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corporate finance

Questions and Answers of Corporate Finance

Define and briefly discuss each of these common stock measures:(a) Book value(b) ROE(c) EPS(d) P/E ratio(e) Beta
Briefly discuss some of the different types of common stock. Which types would be most appealing to you, and why?
Summarize the evidence on the potential cost of being out of the stock market during its best months.
What’s the difference between a secured bond and an unsecured bond?
Are junk bonds and zero coupon bonds the same? Explain. What are the basic tax features of a tax-exempt municipal bond?
What is a convertible bond, and why do investors buy convertible securities?
Describe the conversion privilege on a convertible security. Explain how the market price of the underlying common stock affects the market price of a convertible bond.
Explain the system of bond ratings used by Moody’s and Standard & Poor’s. Why would it make sense to ever buy junk bonds?
Explain the difference between dirty (full) and clean bond prices? What is the significance of the difference in the prices for a bond buyer?
What effects do market interest rates have on the price behavior of outstanding bonds?
Briefly describe the two basic sources of return to investors.
What is the desired rate of return, and how would it be used to make an investment decision?
What are DRPs, and how do they fit into a stock investment program?
What makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns.a. Buy a stock for $30 a share,
Selected financial information about Upper End Clothing, Inc. is as follows:Total assets .............................................................. $20,000,000Total liabilities
Assume that you’ve just inherited $500,000 and have decided to invest a big chunk of it ($350,000, to be exact) in common stocks. Your objective is to build up as much capital as you can over the
Discuss the evidence regarding the ability of most investors to effectively time getting in and out of the stock market. How sensitive are returns to being out of the market for just a few months of
An investor is thinking about buying some shares of Razortronics, Inc., at $75 a share. She expects the price of the stock to raise to $115 a share over the next three years. During that time, she
A company has total assets of $2.5 million, total liabilities of $1.8 million, and $200,000 worth of 8 percent preferred stock outstanding. What is the firm’s total book value? What would its book
The Clarkson Company recently reported net profits after taxes of $15.8 million. It has 2.5 mil-lion shares of common stock outstanding and pays preferred dividends of $1 million a year. The
The price of Garden Designs, Inc. is now $85. The company pays no dividends. Sean Perth expects the price four years from now to be $125 a share. Should Sean buy Garden Designs if he wants a 15
An investor in the 28 percent tax bracket is trying to decide which of two bonds to select: one is a 5.5 percent U.S. Treasury bond selling at par; the other is a municipal bond with a 4.25 percent
Describe and differentiate between bonds(a) Current yield(b) Yield to maturity.Why are these yield measures important to the bond investor? Find the yield to maturity of a 20-year, 9 percent, and
Which of these two bonds offers the highest current yield? Which one has the highest yield to maturity?a. A 6.55 percent, 22-year bond quoted at 52.000b. A 10.25 percent, 27-year bond quoted at
Find the current yield of a 5.65 percent, 8-year bond that’s currently priced in the market at $853.75. Now, use a financial calculator to find the yield to maturity on this bond (use annual
A 25-year, zero coupon bonds was recently quoted at 6.500. Find the current yield and yield to maturity of this issue, given the bond has a par value of $1,000. (Assume annual compounding for the
Assume that an investor pays $850 for a long-term bond that carries a 7.5 percent coupon. During the next 12 months, interest rates drop sharply, and the investor sells the bond at a price of
A 6 percent convertible bond (maturing in 20 years) is convertible into 25 shares of the company’s common stock. The bond has a par value of $1,000 and is currently trading at $800; the stock
You have decided to sell a 5 percent semiannual coupon bond two months after the last coupon payment. The bond is currently selling for $951.25. Answer the following questions about the bond:a. What
Find the conversion value of a convertible bond that carries a conversion ratio of 24, given that the market price of the underlying common stock is $55 a share. Would there be any conversion premium
1. What investment options are open to Elaine?2. What chance does she have of earning a satisfactory return if she invests her $15,000 in?(a) Blue chip stocks(b) Growth stocks(c) Speculative
1. What kind of investment approach do you think the Ashcrofts should adopt—that is, should they be conservative with their money or aggressive? Explain.2. What kind of stocks do you think the
What is a mutual fund? Why are diversification and professional management so important to mutual funds?
