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Questions and Answers of
Corporate Finance
The income statements of High Noon Corp. for the past two years are as follows:RequiredPrepare and interpret a vertical analysis of High Noon's income statements. Round percentages to one decimal
Three companies report the following horizontal analyses:RequiredFor each company, describe what the percentages reveal about the company. Which of the companies would you be most concerned about?
A grocery store and a jewelry store provide the following vertical analyses of certain accounts:Required Identify which company is likely the grocer and which is likely the jewelry store. Explain the
The following ratios are often used in financial statement analysis: _________ Return on equity _________ Debt to assets ratio _________ Times interest earned _________ Quick ratio _________
The following information is available for Warmouth Enterprises:Required For each ratio, indicate whether the change in the ratio is favorable or unfavorable and why.
At the end of 2012, a company has a balance of $1,755,000 in cash and cash equivalents. At the beginning of the year, the company had a $1,560,000 balance. Required Perform a horizontal analysis of
The following statements describe various financial statement analysis ratios: a. Shows the return to each share of stock owned by an investor b. Measures the difference between quick assets and
The following financial information about Cloudburst Co. is available: Sales................. $600,000 Net income............... 130,000 Average total assets........... 900,000 Average
The following financial information about NGC Company is available:Required Compute and interpret the following ratios: profit margin, return on equity, return on assets, earnings per share, and
The following financial information about Stephens Company is available:RequiredCalculate all profitability ratios for Stephens. Round percentages to one decimal point (i.e., 12.8%). Does it appear
The following information was taken from the financial statements of Connor Cookers and Olson Ovens:Required For each company, compute the following 2012 ratios: receivables turnover ratio,
Robinson Tools has $50,000 of quick assets, $135,000 of total current assets, and $100,000 of total current liabilities prior to the following transactions.1. Made sales on account of $10,0002. Paid
The following information was taken from the financial statements of TKO Company:Required Compute the debt to assets ratio, the debt to equity ratio, and times interest earned for both years.
The following financial information regarding Foshee Flapjacks is available:Required Compute the following ratios: debt to assets, debt to equity, and times interest earned. Discuss the solvency of
The following financial information regarding Wick Industries is available:Wick would like to increase its return to stockholders. To do so, it wants to increase its debt to assets ratio to 0.70 by
The following financial information about Carbon Company is available:Required Prepare a DuPont analysis for Carbon Company.
Alyssa's Sporting Goods generated gross profit of $2,550,000 and net sales of $4,090,000 during the year. Operating expenses were $655,000. Required Perform a vertical analysis of operating expenses
The following financial information about Cole's Colas, Inc., is available:RequiredPrepare a DuPont analysis for Cole's Colas and interpret each component of the analysis.
During the year, Shields Corp. generated net income of $123,547 on sales of $1,540,005. At the end of the year, Shields had total assets of $920,558 and total equity of $403,346.Requireda. Conduct a
The following is a list of terms and definitions associated with financial statement analysis tools: 1. Horizontal analysis 2. Current ratio 3. Vertical analysis 4. Quick ratio 5. Profit margin 6.
The following is a list of terms and definitions associated with financial statement analysis tools: 1. Return on assets 2. Debt to equity ratio 3. Earnings per share 4. Times interest earned 5.
