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business
principles of finance
Questions and Answers of
Principles Of Finance
Prepare for working with cases AppendixLO1
Become aware of course expectations AppendixLO1
Identify skills and techniques for case analysis AppendixLO1
Define the different forms of business organization AppendixLO1
Identify the advantages and disadvantages of each form of business organization AppendixLO1
Identify which form of business organization is most appropriate in a given scenario AppendixLO1
Differentiate between an S Corp and an LLC AppendixLO1
Differentiate between a benefit corporation and a B Corp.AppendixLO1
Convert a business idea into a business AppendixLO1
Use the business model canvas as a tool AppendixLO1
Define and apply the lean start- up approach AppendixLO1
Identify unique characteristics of an online business AppendixLO1
Apply entrepreneurship skills to social ventures AppendixLO1
Identify the advantages and disadvantages of debt versus equity AppendixLO1
Identify different types of debt AppendixLO1
Identify different types of lenders and their requirements AppendixLO1
Calculate the costs of different types of debt AppendixLO1
Differentiate between angel investors, venture capital firms, and SBIC investment funds AppendixLO1
Identify different types of crowdfunding AppendixLO1
Identify the contents of financial statements AppendixLO1
Apply the Generally Accepted Accounting Principles (GAAP)AppendixLO1
Weigh relevant factors when setting up the chart of accounts AppendixLO1
Construct the balance sheet the income statement the statement of cash flows (direct method)the statement of cash flows (indirect method)statement of owners’ equity, statement of partners’
Use financial statements and financial ratios to assess the performance and health of a business AppendixLO1
Describe how credit card payment systems work AppendixLO1
Evaluate credit card and merchant bank costs AppendixLO1
Evaluate short- term financing alternatives AppendixLO1
Use pro forma financial statements to evaluate operating and financing strategies AppendixLO1
Identify the different factors affecting the cost of capital • Compute cost of equity • Compute weighted average cost of capital • Apply cost of capital to conduct capital budgeting • Compute
Compute profitability index (PI)AppendixLO1
Use NPV, IRR, payback, PI to make capital budgeting decisions AppendixLO1
Identify adjustments to income when valuing a company AppendixLO1
Identify factors affecting illiquidity discount AppendixLO1
Apply discounted cash flow method to value a company AppendixLO1
Compute free cash flows to the firm AppendixLO1
Compute free cash flows to equity holders AppendixLO1
Apply multiples valuation method to value a company AppendixLO1
Identify advantages and disadvantages of different exit and harvest strategies AppendixLO1
Compute pre- money and post- money valuation AppendixLO1
Identify important factors to consider in succession planning AppendixLO1
Develop awareness of techniques and tactics for succeeding at business plan competitions AppendixLO1
Identify the primary differences between for- profit and non- profit organizations.AppendixLO1
Evaluate Leah’s organizational and financing decision focusing on both risk and control.AppendixLO1
Compare and contrast the shared artist space with the concept of shared office space.AppendixLO1
Discuss Leah’s goal to generate sufficient income as a full- time employment from her investment in the Creative Community Space. What factors should Leah consider in evaluating her
Do a closed-end exercise based on ABC Holding Corp. Assume that ABC has some costs.Illustrate the closed-end fund discount.Thought question: Are you better off buying ABC or the proportions of its
Go back to ABC Holdings:Suppose you know the share price of ABC and the share price of QRM. What should be the market price of XYZ? 60%* ABC share price [XYZ share number of +50%* QRM share number of
Enter a series of annual dates into Excel, starting with 31 January 2015 and ending with 31 January 2022. The final product should look like this: 1 23 A 31-Jan-15 31-Jan-16 31-Jan-17 4 31-Jan-18
Enter a series of hourly times into Excel, starting with 1 am and ending with 1 pm. The final product should look like this: 123456781 A 1:00 AM 2:00 AM 3:00 AM 4:00 AM 5:00 AM 6:00 AM 7:00 AM 8:00
Prof. Smith was born on 15 February 1964. Today is 15 October 2016.a. Subtract the two dates to compute Professor Smith’s age in days.b. Divide by 365 to compute Professor Smith’s age in years.c.
