Questions and Answers of Cost Of Capital In Managerial Finance

What changes in the financial markets' customer base are underway? What are the implications of these projected changes for managers of financial-service institutions?
Explain the reasoning behind the life-cycle hypothesis. How will the life-cycle idea affect the financial system of the future, in your opinion? Why?
What is meant by the term market broadening? Why is this phenomenon taking place inside today's financial marketplace? In your opinion will it continue?
Why are financial innovation and deregulation significant factors in today's money and capital markets? In your opinion are they likely to be important to the future of the financial system?
Explain the meaning of the term financial innovation. How about deregulation? Privatization? Service proliferation? Consolidation? Convergence?
You will learn how your behavior and decisions, along with millions of others, may play an important role in shaping the future of the financial system.
You will learn about recent trends in the financial system and how they may affect each one of us in the future, both personally and professionally.
You will explore the economic, demographic, social, and technological forces reshaping financial institutions, financial markets, and the financial system today.
(Appendixes A) UNCOLLECTIBLE ACCOUNT EXPENSE: AGING METHOD. Glencoe Supply had the following accounts receivable aging schedule at the end of a recent year: LO6
3A-5. Discuss the principal limitations of flow of funds data. Why must a user of flow of funds information keep these limitations in mind?
3A-4. What is a sources and uses of funds statement? Why is it important?
3A-3. How are the Flow of Funds Accounts constructed?
3A-2. Compare and contrast the Flow of Funds Accounts with the National Income and Product Accounts. What types of information does each system of accounts provide that could be useful for making
3A-1. What is meant by the term social accounting? Why is such an accounting system needed?
7. Based on the material in the appendix to this chapter construct sources and uses of funds statements for each sector and for the whole economy using the following information:
6. In this chapter we discussed three different forms or levels of market efficiency.Refer to the appropriate forms of market efficiency in answering the following questions:
5. The following situations may be covered by insider trading laws in the United States. Examine each situation described and indicate whether, in your opinion, a violation of insider trading laws
4. In the appendix to this chapter (especially Exhibit 3A.2 ) you are given household balance sheet information relating to the U.S. household sector’s financial assets and liabilities. Households
3. Insider trading by corporate executives that yields abnormal profits:a. is a violation of the semistrong form of the efficient market hypothesis (EMH) and is subject to investigation by the
2. A manager of Accurate Info, Inc., decides to purchase a golf membership for the senior executives of his firm. If he does not believe that this decision will raise shareholder value, then his
1. Which is true? Trading on inside information would not yield excess returns to investors if the stock market:a. were efficient according to the weak form of market efficiency, but not efficient
13. Why would information about the global and domestic economies be of assistance to investors in stocks, bonds, and other financial assets?
12. Where could you go to gather information about the global economy?
11. If you wanted to gather information about the state of the U.S. economy, which information sources would likely be most helpful to you?
10. Suppose you were planning to take a job with a particular company. What would you want to know about the company and where could you find that information?
9. Suppose you wanted to evaluate the financial condition of a business firm. What major sources exist that could assist you in getting that kind of information?
8. If you needed to gather information for a possible stock or bond purchase, where would you go to get such information? What are the principal sources to check?
7. What steps have been taken recently to promote greater accuracy and reliability of information concerning the financial marketplace and the valuation of individual assets?
6. As you look at the real world around you, do you see examples of what seem to be efficient markets? Can you detect any real-world examples of what seem to be informational asymmetries? How did you
5. What does it mean to say a financial asset is "temporarily overpriced" or "temporarily underpriced"? How can such a situation happen? Why is such overpricing or underpricing likely to be only
4. Explain what is meant by informational asymmetries. What problems can these asymmetries create for participants in the money and capital markets?
3. Carefully explain what is meant by the term efficient market. Are there different levels of market efficiency? What are these levels?
2. Can you explain why financial information that is accurate and reliable is of great significance to government policymakers and regulators within the financial system?
1. Why is the availability and reliability of financial information important to both borrowers and lenders of funds? What can happen when relevant information is missing?
In an appendix to the chapter you will learn about the Flow of Funds Accounts of the United States and discover what is meant by “social accounting.”
You will understand how any individual or institution active in the financial marketplace can keep track of the prices of financial assets, interest rates, and other financial variables.
You will discover why the efficient distribution of information within the financial system is so important and what can happen when relevant financial information is not readily available to all
You will be able to identify the most important sources of information about the money and capital markets and the financial system.
