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Questions and Answers of Finance

Distinguish between the types of dividend distributions that mutual funds make. Are these dividends the only source of return for a mutual fund investor? Explain.
Under what 3 conditions would an investment holding be a candidate for sale? What must be true about the expected return on a risky investment, when compared with the return on a low-risk
What is a problem investment? What questions should one consider when analyzing each investment in a portfolio?
What is active portfolio management? Will it result in superior returns? Explain.
Describe the steps involved in measuring portfolio return. Explain the role of the port folio's HPR in this process and explain why one must differentiate between realized and unrealized gains.
Why is comparing a portfolio's return to the return on a broad market index generally inadequate? Explain.
Briefly describe each of the following return measures for assessing portfolio performance and explain how they are used. a. Sharpe's measure b. Treynor's measure c. Jensen's measure (Jensen's alpha)
Why is Jensen's measure (alpha) generally preferred over the measures of Sharpe and Treynor for assessing portfolio performance? Explain.
Explain the role of portfolio revision in the process of managing a portfolio.
What role do an investor's portfolio objectives play in constructing a portfolio?
Explain the role that formula plans can play in the timing of security transactions. Describe the logic underlying the use of these plans.
Briefly describe each of the following plans and differentiate among them. a. Dollar-cost averaging b. Constant-dollar plan c. Constant-ratio plan d. Variable-ratio plan
Describe how a limit order can be used when securities are bought or sold. How can a stop-loss order be used to reduce losses? To protect profit?
Give 2 reasons why an investor might want to maintain funds in a low-risk, highly liquid investment.
Describe the 2 items an investor should consider before reaching a decision to sell an investment.
What is asset allocation? How does it differ from diversification? What role does asset allocation play in constructing an investment portfolio?
Briefly describe the basic approaches to asset allocation: (a) Fixed weightings, (b) Flexible weightings, and (c) Tactical asset allocation.
What role could an asset allocation fund play? What makes an asset allocation scheme effective?
Why is it important to continuously manage and control your portfolio?
What role does current market information play in analyzing investment returns? How do changes in economic and market activity affect investment returns? Explain.
Which indexes can you use to compare your investment performance to general market returns? Briefly explain each of these indexes.
What are indicators of bond market behavior, and how are they different from stock market indicators? Name 3 sources of bond yield data.
Congratulations! Your portfolio returned 11% last year, 2% better than the market return of 9%. Your portfolio had a standard deviation of earnings equal to 18%, and the risk-free rate is equal to
Niki Malone’s portfolio earned a return of 11.8% during the year just ended. The portfolio’s standard deviation of return was 14.1%. The risk-free rate is currently 6.2%. During the year, the
Your portfolio has a beta equal to 1.3. It returned 12% last year. The market returned 10%; the risk-free rate is 6%. Calculate Treynor’s measure for your portfolio and the market. Did you earn a
During the year just ended, Anna Schultz’s portfolio, which has a beta of 0.90, earned a return of 8.6%. The risk-free rate is currently 7.3%, and the return on the market portfolio during the year
Your portfolio returned 13% last year, with a beta equal to 1.5. The market return was 10%, and the risk-free rate 6%. Did you earn more or less than the required rate of return on your portfolio?
Chee Chew’s portfolio has a beta of 1.3 and earned a return of 12.9% during the year just ended. The risk-free rate is currently 7.8%. The return on the market portfolio during the year just ended
The risk-free rate is currently 8.1%. Use the data in the accompanying table for the Fio family€™s portfolio and the market portfolio during the year just ended to answer the questions that
Over the past 2 years, Jonas Cone has used a dollar-cost averaging formula to purchase $300 worth of FCI common stock each month. The price per share paid each month over the 2 years is given in the
Using the data in the following table, assume you are using a constant-dollar plan with a rebalancing trigger of $1,500. The stock price represents your speculative portfolio, and the MM mutual fund
Portfolio A and Portfolio B had the same holding period return last year. Most of the returns from Portfolio A came from dividends, while most of the returns from Portfolio B came from capital gains.