On 15 February 2017 a bond of XYZ Corporation is selling for $923. The bond has a $30 semi-annual coupon payment on 15 May 2017 and each 6 months afterward until 15 November 2025, when it pays $1,000
A project whose discount rate is 13% has the cash flows indicated below. Use XNPV to compute the project’s net present value. A B Project cash Date 456789 01-Nov-15 13-Jan-16 7 18-Jul-16 31-Dec-16
In this exercise you will show how XNPV is based on daily interest rates. In the spreadsheet below, fill in all the cells marked??? and show that the sum of the entries E5:E10 gives the same result
In the example below, why are the calculations of the IRR in cell B13 and XIRR in cell B14 different? A B 1 IRR vs XIRR 23456789 Date Cash flow 01-Jan-18 -1,000 01-Jan-19 01-Jan-20 300 300 01-Jan-21
The table below presents the year-end prices for the shares of Ford and PPG from 1989 to 2001:1.a. Calculate the following statistics for these two shares: average return, variance of returns,
You invest $500 in a stock for which the return is determined by a coin flip. If the coin comes up head the stock returns 10%, and if it comes up tails the investment returns -10%. What is the
You have $500 to invest. You decide to split it into two parts. The return on each $250 will be determined by a coin toss, and the results of the two tosses are not correlated. If the coin comes up
The previous question assumes that the correlation between the coin flips in 0. Repeat this question with the following correlations:4.a. If the first coin flip is heads, then the second coin flip
Calculate the average return and the variance of a portfolio composed of 30% of GM and 70% of MSFT stocks, using the data described from page000.
Consider the following statistics for a portfolio composed of shares of Companies A and B:6.a. Suggest a portfolio combination that improves return while maintaining the same level of risk.6.b.
Consider the monthly returns for Ford and General Motors stock given below. Were there advantages to diversifying between these two stocks? Explain. A B C MONTHLY RETURNS FOR FORD AND GM STOCK 2
The following spreadsheet presents data for stocks A and B.8.a. What are the return and the standard deviation of a portfolio composed of 30% of stock A and 70% of stock B?8.b. What are the return
Suppose that the return statistics for A and B stock are given below. What is the standard deviation of the portfolio minimum variance? (The answer requires only one calculation.) A B C RETURN
ABC and XYZ are 2 stocks with the following return statistics:10.a. Compute the expected return and standard deviation of a portfolio composed of 25% ABC and 75% XYZ.10.b. Compute the returns of all
Melissa Jones wants to invest in a portfolio composed of stocks ABC and XYX (from question 10), that will yield a return of 19%. What is the weight of each stock in such a portfolio, and what is the
Your client asks you to create a two-asset portfolio having an expected return of 15% and return standard deviation of 12%. The client specifies that the portfolio include 60% of the
What will be the weights, the expected return, the variance, and the standard deviation of a minimum variance portfolio combining the stocks below, using the mathematical way: A B C 1 Return
Consider the following portfolio and accompanying statistics:1.a. Is this an optimal portfolio?1.b. If not, suggest a portfolio combination, which improves return while maintaining the same level of
Using the data provided in the previous question, calculate the market portfolio M, when the risk-free rate of return is 8%. (Recall that the M portfolio is that portfolio which maximizes the Sharpe
On the occasion of your birthday, your wealthy Aunt Hilda sends you a check for $5,000, under the express condition that you invest the money in either (or all) of the following:Government Bonds,
With reference to Question 3 above, you are feeling lucky and decide to take on a riskier portfolio. In particular, in addition to your $5,000 gift, you are able to borrow another $1,000 at the
a. Consider the data below. Compute the expected return and standard deviation of returns for a portfolio composed of 75% stock A and 25% stock B. Mean return Return sigma Correlation PAB Asset A
• You have \($1,000\) to invest. If you follow an optimal investment policy, and if you desire to invest \($500\) in the risk-free asset, what is the mean and standard deviation of your portfolio
(Risk diversification on gambles) Walking down the street of Spartanburg (your hometown), you encounter John, a street hustler. John, is running a coin-toss game, which works like this: You pay John
(Risk diversification on gambles) Still in Spartanburg, you encounter a second street hustler named Mary. Her game is more complicated: After you pay Mary $0.80, she throws a die. If the die comes up
(Portfolio of a risk-free asset and a risky stock) Consider a stock with an expected return of 6% and standard deviation of return of 15%. Suppose that the risk-free asset has a return of 1%. What
(Portfolio of a risk-free asset and a risky stock) You are considering investing in a combination of a stock and a risk-free asset. The stock has an expected return of 7% and standard deviation of
(Mean and variance portfolio of two risky assets and a risk-free asset)Consider the following data for stocks X and Y and a risk-free asset:a. What is the return and standard deviation of the minimum
(Sharpe ratio) What is the Sharpe ratio of the minimum variance portfolio of exercise 5? Show another portfolio composed of stocks X and Y that has a better Sharpe ratio.
