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Questions and Answers of
Corporate Finance
What type of firm typically pays dividends? What are growth stocks? What are income stocks?
What are dividends? Do all firms pay them?
Discuss the differences between common stock and preferred stock.
What are bonds? How do bonds provide a return to investors?
Joel purchased 100 shares of stock for $ 20 per share. During the year, he received dividend checks amounting to $ 150. Joel recently sold the stock for $ 32 per share. What was Joel’s return on
Morris will start investing $ 1,500 a year in stocks. He feels he can average a 12% return. If he follows this plan, how much will he accumulate in 5 years? In 10 years? In 20 years?
Thomas purchased 400 shares of stock A for $ 23 a share and sold them more than a year later for $ 20 per share. He purchased 500 shares of stock B for $ 40 per share and sold them for $ 53 per share
Charles just sold 500 shares of stock A for $ 12,000. In addition, he just sold 600 shares of stock A for $ 6,000. Charles had paid $ 20 per share for all his shares of stock A. What amount of loss
Carlo and Rita’s daughter just celebrated her 16th birthday and Carlo and Rita realize they have accumulated only half the money they will need for their daughter’s college education. With
What is the dollar amount of Joel’s return (see problem 1)?In Problem 1.Joel purchased 100 shares of stock for $ 20 per share. During the year, he received dividend checks amounting to $ 150. Joel
Joel is in a 25% tax bracket. What amount of taxes will he pay on his capital gain if he held the stock for less than a year?
How much would Joel (from problem 1) save in taxes if he held the stock for more than a year, assuming he sold it for the same amount?
Emma bought a stock a year ago for $ 53 per share. She received no dividends on the stock and sold the stock today for $ 38 per share. What is Emma’s return on the stock?
Tammy has $ 3,500 that she wants to invest in stock. She believes she can earn a 12% annual return. What would be the value of Tammy’s investment in 10 years if she is able to achieve her goal?
Dawn decides to invest $ 2,000 each year in stock at the end of each of the next five years. She believes she can earn a 9% return over that time period. How much will Dawn’s investment be worth at
Bob purchased a dot com stock, which was heavily advertised on the Internet, for $ 40 per share shortly after the stock’s IPO. Over the next three years, the stock price declined by 15% each year.
Floyd wants to invest the $ 15,000 he received from his grandfather’s estate. He wants to use the money to finance his education when he pursues his doctorate in five years.What amount will he have
Compare the returns from investing in bank CDs to the possible returns from stock over the next 12 years by filling in the following worksheet.Savings Accumulated over the Next 12 Years
Explain to the Sampsons why there is a trade off when investing in bank CDs versus stock to support their children’s future college education.
Advise the Sampsons on whether they should invest their money each month in bank CDs, in stocks, or in some combination of the two, to save for their children’s college education.
The Sampsons are considering investing in an IPO of a high tech firm, since they have heard that the return on IPOs can be very high. Advise the Sampsons on this course of action.
What are stock exchanges? How do they facilitate the trading of stocks?
Why is it necessary to analyze a firm? What is an annual report? What information does it contain to aid the analysis?
Why may the top managers of a firm be tempted to use misleading estimates of revenues and expenses? How may managers be able to boost the reported earnings of their firm?
Explain how economic growth is measured. How does economic growth affect stock prices? What are some popular indicators of economic growth? How does the government’s fiscal policy affect economic
How do interest rates affect economic growth? Why do interest rates affect some stock prices more than others? Which federal agency influences interest rates?
What is inflation? How is inflation measured? How does inflation affect stock prices?
Why is an industry analysis of stocks important? List some sources of information about firms and their industry. for that stock. c. Review the information provided for various sectors. Why do you
What is a short sale? When would this strategy be used?
How can another country’s economic conditions impact a U. S. firm and therefore its stock price?
Describe a typical stock transaction at the New York Stock Exchange (NYSE). What are floor traders? What are specialists? What other exchanges trade stocks in a similar manner to the NYSE?
