...Chapter 02 Asset Classes and Financial Instruments Multiple Choice Questions 1. Which of the following is not a money market instrument? A. Treasury bill B. Commercial paper C. Preferred stock D. Banker's acceptance 2. Thirteen week T-bill auctions are conducted ____. A. daily B. weekly C. monthly D. quarterly 3. When computing the bank discount yield you would use ____ days in the year. A. 260 B. 360 C. 365 D. 366 4. A dollar denominated deposit at a London bank is called _____. A. eurodollars B. LIBOR C. fed funds D. banker's acceptance 5. Money market securities are sometimes referred to as "cash equivalent" because _____. A. they are safe and marketable B. they are not liquid C. they are high risk D. they are low denomination 6. The most actively traded money market security is A. Treasury bills B. Bankers' Acceptances C. Certificates of Deposit D. Common stock 7. ______ voting of common stock gives minority shareholders the most representation on the board of directors. A. Majority B. Cumulative C. Rights D. Proxy 8. An investor in a T-bill earns interest by _________. A. receiving interest payments every 90 days B. receiving dividend payments every 30 days C. converting the T-bill at maturity into a higher valued T-note D. buying the bill at a discount from the face value received at maturity 9. ______ would not be included in the EAFE index. A. Australia ...
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...homework assignment. 1. Which of the following statements is most CORRECT? a. By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm's common stock. b. From the issuer's point of view, preferred stock is less risky than bonds. c. Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less. d. Unlike bonds, preferred stock cannot have a convertible feature. e. Preferred stock generally has a higher component cost of capital to the firm than does common stock. 2. Which of the following statements about convertibles is most CORRECT? a. One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted. b. Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt. c. At the time it is issued, a convertible's conversion (or exercise) price is generally set equal to or below the underlying stock's price. d. For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock. e. The coupon interest rate on a firm's convertibles is generally set higher than the market yield on...
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...Determine the yield spread between the corporate bond and the Treasury bond. If you are considering the investment in Shaffer’s bonds (that will be held to maturity) and require an 11% rate of return, would you purchase the bonds? Give reasons for your answer. 2) Alternatively, you could consider purchasing Shaffer’s preferred stock. Assume that the preferred stock has a current market price of $42, a par value of $50, and a dividend amounting to 10% of par. Would you be willing to buy the firm’s preferred stock? Why or why not? Your required rate of return for investments of this type is 12.5%. 3) Now assume that Shaffer’s Recliners has earnings per share (EPS) of $1.89, has 750,000 common shares outstanding, and has recently paid a dividend of $0.65 per share. Additionally, the firm has generated a net income of $1,417,500 and has common shareholders’ equity of $6,000,000 (book value). You believe the firm is in a constant state of growth, and your required rate of return for investments of this risk level is 18%. The firm’s common stock is currently trading for $45 per share. Based upon this information, would you be willing to purchase shares of common stock in the firm? Why or why not? Use both the present value of cash flows model and the free cash flow (FCF) approach to determine your answer. The firm’s current FCF is $109,237. Use the firm’s weight average cost of capital, which is currently at 15.83%, as the appropriate discount rate....
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...Financial Management includes the following 5 functions * Financing function- raising capital to support firms operations and investment programs * Capital budget function- selecting the best projects in which to invest firm resources, based on a consideration of risks and return * Financial management function- managing firms interna; cash flows and its capital structure to minimize the financing costs and ensure that the firm can pay its obligations when due * Corporate goverance function- developing an ownership and corporate governance system for the firm that will ensure that managers act ethically and in the best interest of stakeholdes * Risk management function- managing the firms exposure to all types of risk Working capital management 1) Working capital management involves managing and financing the current assets and current liabilities of the firm. Primary focus of working capital management is managing inventories and receivables. a) Managing the firms cash conversion cycle- is the length of time between when the firm makes payments and when it receives cash inflows (1) Can be analyzed by using the flowing 3 periods (a) Inventory coversion period (b) Receivables collecton period (c) Payables deferral period i) Inventory coversion period- average time required to convert materials into finished goods and sell them. IVP= avg inventory/ COGS per day ii) Receivables...
