How is beta estimated?
> Describe what an information asymmetry is in a business transaction. Explain how the inequity associated with an information asymmetry might be, at least partially, solved through the market for goods or services?
> What are some ways to resolve a conflict of interest?
> How can a lack of business ethics negatively affect the performance of an economy? Give an example.
> What is an agency relationship, and what is an agency conflict? How can agency conflicts be reduced in a corporation?
> What is the appropriate goal of financial managers? How do managers’ decisions affect how successful the firm is in achieving this goal?
> All public companies must hire a certified public accounting firm to perform an independent audit of their financial statements. What exactly does the term audit mean?
> What is the primary responsibility of the board of directors in a corporation?
> You have an opportunity to invest $2,500 today and receive $3,000 in three years. What would be the return on your investment if you accepted this opportunity?
> What is a partnership, and what is the biggest disadvantage of this form of business organization? How can this disadvantage be avoided?
> What are the advantages and disadvantages of a sole proprietorship?
> What is a firm’s capital structure, and why is it important?
> Suppose that the standard deviation of the returns on the shares of stock at two different companies is exactly the same. Does this mean that the required rate of return will be the same for these two stocks? How might the required rate of return on the
> What is the difference between the expected rate of return and the required rate of return? What does it mean if they are different for a particular asset at a particular point in time?
> Suppose that you know the risk and the expected return for two stocks. Discuss the process you might utilize to determine which of the two stocks is a better buy. You may assume that the two stocks will be the only assets held in your portfolio?
> You may have heard the statement that you should not include your home as an asset in your investment portfolio. Assume that your house will comprise up to 75 percent of your assets in the early part of your investment life. Evaluate the implications of
> The CAPM is used to price the risk (estimate the expected return) for any asset. Our examples have focused on stocks, but we could also use CAPM to estimate the expected rate of return for bonds. Explain why?
> Which investment category included in Exhibit 7.3 has shown the greatest degree of risk in the United States since 1926? Explain why that makes sense in a world where the value of an asset in this investment category is likely to be more sensitive to cha
> The idea that we can know the return on a security for each possible outcome is overly simplistic. However, even though we cannot possibly predict all possible outcomes, this fact has little bearing on the risk-free return. Explain why?
> Megan Gaumer expects to need $50,000 for a down payment on a house in six years. How much does she need to invest today in an account paying 7.25 percent in order to have $50,000 in six years?
> The correlation between stocks A and B is 0.50, while the correlation between stocks A and C is –0.5. You already own stock A and are thinking of buying either stock B or stock C. If you want your portfolio to have the lowest possible risk, would you buy
> Explain the economic role of brokers and dealers. How does each make a profit?
> What are the three fundamental decisions the financial manager is concerned with, and how do they affect the firm’s balance sheet?
> Describe the cash flows between a firm and its stakeholders?
> Explain how compound interest differs from simple interest?
> Explain the difference between compounding and discounting?
> Explain the importance of a time line?
> You are planning to take a spring break trip to Cancun your senior year. The trip is exactly two years away, but you want to be prepared and have enough money when the time comes. Explain how you would determine the amount of money you will have to save
> Explain the phrase “a dollar today is worth more than a dollar tomorrow”?
> Why is the ROE a more appropriate proxy (for stockholder value maximization) for some firms than for other firms?
> Give an example of a capital budgeting decision and a financing decision?
> How does financial leverage help stockholders?
> What additional information does the fixed asset turnover ratio provide over the total asset turnover ratio? For which industries does it carry greater significance?
> What does a very high inventory turnover ratio signify?
> Inventory is excluded when the quick ratio or acid-test ratio is calculated because inventory is the most difficult current asset to convert to cash without loss of value. What types of inventory are likely to be most easily converted to cash without los
> Why is too much liquidity not a good thing?
> Why is it not enough for an analyst to look at just the short-term and long-term debt on a firm’s balance sheet when assessing the firm’s fixed obligations?
> Why are retained earnings not considered an asset of the firm?
> Compare and contrast depreciation expense and amortization expense?
> Identify the five fundamental principles of GAAP, and explain briefly their importance?
> How does a firm’s cash flow to investors from operating activity differ from net income, and why?
> The equity multiplier for Spiffy Corporation is 1.75, its EBIT return on assets (EROA) is 0.07, and the value of its equity is $850,000. What is the value of Spiffy’s total assets? What is the value of its EBIT?
> What is a major reason for the accounting scandals in the early 2000s? How do firms sometimes attempt to meet Wall Street analysts’ earnings projections?
> How does Exhibit 2.5 help explain why interest rates were so high during the early 1980s as compared to the relatively low interest rates in the early 1960s?