The management of a publicly traded manufacturing company is reviewing the projected fourth quarter financial results in late November. Based on the projected sales, they will fall short of their
What are Electronic Communications Networks (ECNs)? How are ECNs used?
How is the market for a stock created? How do brokerage firms expedite this process? Compare the two types of brokerage services.
What are some advantages of using online brokerage services? Describe how an investor would set up and use an online brokerage account.
What information must you provide when placing an order to buy or sell stock? What is a ticker symbol, and why is it important?
Discuss the differences between a market order, a limit order, and a stop order.
What is buying a stock on margin? What may happen if the value of the stock bought on margin declines? What are the advantages to investors and brokerage firms when stocks are bought on margin?
Offer advice to the Sampsons about whether they should buy these stocks based on the information on the Web site.
Other Web sites identify firms that were top performers the previous day. Should the Sampsons buy these stocks? Explain.
What is a bond? What is a bond’s par value? What are coupon payments, and how often are they normally paid? What happens when investors buy a bond below par value? When should you consider
When an investor sells a bond in the secondary market before the bond reaches maturity, what determines the return on the bond? How do interest rate movements affect bond returns in general?
Discuss the effect of taxes on bond returns.
Discuss default risk as it relates to bonds. How may investors use risk ratings? What is the relationship between the risk rating and the risk premium? How do economic conditions affect default risk?
What is the risk to investors on bonds that have a call feature?
What is interest rate risk? How does a rise in interest rates affect a bond’s price?
How is interest rate risk affected by a bond’s maturity? How can investors use expectations of interest rate movements to their advantage?
Describe how the interest rate strategy for bond investment works. What are some of the potential problems with this strategy?
How does the passive strategy for bond investment work? What is the main disadvantage of this strategy?
Describe the maturity matching strategy of investing in bonds. Give an example. Why is this strategy considered conservative?
What is a call feature on a bond? How will a call feature affect investor interest in purchasing the bond?
How is the value of a bond determined? What information is needed to perform the calculation?
Explain why prices of risky bonds may decline when economic conditions weaken.
Why are prices of some bonds more sensitive to economic conditions than others?
What is a convertible bond? How does a bond’s convertibility feature affect its return?
What is a bond’s yield to maturity? How does the price paid for a bond affect its yield to maturity?
Discuss how bonds are sold on the secondary market.
What are Treasury bonds? Describe their key characteristics.
What are municipal bonds? Why are they issued? Are all municipal bonds free from default risk? What characteristic makes municipal bonds especially attractive to high-income investors?
What are federal agency bonds? Compare and contrast the three most common federal agency bonds.
What are corporate bonds? Are corporate bonds subject to default risk? What are junk bonds? Why would investors purchase junk bonds?
Bernie purchased 20 bonds with par values of $ 1,000 each. The bonds carry a coupon rate of 9% payable semiannually. How much will Bernie receive for his first interest payment?
Sandy has a choice between purchasing $ 5,000 in Treasury bonds paying 7% interest or purchasing $ 5,000 in BB rated corporate bonds with a coupon rate of 9.2%. What is the risk premium on the BB
John is a relatively conservative investor. He has recently come into a large inheritance and wishes to invest the money where he can get a good return, but not worry about losing his principal. His
Paul has $ 10,000 that he wishes to invest in bonds. He can purchase Treasury bonds with a coupon rate of 7% or municipal bonds with a coupon rate of 5.5%. Paul lives in a state with no state income
Bonnie paid $ 9,500 for corporate bonds that have a par value of $ 10,000 and a coupon rate of 9%, payable annually. Bonnie received her first interest payment after holding the bonds for 12 months
Katie paid $ 9,400 for a Ginnie Mae bond with a par value of $ 10,000 and a coupon rate of 6.5%. Two years later, after having received the annual interest payments on the bond, Katie sold the bond
Timothy has an opportunity to buy a $ 1,000 par value municipal bond with a coupon rate of 7% and a maturity of five years. The bond pays interest annually. If Timothy requires a return of 8%, what
Mia wants to invest in Treasury bonds that have a par value of $ 20,000 and a coupon rate of 4.5%. The bonds have a 10 year maturity, and Mia requires a 6% return. How much should Mia pay for her
Emma is considering purchasing bonds with a par value of $ 10,000. The bonds have an annual coupon rate of 8% and six years to maturity. The bonds are priced at $ 9,550. If Emma requires a 10%
Mark has a Treasury bond with a par value of $ 30,000 and a coupon rate of 6%. The bond has 15 years to maturity. Mark needs to sell the bond and new bonds are currently carrying coupon rates of 8%.