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...Taylor Mast BUAD 445 TTH 1:10-2:25 Dr. Leinberger The Rescue of Fannie Mae and Freddie Mac This paper analyzes the working paper of W. Scott Frame, Andreas Fuster, Joseph Tracy, and James Vickery and their views on the Fannie Mae and Freddie Mac bailout as well as gives a background on the companies and how the bailout was structured and will affect both the government and both firms. At the end I will also take a look at a few views of others on the issue of the bailout. I think that this is a very important topic because it played a huge role during the recession. The financial crisis that started from 2007 to 2008 could have had a completely different outcome had the government not stepped in a bailed out these two large investment firms. It has been a topic of much controversy because it could have had a very different outcome had the government not stepped in to prevent two of the largest investment companies but on the flip side they spend a lot of tax payer money on helping private companies that have failed while the rest of the economy is struggling as well. On September 6th, 2008 a federal conservatorship was imposed on two companies named Fannie Mae and Freddie Mac. These two government sponsored enterprises (GSE) play a very central role in the US finance system. This was one of the biggest events during the financial crisis. At the beginning of their conservatorships they held or guaranteed about $5.2 trillion of home mortgage debt. Both companies...
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...Objectives 1. Prepare the entries for cash dividends and stock dividends. Identify the items reported in a retained earnings statement. Prepare and analyze a comprehensive stockholders’ equity section. Describe the form and content of corporation income statements. Compute earnings per share. Questions 1, 2, 3, 4, 5, 6, 7, 8 Exercises 1, 2, 3, 4, 5, 6, 7 2. 9, 10, 11, 12, 13, 14 4, 5 6, 8, 9 2A, 3A, 4A 2B, 3B, 4B 3. 14, 15 6, 7 5, 6, 10, 11, 13, 15, 16 1A, 2A, 3A, 4A, 5A 1B, 2B, 3B, 4B, 5B 4. 15, 16 8 12, 13, 14 5. 17 9, 10 12, 14, 15, 16, 17 3A 3B 14-1 ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description 1A 2A Prepare dividend entries and stockholders’ equity section. Journalize and post transactions; prepare retained earnings statement and stockholders’ equity section. Prepare retained earnings statement and stockholders’ equity section, and compute earnings per share. Prepare the stockholders’ equity section, reflecting dividends and stock split. Prepare the stockholders’ equity section, reflecting various events. Prepare dividend entries and stockholders’ equity section. Journalize and post transactions; prepare retained earnings statement and stockholders’ equity section. Prepare retained earnings statement and stockholders’ equity section, and compute earnings per share. Prepare the stockholders’ equity section, reflecting dividends and stock split. Prepare the stockholders’ equity section, reflecting...
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...acknowledge from the bottom of my heart those who were solicitous and benevolent enough to guide me throughout the period. First and foremost, I am deeply grateful to my college and my research project mentor Prof. Kedar Subramanian whose profound encouragement, cooperation, guidance and keen supervision at every stage of my research paper inspired me in pursuing and completing it successfully and within schedule. I also heartily thank the Head of the Department Prof. RC Agrawal and the Respected Dean for the continuous help and encouragement and the friendly atmosphere of education provided by them. Kritika Goel ABSTRACT The paper is divided into two major segments- Introduction and Review of Literature. Former, gives a foundation of capital structure decisions with its purpose, significance and methodology. Later, provide the development of the present research by examining the earlier literature or secondary data on the same. Capital Structure is a basically a structure or mixture of different types of funding employed by an organization to get the necessary resources for its performance, growth and efficiency. This paper is enriched with the thorough study of capital structure choices and analyses the decisions that a firm(s) makes in its initial year of operation or in the middle if it desire for expansion, to acquire the data mine by getting the sink of future results of their firm. The...
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...1. (TCO 3) At the end of the period it is necessary to close all temporary accounts. (1) Explain why this process is required (10 points) and (2) provide an example of the closing of an expense account, Salary Expense in the form of a journal entry. (10 points) (Points : 20) 1. We have to close temporary accounts at the end of a period because when the temporary accounts are closed, it brings their balances back down to zero. 2. I would Debit Salary Expense and Credit to PayrollExpenses 12/31 DR Salary Expense 1000 Cr Payroll 1000 | 2. (TCO 2) As required to complete Course Project 1, one must follow the cycle that includes 10 steps to complete the accounting cycle. (1) Explain how the debit/credit rules are used when developing journal entries (10 points) and (2) provide an example of the application of the debit/credit rules in the form of a journal entry. (10 points)(Points : 20) 1. In accounting, a debit increases the balance and a credit decreases the balance. The accounts that have a normal debit balance are assets, the owner's equity, expenses and losses. Normal credit balances are liabilities, equity, revenue, and gains. When we debit an account, we raise the balance. When we credit the account, we decrease the balance. Using a double entry system, we would debit one account and credit the other to get the journal in balance.2. An example would be debit rent expense and credit bank account.DR Rent Expense 3000CR Checking...