> Shouldn’t the nominal rate of interest (Equation 2.1) be determined by the actual rate of inflation (∆Pa), which can be easily measured, rather than by the expected rate of inflation (∆Pe)?
> The CFO of a certain company always wears his green suit on a day that the firm is about to release positive information about his company. You believe that you can profit from this information by buying the firm’s shares at the beginning of every day th
> What is the compounding period for most bonds sold in the United States?
> Explain what a convertible bond is?
> What name is given to the relation between risk and expected return implied by the CAPM?
> How would you interpret a beta of 1.5 for an asset? A beta of 0.75?
> What are the two components of total risk?
> What type of return tells you the average compounded return earned by an investor?
> What relation do we generally observe between risk and return when we examine historical returns?
> What is the relation between the variance and the standard deviation?
> How do large corporations adjust their liquidity in the money markets?
> How is the expected return on an investment calculated?
> What are the two components of a total holding period return?
> What is the difference between the interest rate (i) and the growth rate (g) in the future value equation?
> What is the relation between the present value factor and the future value factor?
> What is the discount rate? How does the discount rate differ from the interest rate in the future value equation?
> What is the present value, and when is it used?
> What is the difference between simple interest and compound interest?
> Why is it important to look at a firm’s historical financial statements?
> What are the tax implications of a decision to finance a project using debt rather than new equity?
> Why is it important to consider the consequences of taxes when financing a new project?
> When determining the real interest rate, what happens to businesses that find themselves with unfunded capital projects whose rate of return exceeds the cost of capital?
> All else being equal, if a firm increases its accounts payable, what effect will this have on cash flow to investors?
> How does the calculation of net income differ from the calculation of cash flow to investors from operating activity?
> Explain the difference between cash flows from financing and investing activities?
> Name two working capital accounts that represent sources of cash for the firm?
> How do increases in fixed assets from one period to the next affect cash holdings for the firm?
> What accounting events trigger changes to the retained earnings account?
> How is net income computed?
> What is treasury stock?
> Explain the accounting concept behind depreciation?
> What is net working capital? Why might a low value for this number be considered undesirable?
> Give an example of a conflict of interest in a business setting, other than the one involving the real estate agent discussed in the chapter text?
> How are inflationary expectations accounted for in the nominal rate of interest?
> What is financial intermediation, and why is it important?
> How does information about a firm’s prospects get reflected in its share price?
> What are capital markets, and why are they important to corporations?
> What is the difference between primary and secondary markets?
> Why is it difficult for individuals to participate in the direct financial markets?
> What are the two basic ways in which funds flow through the financial system from lender–savers to borrower–spenders?
> How would you define an ethical business culture?
> List the three main objectives of the Sarbanes-Oxley Act?
> What are agency conflicts?
> What is the Sarbanes-Oxley Act, and what does it focus on? Why does it focus in these areas?
> Why does the internal auditor report to both the CFO and the board of directors?
> What are the major responsibilities of the CFO?
> Why are many businesses operated as sole proprietorships or partnerships?
> You have just invested in a portfolio of three stocks. The amount of money that you invested in each stock and its beta are summarized below. Calculate the beta of the portfolio and use the capital asset pricing model (CAPM) to compute the expected rate
> Given the following information from Capstone Corporation, what price would CAPM predict that the company’s stock will trade for 1 year from today. Assume that the risk free rate is 3 percent and that the market risk premium is 8 percent? Beta: ……………………
> Compare an annuity due with an ordinary annuity. The payments for both are made annually and are of the same dollar amounts. The two annuities also have the same duration in years and the same discount rate. Which of the following statements is /are corr
> What is the relation between business cycles and the general level of interest rates?
> If the nominal rate of interest is 4.25 percent and the expected rate of inflation is 1.75 percent, what is the real rate of interest?
> List the three forms of the efficient market hypothesis, and describe what information is assumed to be reflected in security prices under each of these hypotheses.
> You just purchased a share of IBM stock on the New York Stock Exchange. What kind of transaction was this? a. Primary market transaction. b. Secondary market transaction. c. Futures market transaction. d. Private placement.
> Identify the sources of agency costs. What are some ways these costs can be controlled in a company?
> Which of the following is/are advantages of the corporate form of organization? a. Reduced start-up costs b. Greater access to capital markets c. Unlimited liability d. Single taxation
> Which of the following classes of securities is likely to have the lowest corporate borrowing cost? (LO 5) a. AAA rated bonds. b. A rated bonds. c. BB rated bonds. d. C rated bonds. e. All of the above will have the same corporate borrowing cost.
