Question: 1. When interest is earned on interest

> Briefly describe the monetarists’ view of the relationship between money supply and economic activity.

> How does M2 differ from M1? What are money market mutual funds?

> Describe the M1 definition of the money supply and indicate the relative significance of the M1 components.

> Indicate some of the career opportunities in finance available to business graduates today.

> 1. Assume you are the recipient of a two-year, 5 percent, $100 per year ordinary annuity. What is the present value of the amount to be received at the end of the first year? a. $105 b. $100 c. $95 (rounded) d. $90 (rounded) 2. Assume you are the r

> 1. What do coins that are full-bodied money contain? a. Both silver and gold amounts that are equal in value b. Less value in metal than their face value c. The same value in metal as their face value d. More value in metal than their face value 2.

> Identify the four types of major financial markets.

> How do debt securities and equity securities differ?

> What are the differences between primary and secondary markets?

> Briefly describe the differences between money and capital markets.

> Identify and briefly describe the financial functions in the financial system.

> What are the four major components of an effective financial system?

> Describe what is meant by ethical behavior.

> What are the six principles of finance?

> Identify and briefly describe several reasons for studying finance.

> If your belief about future exchange rates differ from those quoted as forward rates, how can you attempt to profit from this difference in expectations?

> 1. What is a series of equal payments (or receipts) that occur over a number of time periods called? a. Annuity b. Reverse annuity c. Simple interest problem d. Rule of 72 example 2. What is a series of equal payments (or receipts) that occur at th

> Why is hedging similar to buying insurance?

> 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?

> Explain the process to estimating a bid price by estimating zero-NPV cash flow needs.

> Explain the process to estimating cash flows for a cost-saving project.

> Explain the process to estimating cash flows for a revenue-enhancing project.

> Why might there be tax implications when an asset is sold at the termination of a capital budgeting project?

> What information sources are used to develop estimates for a project's a. initial outlays? b. operating life? c. salvage value?

> A U.S. based multinational corporation (MNC) sold some equipment to a British firm today and will receive £1,000,000 from the British firm one month from today. Today’s spot rate is $1.12/£. The MNC is certain the spot rate will be $1.10/£ one month from

> A U.S. based multinational corporation (MNC) purchased equipment from a British firm today and must pay them £1,000,000 one month from today. The MNC is certain the spot rate will be $1.10/£ one month from today. The current forward rate is $1.05/£. Shou

> 1. How many variables are in the future value and present value equations? a. One b. Two c. Three d. Four 2. Which of the following is not a variable in the present value equation? a. Default risk b. Number of periods c. Future value d. Interes

> The current U.S. one month forward rate is $1.25/€. You are an American speculator with $40,000. You are sure the spot rate will be $1.32/€ one month from today. What steps should you take today and one month from today to make a profit buying and sellin

> The current U.S. one month interest rate is 5% compared to 7% in Europe. Today’s spot rate between the euro and dollar is $1.18/€ and today’s one month forward rate is $1.25/€. The U.S. is the home country. You have $1,000 to invest. What steps should yo

> Explain the process for using forward contracts when comparing home currency investments and overseas investments over a given time period.

> Describe the Bretton Woods system for setting currency exchange rates. What are “special drawing rights” and how are they used to foster world trade?

> What is meant by the statement that the international monetary system has operated mostly under a “gold standard”? What are the major criticisms associated with being on a gold standard?

> What is the purpose of an international monetary system?

> Discuss the meaning of the financial account and identify its major components.

> The current account is an important component of the U.S. balance of payments. Describe the current account balance and indicate its major components.

> Briefly indicate the problems facing the United States in its attempt to maintain international financial equilibrium.

> Commercial letters of credit, traveler’s letters of credit, and traveler’s checks all play an important role in international finance. Distinguish among these three types of instruments.

> 1. What is the term for an arithmetic process whereby a future value decreases at a compound interest rate over time to reach a present value? a. Compounding b. Discounting c. Investing d. Speculating 2. What would be the present value of a $100 in

> Explain the role played by the Export-Import Bank in international trade. Do you consider this bank to be in competition with private lending institutions?

> Describe the ultimate sources of funds for export financing with bankers’ acceptances. How are acceptances acquired for investment by these sources?

> Describe the costs involved in connection with financing exports through bankers’ acceptances.

> How may a bank protect itself after having issued a commercial letter of credit on behalf of a customer?

> Describe the process by which an importing firm may substitute the credit of its bank for its own credit in financing international transactions.