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...9B01N019 TELUS: THE COST OF CAPITAL Professor Stephen R. Foerster revised this case (originally prepared by Professors James E. Hatch and David C. Shaw) solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. This material is not covered under authorization from CanCopy or any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright © 2001, Ivey Management Services Version: (A) 2002-04-16 OVERVIEW Barb Williams and Rick Thomas, two managers from service firms, were attending a weeklong executive education course at a well-known business school in November 2001. Both had read an article dealing with the cost of capital as preparation for the next day’s classroom session. As they vigorously discussed the concept, it became clear that they had several differences of opinion. Their assignment was to calculate the cost of capital for Telus Corporation (Telus). Telus...
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...A++PAPER;http://www.homeworkproviders.com/shop/ba-350-week-7-assignment/ BA 350 WEEK 7 ASSIGNMENT BA350 Week 7 Questions 6-3 – Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation coefficient with the market of -0.3, and a beta coefficient of -1.5, Security B has an expected return of 12%, a standard deviation of returns of 10%, a correlation with the market of 0.7, and a beta coefficient of 1.0. Which security is riskier? Why? 7-2 – Two investors are evaluating General Electric’s stock for possible purchase. They agree on the expected value of D1 and also on the expected future dividend growth rate. Further, they agree on the risk of the stock. However, one investor normally holds stocks for 2 years and the other normally holds stocks for 10 years. On the basis of the type of analysis done in this chapter, they should both be willing to pay the same price for General Electric’s stock. True or false? Explain. Problems 6-2 – (Required rate of return) – Assume that the risk-free rate is 6% and that the expected return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.7? 6-6 – (Required rare of return) – Suppose rRF = 5%, rM = 10%, and rA = 12%. Calculate Stock A’s beta. If Stock A’s beta were 2.0, then what would A’s new required rate of return? 7-1 – (DPS Calculation) – Thress Industries just paid a dividend...
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...Surviving firm takes on the assets and liabilities of the selling firm. PURCHASE: Purchasing firm pays for all the assets or all the stock of the selling firm. Distinction between a purchase and a merger depends on the final position of the shareholders of the constituent firms. TAKEOVER: A stock purchase offer in which the acquiring firm buys a controlling block of stock in the target. This enables purchasers to elect the board of directors. Both hostile and friendly takeovers exist. FREEZE-OUTS (also SQUEEZE-OUTS or CASH-OUTS): Transactions that eliminate minority SH interests. HORIZONTAL MERGERS: Mergers between competitors. This may create monopolies. Government responds by enacting Sherman Act and Clayton Act VERTICAL MERGERS: Mergers between companies which operate at different phases of production (e.g. GM merger with Fisher Auto Body.) Vertical mergers prevents a company from being held up by a supplier or consumer of goods. LEVERAGED BUYOUTS (LBOs): A private group of investors borrows heavily to finance the purchase control of an ongoing business. RECAPITALIZATIONS: Does not involve the combination of two separate entities. Here, a firm reshuffles its capital structure. In a SWAP, the corp takes back outstanding equity stocks in return for other types of securities (usually long term bonds or preferred stock) RESTRUCTURINGS: This term...
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...9-807-027 REV: AUGUST 1, 2008 ROBERT F. HIGGINS VIRGINIA A. FULLER NatuRi Corporation In February 2006, Aravind Cherukuri and Kartik Natarajan were reviewing their options for raising capital for NatuRi Corporation, the company they had founded together in 2005. With operations split between Chennai, India, and Boston, Massachusetts, NatuRi had developed a biological compound that showed promising effects in cholesterol management. The compound, discovered by Aravind’s mother, biological scientist Rukmini Cheruvanki, was derived from the byproducts of rice bran oil (RBO) production. Early animal trials had demonstrated that the compound was effective in lowering “bad” cholesterol while simultaneously increasing levels of “good” cholesterol. If manufactured for human ingestion, the compound would provide a natural alternative to synthesized cholesterol-lowering drugs on the market. Although NatuRi was still in the start-up stage, it had captured the attention of at least four potential investors willing to offer a seed investment. Having just received a term sheet from Waltham Partners, a well-known East Coast venture capital firm, Aravind and Kartik were now forced to weigh their options and determine which of the four potential investors currently interested in their venture would be most appropriate for NatuRi’s future growth. Their funding decision for this stage would also impact options for later rounds of funding. The duo had to decide on NatuRi’s ...