The following financial information is available for Last Chance Repossessions Company as of December 31, 2012:Required Calculate all profitability, liquidity, and solvency ratios (except earnings
Amanda's Anchors has applied for a loan from a local bank. The bank is basing its decision on the following information:RequiredFor Amanda's Anchors, calculate the ratios for which the bank has an
Overtake Financial Group is a large corporation whose sole activity is the acquisition of quality subsidiary companies. You are a senior analyst for Overtake, and your manager has just come to you
Access the 2010 annual report for Dick's Sporting Goods by clicking on the About Us, Investor Relations, and Annual Reports links at www.dickssportinggoods.com.Requireda. Examine the company's income
Access the 2010 annual report of American Eagle Outfitters by clicking on the About AEO Inc., AE Investment Info, and Historical Annual Reports links at www.ae.com. Also, access the 2010 annual
Retraction Company currently has a line of credit with HSC Bank. The interest rate on the line of credit increases from 7.25% to 10.25% if the following terms of the credit agreement are not met:
Jim's Computer Warehouse produced net income of $150,000 and cost of goods sold of $400,000 for the year. Net sales were $980,000. Required Calculate Jim's profit margin for the year and briefly
The following financial ratios have been provided to you by your company:Your boss has asked you to prepare a press release to highlight the company's financial results. Analysts have been
During 2012, a company generated net income of $158,000. Total assets at the beginning of the year were $1,480,000 while they were $1,515,000 at the end of the year. Required Calculate the company's
During 2012, Blue Corporation produced net income of $1,550,000. The average number of shares of common stock outstanding for the year was 498,000. Required Calculate Blue's earnings per share for
A company has current assets of $155,900 and total assets of $378,000. Current liabilities are $121,500, and total liabilities are $265,350. Required Calculate the company's current ratio and briefly
In 2012, Ralph's Rug Outlet generated net sales of $1,250,000 and cost of goods sold of $723,000. Ralph's average inventory of rugs during the year was $95,300. Required Calculate Ralph's inventory
A company has current assets of $155,900 and total assets of $378,000. Current liabilities are $121,500 and total liabilities are $265,350. Required Calculate the company's debt to assets ratio and
Suppose that one investment has a mean return of 8% and a standard deviation of return of 14%. Another investment has a mean return of 12% and a standard deviation of return of 20%. The correlation
The expected return on the market is 12% and the risk-free rate is 7%. The standard deviation of the return on the market is 15%. One investor creates a portfolio on the efficient frontier with an
A bank estimates that its profit next year is normally distributed with a mean of 0.8% of assets and the standard deviation of 2% of assets. How much equity (as a percentage of assets) does the
A portfolio manager has maintained an actively managed portfolio with a beta of 0.2. During the last year, the risk-free rate was 5% and major equity indices performed very badly, providing returns
Explain the moral hazard problems with deposit insurance. How can they be overcome?
The bidders in a Dutch auction are as follows:The number of shares being auctioned is 210,000. What is the price paid by investors? How many shares does each investor receive?
An investment bank has been asked to underwrite an issue of 10 million shares by a company. It is trying to decide between a firm commitment where it buys the shares for $10 per share and a best
Use Table 3.1 to calculate the minimum premium an insurance company should charge for a $5 million three-year term life insurance contract issued to a man aged 60. Assume that the premium is paid at
An insurance company’s losses of a particular type per year are to a reasonable approximation normally distributed with a mean of $150 million and a standard deviation of $50 million. (Assume that
During a certain year, interest rates fall by 200 basis points (2%) and equity prices are flat. Discuss the effect of this on a defined benefit pension plan that is 60% invested in equities and 40%
Suppose that in a certain defined benefit pension plan (a) Employees work for 45 years earning wages that increase at a real rate of 2% (b) They retire with a pension equal to 70% of their final
An investor buys 100 shares in a mutual fund on January 1, 2015, for $50 each. The fund earns dividends of $2 and $3 per share during 2015 and 2016. These are reinvested in the fund. The fund’s
Good years are followed by equally bad years for a mutual fund. It earns +8%, –8%, +12%, –12% in successive years. What is the investor’s overall return for the four years?
A fund of funds divides its money between five hedge funds that earn –5%, 1%, 10%, 15%, and 20% before fees in a particular year. The fund of funds charges 1 plus 10% and the hedge funds charge 2
A hedge funds charges 2 plus 20%. A pension fund invests in the hedge fund. Plot the return to the pension fund as a function of the return to the hedge fund.
The current price of a stock is $94, and three-month European call options with a strike price of $95 currently sell for $4.70. An investor who feels that the price of the stock will increase is
A bond issued by Standard Oil worked as follows. The holder received no interest. At the bond’s maturity the company promised to pay $1,000 plus an additional amount based on the price of oil at
The price of gold is currently $1,500 per ounce. The forward price for delivery in one year is $1,700. An arbitrageur can borrow money at 10% per annum. What should the arbitrageur do? Assume that
A company’s investments earn LIBOR minus 0.5%. Explain how it can use the quotes in Table 5.5 to convert them to(a) three(b) five(c) ten-year fixed-rate investments.