Using the data in the following table, assume you are using a variable-ratio plan. You have decided that when the speculative portfolio reaches 60% of the total, you will reduce its proportion to
John Reardon purchased 100 shares of Tomco Corporation in December 2013 at a total cost of $1,762. He held the shares for 15 months and then sold them, netting $2,500. During the period he held the
Jeff Krause purchased 1,000 shares of a speculative stock on January 2 for $2.00 per share. Six months later on July 1, he sold them for $9.50 per share. He uses an online broker that charges him $10
Jill Clark invested $25,000 in the bonds of Industrial Aromatics, Inc. She held them for 13 months, at the end of which she sold them for $26,746. During the period of ownership she received $2,000
Charlotte Smidt bought 2,000 shares of the balanced no-load LaJolla Fund exactly 1 year and 2 days ago for an NAV of $8.60 per share. During the year, the fund distributed investment income dividends
Linda Babeu, who is in a 33% ordinary tax bracket (federal and state combined) and pays a 15% capital gains rate on dividends and capital gains for holding periods longer than 12 months, purchased 10
Mom and Pop had a portfolio of long-term bonds that they purchased many years ago. The bonds pay 12% interest annually, and the face value is $100,000. If Mom and Pop are in the 25% tax bracket,
On January 1, 2014, Simon Love’s portfolio of 15 common stocks, completely equity-financed, had a market value of $264,000. At the end of May 2014, Simon sold one of the stocks, which had a
Mary and Nick Stalcheck have an investment portfolio containing 4 investments. It was developed to provide them with a balance between current income and capital appreciation. Rather than acquire
Charles Spurge, a mathematician with Ansco Petroleum Company, wishes to develop a rational basis for timing his portfolio transactions. He currently holds a security portfolio with a market value of
What is float? What are its four components? What is the difference between availability float and clearing float?
What is the difference between a ZBA and a controlled disbursement account? Are they direct substitutes?
What are some of the recent developments in the accounts payable and disbursements area? What role does new technology play in fraud prevention in disbursements?
Why are providing liquidity and preserving principal the primary concerns in choosing short-term in-vestments? What guidelines should be included in a short- term investment policy?
What securities are considered the benchmark for money market financial instruments, and why? What are some of the popular non- U. S. Treasury money market instruments?
What is the key base rates used in variable rate short- term borrowing, and how do they factor into the all-in-rate? What other charges might be applicable to short-term borrowing? How do they impact
What activities are involved in cash position management? How does the cash manager monitor and take actions with regard to the end- of- day checking account balances?
How do smaller firms that do not engage in cash position management typically set their target cash balance? What is typically detailed in a bank account analysis statement?
What is the firm’s objective with regard to collection float?
What are the common types of collection systems? What are the benefits of using a lockbox system? How does it work? How can the firm assess the economics of a lockbox system?
Why do firms employ cash concentration techniques? What are some of the popular transfer mechanisms used by firms to move funds from depository banks to their concentration banks?
How can the cash manager model the benefits and costs of various funds transfer mechanisms to assess their economics? How can this analysis be used to determine the minimum transfer amount?
What is the primary purpose of the accounts payable function? Describe the procedures used to manage accounts payable. What are the key differences between centralized and decentralized payables
When is it advantageous for a company to pay early and take an offered cash discount? Under what circumstance would the firm be advised to always take any offered cash discounts?
Briefly describe each of the following funds transfer mechanisms: • Depository transfer check (DTC) • Automated clearinghouse (ACH) debit transfer • Wire transfer Why are wire transfers
Quick Burger Inc., a national chain of hamburger restaurants, has accumulated a $27,000 balance in one of its regional collection accounts. It wishes to make an efficient, cost-effective transfer of
Wachovia Corporation is a major (super regional) U.S. bank. The Wachovia corporate website is located at www.wachovia.com. Among the cash management services available to its business customer are
Describe how a domestic firm might use a forward contract to hedge an economic exposure. Why does uncertainty about the magnitude of the exposure make this difficult?
Consider a U. S. firm that has for many years exported to European countries. How does the creation of the euro simplify or complicate the management of transactions exposure for this firm?
Why does discounting the cash flows of a foreign investment using the foreign cost of capital, then converting that to the home currency at the spot rate, yield the same NPV as converting the
Why is it not surprising to find that the risk premium on the world market portfolio is lower than the domestic risk premium?
Define spot and forward exchange rates. If a trader expects to buy a foreign currency in one month, can you explain why the trader might prefer to enter into a forward contract today rather than
Explain the logic behind each of the four parity relationships.
Explain the role of arbitrage in maintaining the parity relationships.
In what sense is interest rate parity an application of the law of one price?
An investor who notices that interest rates are much lower in Japan than in the United States borrows in Japan and invests the proceeds in the United States. This is called uncovered interest
Distinguish between transactions, translation, and economic exposure.