Who are the key players in a typical mutual fund organization?
What’s the difference between an open-end mutual fund and an ETF?
What types of ETFs are available to investors?
What’s the difference between a load fund and a no-load fund?
What is a 12(b)-1 fund? Can such a fund operate as a no-load fund?
Briefly describe a back-end load, a low load, and a hidden load. How can you tell what kind of fees and charges a mutual fund has?
What’s the difference between a growth fund and a balanced fund?
What’s an international fund, and how does it differ from a global fund?
What’s an asset allocation fund? How do these funds differ from other types of mutual funds?
If growth, income, and capital preservation are the primary objectives of mutual funds, why do we bother to categorize them by type?
What are automatic reinvestment plans, and how do they differ from automatic investment plans?
What are the most common reasons for buying mutual funds?
Briefly describe the steps in the mutual fund selection process.
Why does it pay to invest in no-load funds rather than load funds? Under what conditions might it make sense to invest in a load fund?
Identify three potential sources of return to mutual fund investors, and briefly discuss how each could affect total return to shareholders.
Which would you rather have: $100 in dividend income or $100 in capital gains distribution? $100 in realized capital gains or $100 in unrealized capital gains?
Describe how to evaluate the attractiveness of investing in an index-based ETF.
Define and briefly discuss the role of each of these factors in evaluating a proposed real estate investment:a. Cash flow and taxesb. Appreciation in valuec. Use of leverage
Describe the major categories of income property, and explain the advantages and disadvantages of investing in income property. How can a single-family home be used to generate income?
Describe how the following securities allow investors to participate in the real estate market.a. Stock in real estate–related companiesb. Real estate limited partnerships (LPs) or limited
Briefly describe the basic structure and investment considerations associated with a REIT. What are the three basic types of REITs?
What are fund families? What advantages do these families offer investors?
How important is general market behavior in affecting the price performance of mutual funds?
Why is speculating in raw land considered a high-risk venture?
Contrast mutual fund ownership with direct investment in stocks and bonds. Assume that your class is going to debate the merits of investing through mutual funds versus investing directly in stocks
Using the mutual fund quotes in Exhibit 13.4, and assuming that you can buy these funds at their quoted NAVs, how much would you have to pay to buy each of the following funds?Artio Select
For each pair of funds listed below, select the fund that would be less risky and briefly explain your answer.a. Growth versus growth-and-incomeb. Equity-income versus high-grade corporate bondsc.
What investor service is most closely linked to the notion of a fund family? If a fund is not part of a family of mutual funds, can it still offer a full range of investor services? Explain. Using a
About a year ago, Nigel Palmer bought some shares in the Equity Partners Mutual Fund. He bought the fund at $24.50 a share, and it now trades at $26. Last year, the fund paid dividends of 40 cents a
Describe an ETF and explain how these funds combine the characteristics of open- and closed-end funds. Within the Vanguard family of funds, which would most closely resemble a “Spider” (SPDR)? In
A year ago, the Alpine Growth Fund was being quoted at an NAV of $21.50 and an offer price of $23.35; today, it’s being quoted at $23.04 (NAV) and $25.04 (offer). Use the approximate yield formula
Here is the per-share performance record of the Mile High Growth-and-Income fund for 2015 and 2014:Use this information to find the rate of return earned on this fund in 2014 and in 2015. What is
Using the Morningstar information in Exhibit 13.10, evaluate the performance of the QQQ index-based ETF. Specifically, comment on how well it tracks the underlying NASDAQ 100 index and how its
Assume that you’ve just inherited $100,000 and wish to use all or part of it to make a real estate investment.a. Would you invest directly in real estate, or indirectly through something like a
Lilia Castillo is thinking about investing in some residential income-producing property that she can purchase for $200,000. Lilia can either pay cash for the full amount of the property or put up
1. In view of Eileen’s long-term investment goals, do you think mutual funds or ETFs are the more appropriate investment vehicle for her?2. Do you think that she should use her $15,000 savings to
1. Explain to Todd the key reasons for purchasing mutual fund or ETF shares.2. What special fund features might help Todd achieve his investment objectives?3. What types of mutual funds or ETFs
Discuss the relationship of retirement planning to financial planning. Do investment and tax planning have a role in retirement planning?