Estimate the interest rate paid by P&G on the 5/30 swap in Business Snapshot 5.4 if(a) The CP rate is 6.5% and the Treasury yield curve is flat at 6% (b) The CP rate is 7.5% and the Treasury
Suppose that the principal assigned to the senior, mezzanine, and equity tranches for the ABSs and ABS CDO in Figure 6.4 is 70%, 20%, and 10% instead of 75%, 20% and 5%. How are the results in Table
Investigate what happens as the width of the mezzanine tranche of the ABS in Figure 6.4 is decreased, with the reduction in the mezzanine tranche principal being divided equally between the equity
A stock price has an expected return of 9% and a volatility of 25%. It is currently $40. What is the probability that it will be less than $30 in 18 months?
An investor owns 10,000 shares of a particular stock. The current market price is $80. What is the ``worst case'' value of the portfolio in six months. For the purposes of this question, define the
A binary option pays off $500 if a stock price is greater than $60 in three months. The current stock price is $61 and its volatility is 20%. The risk-free rate is 2% and the expected return on the
The gamma and vega of a delta-neutral portfolio are 50 per $ per $ and 25 per %, respectively. Estimate what happens to the value of the portfolio when there is a shock to the market causing the
Consider a one-year European call option on a stock when the stock price is $30, the strike price is $30, the risk-free rate is 5%, and the volatility is 25% per annum. Use the DerivaGem software to
A financial institution has the following portfolio of over-the-counter options on sterling:TypePositionDelta of OptionGamma of OptionVega of OptionCall−1,0000.502.21.8Call
Consider again the situation in Problem 8.17. Suppose that a second traded option with a delta of 0.1, a gamma of 0.5, and a vega of 0.6 is available. How could the portfolio be made delta, gamma,
Suppose that a bank has $10 billion of one-year loans and $30 billion of five-year loans. These are financed by $35 billion of one-year deposits and $5 billion of five-year deposits. The bank has
Portfolio A consists of a one-year zero-coupon bond with a face value of $2,000 and a 10-year zero-coupon bond with a face value of $6,000. Portfolio B consists of a 5.95-year zero-coupon bond with
What are the convexities of the portfolios in Problem 9.16? To what extent does (a) duration and (b) convexity explain the difference between the percentage changes calculated in part (c) of Problem
When the partial durations are as in Table 9.5, estimate the effect of a shift in the yield curve where the ten-year rate stays the same, the one-year rate moves up by 9e, and the movements in
Suppose that the change in a portfolio value for a one-basis-point shift in the 1-year, 2-year, 3-year, 4-year, 5-year, 7-year, 10-year, and 30-year rates are (in $ million) +5, –3, –1, +2, +5,
Suppose that observations on a stock price (in dollars) at the end of each of 15 consecutive days are as follows: 30.2, 32.0, 31.1, 30.1, 30.2, 30.3, 30.6, 30.9, 30.5, 31.1, 31.3, 30.8, 30.3, 29.9,
Suppose that the price of an asset at close of trading yesterday was $300 and its volatility was estimated as 1.3% per day. The price at the close of trading today is $298. Update the volatility
An Excel spreadsheet containing over 900 days of daily data on a number of different exchange rates and stock indices can be downloaded from the authors
Suppose that the parameters in a GARCH(1,1) model are a = 0.03, b= 0.95 and w = 0.000002.(a) What is the long-run average volatility?(b) If the current
Estimate parameters for the EWMA and GARCH(1,1) model on the euro-USD exchange rate data between July 27, 2005, and July 27, 2010. This data can be found on the author’s
The probability that the loss from a portfolio will be greater than $10 million in one month is estimated to be 5%.(a) What is the one-month 99% VaR assuming the change in value of the portfolio is
Suppose that the price of Asset X at close of trading yesterday was $300 and its volatility was estimated as 1.3% per day. The price of X at the close of trading today is $298. Suppose further that
The probability density function for an exponential distribution is e−x where x is the value of the variable and is a parameter. The cumulative probability distribution is 1− e−x.