> How do importers protect themselves against improper delivery of goods when they are required to make payment as they place an order?

> Describe the various ways by which an exporter may finance an international shipment of goods. How may commercial banks assist the exporter in the collection of drafts?

> What are sight and time drafts? Indicate how they differ.

> How has the value of the U.S. dollar changed relative to other major currencies in recent years? What is “hedging” and how are forward contracts used to manage foreign exchange risk?

> Explain the role of supply and demand as it relates to the establishment of exchange rates between countries.

> What are currency or foreign exchange markets?

> What types of financial crises have some countries in the EU faced in recent years?

> What is the euro? Identify some of its distinguishing characteristics.

> What is meant by the term euro zone members? Which countries are euro zone members?

> What is the European Union (EU)? How did it develop? Who are the current members of the EU?

> Describe the international monetary system currently in use.

> What is an international monetary system based on “flexible exchange rates”?

> 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?

> 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.

> 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.

> 1. For which type of annuity do equal periodic payments (or receipts) occur at the beginning of each period? a. Ordinary annuity b. Annuity due c. Reverse annuity d. Annuity rule 2. What would be the future value of an annuity due, two-year investm

> 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 company had a return of 20 percent. What would you est

> Financial researchers at Smith Sharon, an investment bank, estimate the current security market line as: E(Ri ) = 4.5 + 6.8(i ) a. Explain what happens to expected return as beta increases from 1.0 to 2.0. b. Suppose an asset has a beta of –1.0. What is

> Suppose the estimated security market line is: E(Ri ) = 4.0 + 7( i ) a. What is the current Treasury bill rate? b. What is the current market risk premium? c. What is the current expected market return? d. Explain what beta ( ) measures.

> Using your answers to Parts a and b in Problem 4, estimate your portfolio’s expected return if the security market line is estimated as: E(Ri ) = 5.2 + 8.4( i ) Data from Problem 4: You’ve collected data on the betas of various mutual funds. Each fund

> You’ve collected data on the betas of various mutual funds. Each fund and its beta is listed in the text. a. Estimate the beta of your fund holdings if you held equal proportions of each of the above funds. b. Estimate the beta of your fund holdings if y

> As mentioned above, 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” function to estimate the alpha or intercept term of the regressi

> Below is nine month’s return data for Walgreens and the S&P 500. Month Walgreens Return S&P500 Return  1 0.0203 7.5%  2 -0.0595 1.8%  3 0.0023 -8.2%  4 0.0203 -6.4%  5 -0.0221 -1.1%  6 -0.1426 -2.5%  7 -0.0597 0.5%  8 0.

> Stock market forecasters are predicting that the stock market will rise a modest 5 percent next year. Given the beta of each stock listed in the text, what is the expected change in each stock’s value?

> 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. $55 strike price b. $65 strike price c. $75 strike pric

> 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 $2.50. a. $25 strike price b. $30 strike price c. $35 strik

> 1. Which of the following is a principle of finance? a. Money has a time value b. Higher returns are expected for taking on more risk c. Diversification of investments can reduce risk d. All of the choices are correct 2. Which of the following is t

> 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 price b. $65 put price c. $75 put price

> 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 price b. $30 call price c. $35 call price

> The following are the cash flows for three investments that actually occur at the beginning of each year rather than at the end of each year. a. Find the present values at the end of time period zero for each of these three investments if the discount

> Use a financial calculator to solve for the interest rate involved in the following future value of an annuity due (FVAD) problem. The future value is $57,000, the annual payment is $7,500, and the time period is 6 years.

> The following information is available to you: travelers checks = $1 million; coin and paper currency = $30 million; repurchase agreements and Eurodollars = $15 million; demand deposits = $25 million; retail money market mutual funds = $60 million; savin

> Following are components of the M1 money supply at the end of last year. What will be the size of the M1 money supply at the end of next year if currency grows by 10 percent, demand deposits grow by 5 percent, other checkable deposits grow by 8 percent,

> Determine the size of the demand deposits component of the M1 money supply using the following information. Currency…………………………………………..$350 million Traveler’s checks………………………………..$10 million Other checkable deposits………………….$200 million Small time deposit

> Determine the size of the M1 money supply using the following information. Currency………………………………………………..$700 billion Money market mutual funds ………………..$2,000 billion Demand deposits……………………………………$300 billion Other checkable deposits…………………………$300 billion