Identify and briefly discuss the three biggest mistakes people tend to make when setting up retirement programs.
What benefits are provided under the Social Security Act, and who is covered?
What is the earnings test, and how does it affect Social Security retirement benefits?
Does Social Security coverage relieve you of the need to do some retirement planning on your own?
Which basic features of employer-sponsored pension plans should you be familiar with?
Under which procedure will you become fully vested most quickly—cliff or graded vesting?
What is the difference between a profit-sharing plan and a salary reduction, or 401(k), plan?
Why is it important to evaluate and become familiar with the pension plans and retirement benefits offered by your employer?
Briefly describe the tax provisions of 401(k) plans and Keogh plans.
Describe and differentiate between Keogh plans and individual retirement arrangements. What’s the difference between a nondeductible IRA and a Roth IRA?
Under what circumstances would it make sense to convert your traditional IRA to a Roth IRA?
What is an annuity? Briefly explain how an annuity works and how it differs from a life insurance policy.
What is a fixed-rate annuity, and how does it differ from a variable annuity? Does the type of contract (fixed or variable) have any bearing on the amount of money you’ll receive at the time of
How do variable annuity returns generally compare to mutual fund returns? Can you explain why there would be any difference in returns?
How does income needs fit into the retirement planning process?
Jacqueline Strauss, a 25-year-old personal loan officer at First National Bank, understands the importance of starting early when it comes to saving for retirement. She has designated $3,000 per year
Use Worksheet 14.1 to help Bill and Shirley Hogan, who’d like to retire while they’re still relatively young—in about 20 years. Both have promising careers, and both make good money. As a
Many critics of the Social Security program feel that participants are getting a substandard investment return on their money. Discuss why you agree or disagree with this viewpoint.
Use Exhibit to estimate the average Social Security benefits for a retired couple. Assume that one spouse has a part-time job that pays $24,000 a year, and that this person also receives another
Kristin Caldwell has just graduated from college and is considering job offers from two companies. Although the salary and insurance benefits are similar, the retirement programs are not. One firm
David Cheung is an operations manager for a large manufacturer. He earned $68,500 in 2012 and plans to contribute the maximum allowed to the firm’s 401(k) plan. Assuming that David is in the 25
Describe the three basic types of IRAs (traditional, Roth, and nondeductible), including their respective tax features and what it takes to qualify for each. Which is most appealing to you
Ralph Porter is in his early 30s and is thinking about opening an IRA. He can’t decide whether to open a traditional/deductible IRA or a Roth IRA, so he turns to you for help.a. To support your
Explain how buying a variable annuity is much like investing in a mutual fund. Do you, as a buyer, have any control over the amount of investment risk to which you’re exposed in a variable annuity
Briefly explain why annuities are a type of tax-sheltered investment. Do you have to give up anything to obtain this tax-favored treatment?
Why is it important to check an insurance company’s financial ratings when buying an annuity? Why should you look at past performance when considering the purchase of a variable annuity?
Briefly describe the main characteristics of defined contribution and defined benefit pension plans, and discuss how they differ from cash-balance plans. In each of these plans, does the employee or
Use Exhibit 14.3 to determine the annual Social Security benefit for Dan Whetstone, assuming that he is an “average” retiree. Dan is 65 years old and earns $18,000 a year at a part-time job.
Use Worksheet 14.1 to assist Stacy Eustus with her retirement planning needs. She plans to retire in 15 years, and her current household expenditures run about $50,000 per year. Stacy estimates that

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