Create an Excel spreadsheet to produce a chart similar to Figure 11.5 showing samples from a bivariate Student’s t-distribution with four degrees of freedom where the correlation is 0.5. Next
Suppose that a bank has made a large number loans of a certain type. The one-year probability of default on each loan is 1.2%. The bank uses a Gaussian copula for time to default. It is interested in
The default rates in the last 15 years for a certain category of loans is 2%, 4%, 7%, 12%, 6%, 5%, 8%, 14%, 10%, 2%, 3%, 2%, 6%, 7%, 9%. Use the maximum likelihood method to calculate the best fit
Suppose that each of two investments has a 4% chance of a loss of $10 million, a 2% chance of a loss of $1 million, and a 94% chance of a profit of $1 million. They are independent of each other.(a)
Suppose that daily changes for a portfolio have first-order correlation with correlation parameter 0.12. The 10-day VaR, calculated by multiplying the one-day VaR by , is $2 million. What is a better
Suppose that we back-test a VaR model using 1,000 days of data. The VaR confidence level is 99% and we observe 15 exceptions. Should we reject the model at the 5% confidence level? Use Kupiec’s
The change in the value of a portfolio in three months is normally distributed with a mean of $500,000 and a standard deviation of $3 million. Calculate the VaR and ES for a confidence level of 99.5%
The probability that the loss from a portfolio will be greater than $10 million in one month is estimated to be 5%.(a) What is the one-month 99% VaR assuming the change in value of the portfolio is
Suppose that a one-day 97.5% VaR is estimated as $13 million from 2,000 observations. The one-day changes are approximately normal with mean zero and standard deviation $6 million. Estimate a 99%
Suppose that the portfolio considered in Section 13.1 has (in $000s) 3,000 in DJIA, 3,000 in FTSE, 1,000 in CAC 40, and 3,000 in Nikkei 225. Use the spreadsheet on the author’s web site to
Investigate the effect of applying extreme value theory to the volatility adjusted results in Section 13.3 with u = 350.
Values for the NASDAQ composite index during the 1,500 days preceding March 10, 2006, can be downloaded from the author’s web site. Calculate the one-day 99% VaR and the one-day 99% ES on March 10,
Consider a position consisting of a $300,000 investment in gold and a $500,000 investment in silver. Suppose that the daily volatilities of these two assets are 1.8% and 1.2% respectively, and that
Consider a portfolio of options on a single asset. Suppose that the delta of the portfolio is 12, the value of the asset is $10, and the daily volatility of the asset is 2%. Estimate the one-day 95%
Suppose that you know the gamma of the portfolio in Problem 15.17 is –2.6. Derive a quadratic relationship between the change in the portfolio value and the percentage change in the underlying
A company has a long position in a two-year bond and a three-year bond as well as a short position in a five-year bond. Each bond has a principal of $100 and pays a 5% coupon annually. Calculate the
A company has a position in bonds worth $6 million. The modified duration of the portfolio is 5.2 years. Assume that only parallel shifts in the yield curve can take place and that the standard
A bank has written European a call option on one stock and a European put option on another stock. For the first option, the stock price is 50, the strike price is 51, the volatility is 28% per
A common complaint of risk managers is that the model-building approach (either linear or quadratic) does not work well when delta is close to zero. Test what happens when delta is close to zero in
The calculations in Section 15.3 assume that the investments in the DJIA, FTSE 100, CAC 40, and Nikkei 225 are $4 million, $3 million, $1 million, and $2 million, respectively. How do the VaR and ES
Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How
Estimate the capital required under Basel I for a bank that has the following transactions with another bank. Assume no netting.(a) A two-year forward contract on a foreign currency, currently worth
A bank has the following transaction with a AA-rated corporation(a) A two-year interest rate swap with a principal of $100 million that is worth $3 million(b) A nine-month foreign exchange forward
Suppose that the assets of a bank consist of $500 million of loans to BBB-rated corporations. The PD for the corporations is estimated as 0.3%. The average maturity is three years and the LGD is 60%.
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