What if Mark’s Treasury bond in the previous problem had a coupon rate of 9% and new bonds still had interest rates of 8%? For what price should Mark sell the bond in this situation?
Should the Sampsons consider investing a portion of their savings in bonds to save for their children’s education? Why or why not?
If the Sampsons should purchase bonds, what maturities should they consider, keeping in mind their investment goal?
If the Sampsons should consider bonds, should they invest in corporate bonds or municipal bonds? Factor into your analysis the return they would receive after tax liabilities, based on the bonds
The Sampsons learn that many corporate bonds have recently been downgraded due to questionable financial statements. However, the Sampsons are not concerned, since the corporate bond they are
What are mutual funds? What two broad categories of mutual funds exist, and how are they different? Do investors select the securities the mutual fund invests in?
Why do investors invest in index funds? Discuss the popularity of index fund investment as it relates to expenses. What tax advantage do index funds offer relative to other types of mutual funds?
List and briefly describe the types of bond mutual funds.
Why are some U. S. investors attracted to international and global bond funds? What risk is associated with these funds that investors are not subject to when investing strictly in U. S. bond funds?
Describe the three ways a mutual fund can generate returns for investors.
Is a stock mutual fund’s past performance necessarily an indicator of future performance? What type of risk affects all stock mutual funds? Describe the tradeoff between the expected return and
Discuss return and risk as they relate to bond mutual funds. What type of risk are all bond funds subject to? What other risk is associated with some bond funds? Describe the trade off between risk
What should investors consider when deciding whether to purchase shares of a mutual fund? What characteristics of a mutual fund should be considered? Briefly discuss each characteristic.
What is a prospectus? How does an investor obtain one? What information does a prospectus provide?
Where can an investor find price quotations for closed end and open end funds? What information will be provided in a quotation for open end funds? What information will be provided in a quotation
Explain how Lipper indexes are used.
List three reasons for investing in mutual funds.
Discuss diversification among mutual funds. Describe some strategies that make diversification more effective. What is a mutual fund supermarket?
What is a mutual fund’s net asset value (NAV)? How is the NAV calculated and reported?
What is an open end mutual fund? What types of companies usually manage open end funds? Describe how these funds work on a day to day basis.
What is a closed end fund? Describe how closed end funds function.
What kinds of expenses do mutual funds incur? How are expense ratios calculated? Why should investors pay attention to expense ratios?
Describe the three components of the expense ratio. How can a no load fund compensate brokers?
List and briefly describe the different types of stock mutual funds.
Hope invested $ 9,000 in a mutual fund when the price per share was $ 30. The fund has a load fee of $ 300. How many shares did she purchase?
If Hope (from problem 1) had invested the same amount of money in a no load fund with the same price per share, how many shares could she have purchased?
Mark owns a mutual fund with a NAV of $ 45.00 per share and expenses of $ 1.45 per share. What is the expense ratio for Mark’s mutual fund?
Hope (from problem 1) later sells her shares in the mutual fund for $ 37 per share. What would her return be in problems 1 and 2?
Hunter invested $ 7,000 in shares of a load mutual fund. The load of the fund is 7%. When Hunter purchased the shares, the NAV per share was $ 70. A year later, Hunter and why? sold the shares at a
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