse effects of agency problems?
Describe the financial goal espoused by business firms.
What is a statement of cash flows? What are the three standard sections contained in a statement of cash flows?
How do the financial markets accommodate the needs of risky firms and safe firms?
Stevens Incorporated’s stock has a 14 percent return, a beta of 0.85, and the market return is 15 percent.a. What was the risk-free rate in the economy for the year?b. The stock market of another
Using your answers to Problems 4a and 4b, estimate your portfolio’s expected return if the security market line is estimated as E(Ri) = 5.2 + 8.4(????i).a. Estimate the beta of your fund holdings
You’ve collected data on the betas of various mutual funds. Each fund and its beta is listed below:Mutual Fund BetaWeak
As mentioned, spreadsheets can do the work for us of computing beta. Use Excel’s “slope” function to estimate the beta of Microsoft using the data in Table LE12.1. Use the “intercept”
Below is nine months’ return data for Walgreens and the S&P 500.a. Estimate the intercept (alpha) and beta for Walgreens stock using spreadsheet functions.b. Interpret what the slope estimate
Stock market forecasters are predicting the stock market will rise 5 percent next year. Given the beta of each stock below, what is the expected change in each stock’s value?Firm
Based upon your answers to Question 1, which asset appears riskiest based on standard deviation? Based on coefficient of variation? Asset Annual Returns A 5%, 10%, 15%, 4% B -6%, 20%, 2%, –5%, 10%
From the information below, compute the average annual return, the variance, standard deviation, and coefficient of variation for each asset. Annual Returns 5%, 10%, 15%, 4% -6%, 20%, 2%, –5%, 10%
Define a portfolio, and describe how the expected return on a portfolio is computed.
Explain the historical relationships between return and risk for common stocks versus corporate bonds.
What sources of risk does a firm face, and which of those sources are reflected on the firm’s income statement?
Business risk has three possible sources. What are they?
What is the coefficient of variation? How is it used as a measure of risk?
Boneyard Biscuits’ Dutch auction for an IPO was a great success. The firm offered 100 million shares. Bids appear below.a. What is the clearing price?b. What options do Boneyard and its
Below are the results of a Dutch auction for an IPO of Bagel’s Bagels, a trendy bagel and coffee shop chain. Bagel’s is offering 50 million shares.a. What will be the clearing price?b. How many
Between 2007 and 2014, the costs of unethical behavior in investment banks (fines, lawyer costs, trading losses) were estimated at over $100 billion, about 6.6 percent of industry revenue. Will this
Describe buying on margin.
What risk does a zero-coupon bond address?
Following are the cash flows for three investments (originally presented in end-of-chapter problem 25) that actually occur at the beginning of each year rather than at the end of each year.a. Find
Use a financial calculator to solve for the interest rate involved in the following future value of an annuity due problem. The future value is $57,000, the annual payment is $7,500, and the time
What is the present value of a five-year lease arrangement with an interest rate of 9 percent that requires annual payments of $10,000 per year with the first payment being due now?
Describe the process for solving for the time period in present and future value problems.
What role did individuals play in the development of the 2007–08 financial crisis?
Identify and briefly describe the financial functions in the financial system.
Determine the intrinsic values of the following put options when the stock is selling at $63 just prior to expiration of the options.a. $55 put priceb. $65 put pricec. $75 put price
Determine the profit (or loss) to a call buyer and a call writer for the following call options when the stock is selling at $32 just prior to expiration of the options and the option premium is
Determine the profit (or loss) to a put buyer and a put writer for the following put options when the stock is selling at $63 just prior to expiration of the options and the option premium is $3.a.
Currently, the price of Mattco stock is $30 a share. You have $30,000 of your own funds to invest. Using the maximum margin allowed, what is your percentage profit or loss under the following
The four stocks below are part of an index. Use the information below:a. Compute a price-weighted index by adding their prices at time t and time t + 1. What is the percentage change in the index?b.
The Quad Index is comprised of four stocks: Uno, Dos, Tres, and Fore.a. Given the data below on the number of shares outstanding and their share prices at time (t) and time (t + 1), what is the
A U.S. firm wants to raise $10 million of capital so it can invest in new technology. How much will it need to raise to net $10 million using the average costs of raising funds in the chapter?
In late 2014, you purchased the common stock of a company that has reported significant earnings increases in nearly every quarter since your purchase. The price of the stock increased from $12 a
Briefly describe what is meant by a derivative security.
Determine the intrinsic values of the following call options when the stock is selling at $32 just prior to expiration of the options.a. $25 call priceb. $30 call pricec. $35 call price
Briefly describe how securities are valued.