> Determine the size of the M1 money supply using the following information. Currency plus Traveler’s checks………………..$25 million Negotiable CDs………………………………………..$10 million Demand deposits……………………………………..$13 million Other checkable deposits…………………………..$12 m

> You are considering becoming a franchisee with the Kopy-Kopy Copy and Pizza Delivery Service. For $50,000, they give you training and exclusive territorial rights. Equipment can be purchased through the home office for an additional $50,000, all of which

> 1. What does the risk-return finance principal imply? a. Higher returns are expected for taking on more risk b. Lower returns are expected for taking on more risk c. Money has a time value d. Default risk premiums are zero 2. If the risk free rate

> Annual savings from Project X include a reduction in ten clerical employees with annual salaries of $15,000 each, $8,000 from reduced production delays, $12,000 from lost sales due to inventory stock outs, and $3,000 in reduced utility costs. Project X c

> The following is a simplified project income statement for Ma & Pa Incorporated. The project is expected to last for eight years. Its up-front cost is $2,000. Its cost of capital is 12 percent. Sales…………………………………………………..……$ 925.00 – cash expenses…………………

> The Brassy Fin Pet Shop is considering an expansion. Construction will cost $90,000 and will be depreciated to zero, using straight-line depreciation, over five years. Earnings before depreciation are expected to be $20,000 in each of the next five years

> Use the information in Problem 10 to do the following: a. Calculate the payback period for the machine. b. If the project’s cost of capital is 10 percent, would you recommend buying the machine? c. Estimate the internal rate of return for the machine. D

> A machine can be purchased for $10,500 including transportation charges, but installation costs will require $1,500 more. The machine is expected to last four years and produce annual cash revenues of $6,000. Annual cash-operating expenses are expected t

> Find the NPV and PI of a project that costs $1,500 and returns $800 in Year 1 and $850 in Year 2. Assume the project’s cost of capital is 8 percent.

> Construct a spreadsheet that computes the effective annual rates on the commercial paper offerings. Inputs to the spreadsheet should include the dollar amount of paper to be issued, the number of days the paper is outstanding, the stated annual rate, and

> Compute the effective annual rates of the following: a. $1 million maturing in 90 days with a stated annual rate of 6 percent. Fees are 0.02 percent of the principal. b. $15 million maturing in 60 days with a stated annual rate of 7.6 percent. Fees are 0

> Bank A offers loans with a 10 percent stated annual rate and a 10 percent compensating balance. You wish to obtain $250,000 in a six-month loan. a. How much must you borrow in order to obtain $250,000 in usable funds? Assume you currently do not have any

> Your firm needs to raise funds for inventory expansion. a. What is the effective annual rate on a loan of $150,000 if it is discounted at a 12 percent stated annual rate and it matures in five months? b. How much must you borrow in order to obtain usabl

> 1. Inflation is best described as which of the following? a. Increase in the price of goods or services that is offset by an increase in quality b. Increase in the price of goods or services that is not offset by an increase in quality c. Decrease in

> What conclusions can you make about credit terms from reviewing your answers to Problem 4? Data from Problem 4: Compute the effective cost of not taking the cash discount under the following trade credit terms: a. 2/10 net 40 b. 2/10 net 50 c. 3/10 net

> Compute the effective cost of not taking the cash discount under the following trade credit terms: a. 2/10 net 40 b. 2/10 net 50 c. 3/10 net 50 d. 2/20 net 40

> Obtain a current issue of the Federal Reserve Bulletin, or review of copy from the Fed’s Web site (www.federalreserve.gov) or the St. Louis Fed’s Web site (www.stlouisfed.org), and determine the changes in the prime rate that have occurred since the end

> Comfin Company has the following estimates on its level of current and total assets for the next two years (presented in text): a. Estimate the levels of permanent and temporary current assets for Comfin over these months. Find the average amount for fix

> Assume that you have been offered cash discounts on merchandise that can be purchased from either of two suppliers. Supplier A offers trade credit terms of 3/20, net/70, while Supplier B offers 4/15, net/80. What is the approximate effective cost of miss

> Which of the following offer the lowest effective rate for Wolf Howl jackets? Assume Wolf Howl will need to borrow $800,000 for 180 days. a. A 14% APR bank loan b. A 13% APR, discounted bank loan. c. 12.5% APR with fees of 1% for receivables financing. d

> CDRW is evaluating an inventory financing arrangement with DVD Banks. CDRW estimates an average monthly inventory balance of $800,000. DVD Bank is offering a 12 percent APR loan on 75 percent of the value of the inventory. DVD’s inventory storage and eva