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...Finance 355; 7:00pm, Cutler Long Term Financing Paper | CISCO Inc. | Team Advantage: | CAPM Model & Discounted Cash Flows Capital Assets pricing and Discounting Cash flow are the widely used valuation methods for investment. ¾ of US companies using CAPM for Capital budgeting. General idea behind a CAPM is that investors need to be compensated for the risk that they are taking. Under the CAPM we are observing how much return Cisco’s investors are expecting. For the Calculation CAPM for CISCO we used numbers based off industry standards from S&P 500 and U.S. Treasury. CISCO Beta was calculated at 1.18 (source: http://finviz.com/quote.ashx?t=csco). For the risk free rate 0.17% was calculated based of the yearly US treasury rate from 2012 (source: http://www.treasury.gov ). 11.62% is the market risk based on the YTD return for the S&P 500 (source: http://money.cnn.com/data/markets/sandp/). 12.97% would be the expected/required return for CISCO. CAPM is calculated as follows: = 0.17% + 1.18 (11.79 -0.17) = 0.17+ 1.18 (11.79 – 0.17) = 1.35 (11.62) = 12.97% Discounted Cash Flow Model relies on future cash flow. It is described as "discounted" cash flow because cash in the future is worth less than cash today. DCF says that a company is worth all of the cash that it could make available to investors in the future. There are 3 approaches to DCF: PV, NPV, DDM. We need 3 input for DCF model: projected CF, discount rate and length of time for ongoing project...
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...Running Head: Financing Alternatives Lester Electronics Financing Alternative Benchmarking for Bernard Lester University of Phoenix MBA – 540 Introduction In this paper will compare and contrast issues that various companies had experienced in past mergers to the issues presented in the Lester Electronic Scenario. The companies benchmarked are Disney-Pixar, Lucent-Alcatel, Monaco Coach Corporation, SMC Corporation, Infosmart-Cyber Merchants, Fidelity Bank of Nassau, Royal Bank of Canada, and AT&T. One of the issues presented in the scenario is that LEI was preparing to conduct a joint venture with Shang-wa when Transnational Electronics made an offer to acquire Shang-wa. The main issue is that if Shang-wa is acquired by TEC, the joint venture between Shang-wa and LEI will not be possible. LEI intends to remain as the company of choice but this might not be possible if TEC acquires Shang-wa. Some of the concepts that Team A will evaluate considering the LEI scenario issues are: capital management strategies to maximize shareholder wealth, economic exposure, the challenges of cross-border growth strategies, working capital management, and internal and external growth strategies, and cultural barriers, while identify the best financing alternative for the merger. Companies Benchmarked Alcatel-Lucent – Yolanda Smothers Alcatel-Lucent provides telecommunications...
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...- The role of financial institutions and the different types of financial institutions Depository Institutions: 1. They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most surplus units 2. They repackage funds received and deposits to provide loans of the sie and maturity desired by deficit units 3. They accept the risk on loans provided 4. They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units 5. They diversify their loans among numerous deficit units and therefore can absorb defaulted loans better than individual surplus units could (Commercial Banks, Savings Institutions, Credit Unions) (Finance Co, MF, Security Firms, Insurance Co, Pension Funds) - The various types of risk and ways to manage risk Systemic Risk- The spread of financial problems among financial institutions and across financial markets that could cause a collapse in the financial system. Credit Risk – the risk of loss from default on credit Market Risk – the risk of loss from changes in interest rates or market value of securities or other assets Operating Risk – the risk of loss from operating activities, e.g. fraud, systems or operational errors. - Causes of the financial crisis, key lessons learned and forces that will change financial services in the future a. Causes: Mortgage originators sold mortgages...
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