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Questions and Answers of
Corporate Finance
Describe at least five ways, other than increasing your insurance credit score, to reduce the cost of homeowner’s insurance.
Jody Solan currently insures her home for 100 percent of its replacement value with an HO-3 policy. For Jody, this works out to $140,000 in dwelling (Part A) coverage. What are the maximum dollar
The Superior Insurance Company of Maine recently advertised the following discounts for qualified drivers: ♦ 10 percent discount to drivers who have not had an accident in the past 7 years ♦ 15
Keith and Dena Diem have personal property coverage with a $250 limit on currency, a $1,000 limit on jewelry, and a $2,500 limit on gold, silver, and pewter. They do not have a personal property
How much would a homeowner receive with actual cash-value coverage and with replacement cost coverage for a 3-year-old sofa destroyed by a fire? The sofa would cost $1,000 to replace today, whereas
Carmella Estevez has a homeowner's insurance policy with $100,000 of liability insurance. She is concerned about the risk of lawsuits because her property borders a neighborhood park. What can she do
Jerry Carter's home is currently valued, on a replacement cost basis, at $315,000. When he last checked his policy, his home was insured for $235,000, and he did not have an inflation guard
Carmen Viers lost everything to a fire and has spent the last 8 weeks living in a motel room at a cost of $4,500. Her dwelling, which was destroyed as a result of a lighting strike, was insured with
Larry Simmons has split-limit 100/300/50 automobile liability insurance. Several months ago Larry was in an accident in which he was found to be at fault. Four passengers were seriously injured in
Bill Buckely has split-limit 25/50/10 automobile liability insurance on his 2008 Subaru. Driving home from work in a snowstorm, he hit a Mercedes, slid into a guardrail, and knocked down a telephone
Jessica Railes is purchasing a condo and is shopping for an HO-6 policy. Her auto insurer quoted her an annual rate of $550. However, if she insures both her condo and her car with the same company,
1. What type of homeowner's insurance policy is best for the Leylands? Which covered perils would be of greatest interest living in their location?2. What is the minimum amount of Coverage A that the
1. After reviewing her personal automobile policy, Bronwyn realized that she had $75,000 of single-limit, Part A coverage; $15,000 of Part B coverage; $75,000 of Part C coverage; and "full" Part D
Explain the difference between investing and speculating. Give an example of each.
Differentiate between systematic and unsystematic risk. Which of these is more important to the average investor? Why?
Why might investors not be willing to take risks with their investment portfolios even though they take risks elsewhere? What investment concepts might help them be more willing to take an
What is the long-term relationship between risk and time? Why is this relationship such an important concept to remember when developing and implementing an investment program?
What is meant by the term “asset allocation”? What makes asset allocation such a simple and powerful concept?
What is the purpose for adjusting your asset allocation as you age? Why wouldn’t “the best” or highest returning portfolio always be prudent?
What is the relationship between market efficiency and the success of market timing? Does market timing work consistently? What six efficient market concepts should be considered when investing?
Why is it important to maintain an adequate emergency fund before creating and implementing an investment program?
What are five ways to find money to invest?
Why should you look for tax-favored investment strategies? How can these strategies help you attain your goals?
Name and briefly describe the two basic categories of investments. Provide two examples of each.
What are the three primary points of information needed to evaluate the potential total and annual return of a lending investment?
Remembering the information from the tax chapter, when it comes to income taxes, why is capital gain income better than dividends or interest income?
What is the basic difference between the nominal rate of return and the real rate of return? Which of them might be a better measure of how well an investment has performed? Why?
Investors need to be aware of nine sources of risk when calculating the risk–return trade-off. List and briefly describe these nine sources of risk.
Everyone needs an emergency fund. Assume your best friend asks you to evaluate a list of investments for an emergency savings fund. Comment on the appropriateness of each of the following:a.
Last year you sold short 400 shares of stock selling at $90 per share. Six months later the stock had fallen to $45 per share. Over the 6-month period, the company paid out two dividends of $1.50 per
Jana just found out that she is going to receive an end-of-year bonus of $40,000. She is in the 35 percent marginal tax bracket. Calculate her income tax on this bonus. Now assume that instead of
After reading this chapter, it isn't surprising that you're becoming an investment wizard. With your newfound expertise, you purchase 100 shares of KSU Corporation for $37 per share. Over the next 12
Categorize each of the nine different sources of risk according to the investment class to which it applies. If the risk applies to both stocks and bonds, then categorize it as "both."