Who are the major players in foreign currency markets, and what are their motivations for trading? Discuss.
A German company manufactures a specialized piece of manufacturing equipment and leases it to a U.K. enterprise. The lease calls for five end-of-year payments of £1 million. The German firm spent
What are the most important ways that entrepreneurial finance differs from ordinary finance? What special burdens confront financial managers of EGCs?
What type of growth in venture capital funding and investment has China and India experienced during recent years? What is their future outlook for venture capital growth?
Why do firms usually finance intangible assets with equity rather than with debt?
What is an angel capitalist, and how does this type of investor differ from a professional (institutional) venture capitalist?
Why do you think that private limited partnerships have come to dominate the U. S. venture capital industry? Can you think of any weaknesses this organizational form may have as a vehicle for
Why do venture capitalists almost always use staged financing and convertible securities to finance entrepreneurial companies?
Entrepreneurs often refer to venture capitalists as vulture capitalists, due to the amount of equity they demand before investing. Do you think the standard venture capital pricing formula is a
Why do you think European governments and stock exchanges want to promote a vibrant entrepreneurial sector? Can you think of any competitive advantages that may accrue to Europe, due to its
Compare some of the competitive strengths and weaknesses of venture capital, as practiced in Europe, Japan, and Canada, with those of the United States.
How has the European venture capital industry changed over the past ten years? Do you think these changes have made it more or less competitive and efficient?
What are the responsibilities and typical payoff for a general partner in a venture capital limited partnership? Discuss.
Six years ago, High-Tech Fund III made a $3 million investment in Internet Printing Company (IPC) and received 2 million shares of series A convertible preferred stock. Each of these shares is
Harvey Redmond is planning a new business that he expects will grow into a large company within a few years. Harvey’s lawyer has advised him that large companies are usually C-type corporations
Canaday Ltd. has the following receivables balances ($M)Gross Accounts Receivable .....$175Bad Debt Reserve..... (3)Net Accounts Receivable..... $172Two years ago a customer was approved for an
Jacob Cornwall has a business in which he’s invested $250,000 of his own money, which is the firm’s only capital. (There are no other equity investors and no debt.) In a recent year the firm had
During the last year Alpha Co had Net Income of $150, paid $20 in dividends, and sold new stock for $40. Beginning equity for the year was $700. Calculate ending equity.
The Lindscomb family had the following income in 2012:Salaries: Mark..........$63,500Ashley............. 57,900Interest on investments:IBM bonds............ $ 4,750New York City bond......
The Benjamin family had wage earnings of $185,000 in 2012. They received interest of $4,500 on corporate bonds and $1,500 on bonds issued by the state. Their dividend income was $500, and they had a
Joan and Harry Leahy both had income in 2012. Harry made $72,500 in wages. Joan has an incorporated small business that paid her a salary of $50,000. In addition, the business had profits of $15,000,
Harry Swartz wants to invest in a bond and has narrowed his choices down to two issues. The first is offered by Microsoft Corp. and pays an interest rate of 8%. The second option is offered by the
McFadden Corp. reports the following balances on their December 31, 20X2 Balance Sheet:($000)Accounts Payable.......... 60Accounts Receivable....... 120Accumulated Depreciation...350Fixed Assets
Why do we need the quick ratio when we have the current ratio?
Why don't we calculate the total difference in the equity accounts between the beginning and end of the year and consider that difference as a source or use of cash? Why do we similarly exclude the
A company has been growing rapidly for the last three years. It was profitable before the growth spurt started. Although this year's revenues are almost three times those of three years ago, the
You invested $20,000 in the stock of HiFly Inc two years ago. Since then the stock has done very well more than doubling in value. You tried analyze HiFly’s financial statements twice in the last
A group of investors is considering buying the Wheelwright Corporation, but does not want to contribute to the company€™s financial support after the purchase. Wheelwright€™s management has
Notice that the calculations called for here do not involve cost of capital. William Edwards, Inc. (WEI) had one million shares of common stock outstanding on 12/31/20X0. The stock had been sold for
At the close of 20X3, the financial statements of Northern Manufacturing were as follows.In addition, Northern paid dividends of $1.2M and sold new stock valued at $1.0M during 20X3. Use the CASHFLO
Write a program to generate a Statement of Cash Flows yourself. It isn't as hard as you might think. First set up the Income Statement and two Balance Sheets on the spreadsheet just as they appear in

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