(Sharpe ratio) Compute the Sharpe Ratio for the following portfolios, assuming the risk-free asset is 4%. What is the best portfolio according to Sharpe ratio? A B 1 D E Average 234567890 return
(Statistics for assets and portfolio, finding the market portfolio, Sharpe ratio)Given the year-end prices of the shares of IBM and Coca-Cola (COKE), answer the following questions:a. For the years
(Market portfolio, CML) In the Golkoland stock market, there are only two listed stocks, Xirkind and Yirkind. The risk-free rate of return in Golkoland is 5%, and the portfolio of Xirkind and Yirkind
(CML) The market portfolio of the Tierra del Fuego stock market has an expected return E r( ) M = 22% and a standard deviation of returns σM = 19%.The risk-free rate is rf= 7%.a. What is the
(CML) In a stock market where only two stocks are traded:a. The market portfolio is composed of 37.5% stock A and 62.5%stock Z. Find the equation of the capital market line (CML).b. Will the market
(CML) Below are the return statistics of stocks X and Y:a. Calculate the capital market line (CML) using this data.b. Find the difference in standard deviation between a portfolio on the CML and a
(CML with leverage) You have $1,000 to invest. The risk-free rate is rf = 6%.The market portfolio has expected return E(rM) = 15% and σM = 20%.a. What is the mean and standard deviation of your
(CML) On the occasion of your birthday, your wealthy Aunt Hilda sends you a check for $5,000, under the express condition that you invest the money in either (or all) of the following: government
(CML with leverage) With reference to exercise 14 above, you are feeling lucky and decide to take on a riskier portfolio. In particular, in addition to your $5,000 gift, you are able to borrow
(Two-stock efficient frontier, CML) Anders Smith proposes to invest in a portfolio of two stocks, X and Y. Information about the two stocks is given belowa. Fill in the highlighted cells, and compute
(Two-stock portfolio beta) Formula and Dormula are two stocks listed on the Chitango stock market. Their βs are 1.8 and 2.6, respectively. What is the beta of a portfolio invested 20% in Formula and
(Two-stock portfolio beta) Consider the data belowa. Compute the expected return and standard deviation of returns for a portfolio composed of 75% stock A and 25% stock B.b. What is the beta of the
SML) Stock \(\mathrm{C}\) has a \(\beta_{C}=1.3\), and the portfolio \(P\) is composed of \(75 \%\) stock \(\mathrm{C}\) and \(25 \%\) stock \(\mathrm{D}\) and has a \(\beta_{P}=1.8\). What is the
(SML) Consider the following data: \(E\left(r_{m}\right)=0.18, \beta_{i}=1.05, R_{f}=0.07\). What is the expected return of stock \(i\) ?
(SML) Consider the following data: \(E\left(r_{m}\right)=0.22, E\left(r_{i}\right)=0.33, R_{f}=0.09\). What is the \(\beta\) of stock \(i\) ?
(SML) Consider the following data: \(E\left(r_{m}\right)=0.25, \beta_{i}=0.85, E\left(r_{i}\right)=0.22\). What is the return of the risk-free asset?
(SML) Consider the following data: \(E\left(r_{m}\right)=0.2, \operatorname{Cov}\left(r_{i}, r_{m}\right)=0.1, r_{f}=0.06\), \(\sigma_{M}^{2}=0.15\). What is the expected return of stock \(i\) ?
(SML) Consider the following data: \(E\left(r_{i}\right)=0.15, \operatorname{Cov}\left(r_{i}, r_{m}\right)=0.067\), \(r_{f}=0.02, \sigma_{M}^{2}=0.089\). What is the market return?
(SML) Consider the following data: \(E\left(r_{m}\right)=0.22, \operatorname{Cov}\left(r_{i}, r_{m}\right)=0.04, E\left(r_{i}\right)=\) \(0.12, \sigma_{M}^{2}=0.09\). What is the return of the
(Calculating beta, regression) The table below provides the annual rates of return on ABC Corp., XYZ Corp. and the market portfolio Ma. Calculate the βXYZ and the βABC. Use the formulab. Which
(Efficient frontier and finding M) Suppose that there are only two stocks, Company A and Company B. The relevant statistics for the portfolio are given below.a. Show that a portfolio invested 80% in
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