You just learned that a well-established company will issue a bond with a maturity of 100 years. The bond appears to be a good deal because it yields 8.5 percent. Assuming that the inflation rate
Which securities market regulations deal with each of the following?a. Requires disclosure of relevant information on initial public offerings and registration with the FTCb. Created the Securities
Arianna just made a fantastic investment: She purchased 400 shares in Great Gains Corporation for $21.50 per share. Yesterday the stock closed at $56.50 per share. In order to lock in her gains, she
Harry and Harriett own 1,000 shares of AI Inc. in a brokerage account that is titled "Harry and Harriett, Tenancy-in-Common." Explain how the assets would be handled if Harry passed away. Would this
Assume you just purchased 250 shares of Home Depot at $40 per share and 50 percent of this was purchased "on the margin." Fill in the blanks to determine your contribution to this transaction:Total
1. What should be John and Emily's first priority before investing or making any investment plans? 2. If John and Emily asked you to prioritize their goals, how would you rank their investment
1. Before investing any money, what five things should Marcelino do first? 2. Is Marcelino's strategy of investing in an oil exploration stock to make quick profits investing or speculating? Support
1. Should Hasit be concerned about the lack of insurance on his brokerage account? Are there any specific securities acts you could cite to back up your answer?2. Chandni is concerned about insider
Explain how stocks generate returns. Is one form of return preferable over the other? Be sure to consider both liquidity and taxation in your answer.
What is the difference between a bear market and a bull market? How can you easily remember the relevant stock price trends when you hear these terms?
Describe the following stock classifications: (a) blue-chip stock, (b) growth stock, (c) income stock, (d) speculative stock, (e) cyclical stock, and (f) defensive stock. Identify one publicly traded
How are large-cap, mid-cap, and small-cap companies defined? Which of these types tend to produce the highest average return?
Describe the basic differences between technical analysis and fundamental analysis. List examples of different tools a technical analyst and a fundamental analyst might use when valuing an investment.
What three factors influence the value of common stock? Briefly describe each.
In terms of the risk–return trade-off (Principle 8), why is there an inverse relationship between interest rates and the value of a share of common stock?
What are seven investment strategies of which to be wary?
What four advantages does dollar cost averaging offer over a buy-and-hold strategy? When is a buy-and-hold approach a better investment strategy?
Summarize the advantages and disadvantages of DRIPs.
Explain two ways an investor can reduce risk when purchasing stocks.
List and describe four reasons why someone should consider investing in stocks.
What does beta measure? How can this measurement help you assemble an appropriate portfolio?
List the six questions an investor should ask periodically to check the progress of stock investments.
What is meant by the term “limited liability,” and why is this concept important to common stock investors?
In terms of a common shareholder’s claim on assets, when should a stockholder receive payment if a company declares bankruptcy?
What is a stock split? Why might a stock split occur?
What is the book value of a stock? How is it calculated? What is its relationship to the concept of personal net worth?
Two of the most commonly cited stock market indexes are the Dow and the S&P 500. Which of these two indexes better represents movements in the overall market? Why?
Assume that you own 200 shares of General Dynamics Corp. (GD) selling at $90 per share. In order to make the stock more affordable for the average investor, GD's management has decided to split the
Using the calculations from Problem 9, assume that instead of investing $200 every quarter, the investor decided to make a lump-sum $800 purchase on the first day of the year. If at year-end the
The Haley Corporation has just announced year-end results as follows:Value of company assets …………………………………$12,500,000Value of company liabilities
The Smell Fresh Kitty Litter Company has assets of $10 million, liabilities of $4 million, and 2 million shares outstanding. Assuming creditors are paid in full prior to stockholders receiving any
Wildcat Corporation recently disclosed the following financial information:Earnings / revenue …………………………… $1,500,000Assets ………………………………………..