What is meant by the yield to maturity (YTM) on a bond?
Lerman Company has preferred stock outstanding. It pays an annual dividend of $10. If its current price is $70, what discount rate will investors use to value the stock?
What is a round lot of common stock?
How does a Treasury Inflation Protected Security (TIPS) bond diff er from the typical U.S. Treasury security?
Given the information below, compute annualized returns: Income Purchase Price Сштеnt Time Asset Price Received Period $ 20 $ 26 18 75 weeeks 3 months 2 years 8 months $2 15 0.40 150 130 3.00 D
Can only large institutional investors purchase bonds? Explain.
Given the information below, compute annualized returns: Price Initial Price Time Period 15 months 11 months Income Asset Change $ 2 $ 6 10 $29 40 B 70 30 7 years 24 months 50 20 -8 D
A credit card advertisement states that the annual percentage rate is 21 percent. If the credit card requires quarterly payments, what is the effective annual rate of interest on the loan?
You have recently seen a credit card advertisement stating that the annual percentage rate is 12 percent. If the credit card requires monthly payments, what is the effective annual rate of interest
Describe how the present value of an annuity can be found.
What is an ordinary annuity? What is an annuity due?
Assume you are planning to invest $5,000 each year for six years and will earn 10 percent per year. Determine the future value of this annuity if your first $5,000 is invested at the end of the
Describe the process for solving for the interest rate in present and future value problems.
Explain simple interest.
Assume you are planning to invest $5,000 each year for six years and will earn 10 percent per year. Determine the future value of this annuity due problem if your first $5,000 is invested now.
Go to the Federal Reserve website, http://www.federalreserve.gov. Go to “Economic Research and Data,” and access “Consumer Credit.” Determine current interest rates charged by finance
Assume you are planning to invest $100 each year for four years and will earn 10 percent per year. Determine the future value of this annuity due problem if your first $100 is invested now.
How can a default risk premium change over time?
What is meant by default risk and a default risk premium?
Describe the process by which inflation took place historically before modern times.
The interest rate on a 20-year Treasury bond is 9.25 percent. A comparable maturity, Aaa-rated corporate bond is yielding 10 percent. Another comparable maturity, but lower-quality corporate bond has
What is the tax status of income from federal securities?
Describe the dealer system for marketable U.S. government securities.
What are the types of marketable securities issued by the Treasury?
Find the market interest rate for a debt security given the following information: real rate = 2 percent, liquidity premium = 2 percent, default risk premium = 4 percent, maturity risk premium = 3
A 20-year U.S. Treasury bond has a 3.50 percent interest rate, while a same maturity corporate bond has a 5.25 percent interest rate. Real interest rates and inflation rate expectations would be the
A one-year U.S. Treasury security has a market interest rate of 2.25 percent. If the expected real rate of interest is 1.5 percent, what is the expected annual inflation rate?
As an economist for a major bank, you are asked to explain a substantial increase in the price level when neither the money supply nor the velocity of money has increased. How can this occur?
Assume investors expect a 2.0 percent real rate of return over the next year. If inflation is expected to be 0.5 percent, what is the expected market interest rate for a one-year U.S. Treasury
What is a mortgage? What is meant by the term mortgage markets?
Trace the effect on bank reserves of a change in the amount of cash held by the public.
What are the four requirements that need to be determined when entering into a forward contract?
What risks does a company face due to changing exchange rates?
Discuss how the U.S. government influences the economy and how the government responded to the 2007–09 perfect financial storm.
Go to the St. Louis Federal Reserve Bank’s website at http://www.stlouisfed.org, and access current economic data.a. Find M1 and the monetary base, and then estimate the money multiplier.b.
Briefly describe and compare the central banks in the United Kingdom, Japan, and Economic Monetary Union.
What federal agencies are responsible for supervising and regulating depository institutions that are not commercial banks?
Identify the seven individuals who served as chairs of the Fed Board of Governors since the early 1950s. Indicate each individual’s approximate time and length of service as chair.
Assume that the Fed decides to increase the required reserve percentage on transaction accounts above $40 million from 8 percent to 10 percent. All other information remains the same as given in
Assume that banks must hold a 2 percent reserve percentage against transaction account balances up to and including $40 million. For transaction accounts above $40 million, the required reserve
A bank has $10 million in vault cash and $110 million in deposits. If total bank reserves were $15 million with $2 million considered to be excess reserves, what required reserves ratio is implied?
What are the Basel Capital Accords, and what is their purpose?

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