An investor is considering purchasing one of the following three stocks. Stock X has a market capitalization of $7 billion, pays a relatively high dividend with little increase in earnings, and has a
Use the following data to answer the questions that follow.Company BetaSavoy Corp……………………………..0.70Hokie Industries ……………………….1.35Graham Records
Use the information in the table below to answer the following questions.a. What is the current dividend yield for Boeing Company (BA) based on the stock's recent closing price?b. What is your
Leona is considering starting a tailoring business, "Get Stitched Up," to supplement her retirement. She is 60 years old and has been helping family and friends with their sewing and tailoring needs
Assume an investor made the purchases listed in the table below on the first day of every quarter for a year. Use the information provided to fill in the blanks.
1. Which type of stock or combination of stocks would be appropriate for Shannel? Develop your answer in terms of Shannel's risk tolerance, time frame, and goals.2. What role should cyclical and
1. Assuming that the stock actually splits two for one, how many shares will Pete and Jessica own? What will be the market value of their stock after the split? How will the split affect the value of
What are three reasons why investors should consider adding bonds to their portfolios?
Describe a Treasury inflation-indexed bond. Who should consider these bonds for an investment portfolio?
What advantages do I bonds offer investors? At purchase, how do I bonds differ from EE bonds?
What types of entities issue municipal bonds? What significant feature of municipal bonds attracts investors? Given this feature, who should consider investing in municipal bonds?
What are the two types of municipal bonds, and which type has the greater default risk? Why?
What is a zero coupon bond? Give an example of when the use of zero coupon bonds might be appropriate in an investment portfolio. Do you think these types of bonds should be owned in taxable or
What potential risks do investors face when they purchase junk bonds? How are investors compensated for these risks? What rating would you expect to see a junk bond carry?
Explain the difference between current yield and yield to maturity. Which is a more accurate measure of the return an investor will receive?
What is the difference between the quoted price and the invoice price? When would you expect the two prices to be equal?
What is meant by the terms “premium” and “discount” when referring to the price of a bond?
Using sound bond valuation principles, explain in terms of present value why zero coupon bonds sell at such a deep discount to the par value.
Why are bonds generally considered to be relatively safe investments compared to stocks?
An investor’s required rate of return is important when valuing a bond. What two factors can cause an investor’s required rate of return to change?
Describe the relationship between interest rates and bond values. If investors’ required rate of return decreases, what should happen to the value of bonds? Would this bond be purchased at a
What features do preferred stock shares offer investors? What feature, similar to a bond, should cause investors to demand a higher dividend yield?
Describe the differences between direct and indirect real estate investments.
What is an indenture, and why is it an important document for bond investors?
Why do firms issue bonds with call provisions? During what type of interest rate environment would you expect an issuer to exercise a call? How do firms make callable bonds more attractive to
What is a sinking fund, and why is it an advantage to investors?
Compare Treasury bills, notes, and bonds in terms of maturity and yield.
What is a pass-through certificate, and how is a pass-through both similar to and different from a Treasury security? Give an example of an agency that issues pass-throughs.
What is the value (today's price) of a preferred stock that pays an annual dividend of $3.50 when the required rate of return is 8.5 percent? What is the value when the required rate of return
A $1,000 TIPS (Treasury Inflation-Protected Security) is currently selling for $940 and carries a coupon interest rate of 4 percent. a. If you buy this bond, how much will you receive for your first
How much will a $500 EE savings bond cost when you initially purchase it? Assuming the bond earns 3.6 percent annually, approximately how long will it take for the bond to reach its stated face value?
An investor is considering purchasing a bond with a 5.5 percent coupon interest rate, a par value of $1,000, and a market price of $927.50. The bond will mature in 9 years. Based on this
Three friends, Jodie, Natalie, and Neil, have asked you to determine the equivalent taxable yield on a municipal bond. The bond's current yield is 3.75 percent with 5 years left until maturity. Jodie
An XYZ April 2041 bond with a 5.5 percent coupon interest rate and a par value of $1,000 recently had a price of 95.625. Calculate the following:a. When will the bond mature?b. How much would you
According to Figure 13.3, as a bond approaches maturity, the premium (or discount) reduces to zero. Prove this by calculating the sales price with 7, 5, and 2 years remaining to maturity for the
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