7. Jack and Jill are small business owners who run a hot dog stand licensed to operate outside a business shopping district. They have been so successful that they believe a second hot dog stand in
6. Marvin purchases a $2,000 computer online using his credit card. His wife, Jane, purchases an identical computer with a check. For Marvin and Jane's combined household balance sheet. What is
5. A household receives $6,000 in income for the month of September. Which of the following could have been true of the household's financial assets and liabilities (debt) if its total expenditures
4. What would happen to the purchasing power of the U.S. dollar if the base period for the cost of living index were 1980 = 100 and the index reached the following levels in the indicated years?a.
4. ITT Corporation in the most recent period reported current sales receipts of$542 million, current operating expenditures of $577 million, and net new debt issued of $5 million. What change in
2. In this chapter, a number of different types of financial transactions were discussed: direct finance, semidirect finance, indirect finance (intermediation), disintermediation and
1. In a recent year, the various sectors of the economy listed below reported the following net changes in their financial assets and liabilities (measured in billions of dollars):
20. Explain the difference between a bank-dominated financial system and a market-dominated financial system. What trends in the structure of the financial system appear to be ongoing in the more
19. What is disintermediation and why is it important? How has disintermediation changed in recent years? What is meant by the term reintermediation?
18. What factors influence the particular financial assets each financial institution acquires?
17. Which financial institutions are the largest within the financial system? Why do you think this is so?
16. In what different ways are financial institutions classified or grouped? Why are such classifications or groupings important in helping us understand what different financial institutions do and
15. What are the essential differences between primary and secondary securities? Why are these instruments important to the operation of the financial system?
14. In the evolution of the financial system, which do you think came first-direct, indirect, or semidirect finance? Why do you think this is so?
13. What is direct finance? Semidirect finance? Indirect finance?
12. Would you expect to find a relationship between money supply growth and inflation or deflation? What kind of relationship?
11. Can you distinguish between inflation and deflation? What do they have to do with money, if anything?
10. Does money have any serious limitations as a financial asset? What are these limitations?
9. Explain what money is. What are its principal functions within the system of money and capital markets? within the economy?
8. Which were you last year-a deficit-, surplus-, or balanced-budget unit? Why is it important to know?
7. What do the following terms mean? Deficit-budget unit (DBU) Surplus-budget unit (SBU) Balanced-budget unit (BBU)
6. What is the relationship between the process of creating financial assets and liabilities and the acts of saving and investment? Why is that relationship important to your financial and economic
5. When a business, household, or unit of government is in need of additional funding, what are its principal alternatives? What factors should these different economic units consider when they have
4. What is the difference between internal finance and external finance?
3. Carefully explain why the volume of financial assets outstanding must always equal the volume of liabilities outstanding.
2. How do financial assets come about within the functioning of the financial system?
1. Exactly what do we mean by the term financial asset?
You will examine the important jobs carried out by financial intermediaries in lending and borrowing and in creating and destroying financial assets.
You will explore the critical roles played by money within the financial system and the linkages between money and inflation in the prices of goods and services.
You will discover the nature and characteristics of financial assets —how they are created and destroyed by decision makers within the financial system.
You will see the most important channels through which funds flow from lenders to borrowers and back again within the global system of money and capital markets.
3. One of the world's most important financial markets that we will study throughout this book is the market for U.S. Treasury securities. It is important because it is one of the few default-free,
2. A large share of household wealth is held in the form of corporate stock. How much wealth does the entire stock market represent? To find an approximate answer, go to the Web site for Wilshire
8. Your text defines the wealth of a business firm as the sum of all its assets.To determine its net wealth (or total equity) you have to subtract the firm’s liabilities from its assets. Net wealth
7. One definition of pure arbitrage is to combine a series of investments with a series of debts such that the net dollar investment is zero, no risk is taken, and a profit is made. How does this
6. At the end of the calendar year, a firm has total financial assets amounting to $3.78 billion, while its total liabilities are $3.63 billion. What is this firm's net financial wealth? If the firm
5. Classify the market in which each of the following financial transactions takes place as: (a) money versus capital; (b) primary versus secondary; (c) open versus negotiated; and (d) spot versus
4. Roberto begins the year with $5,000 in a savings account earning a 6 percent interest return annually. He decides to add $1,000 to that savings account today and he assumes interest rates will not
16. George Wilkins checked the spreadsheet where he keeps track of his assets and liabilities. He discovered that (i) he owes $80,000 on his house, which he believes to be worth $150,000; (ii) his
The change in a household’s wealth over a quarter is given by its wealth at the beginning of the quarter plus its savings during the quarter.
A household’s current savings includes its current purchases of corporate stock as well as prior holdings of corporate stock and its current investment includes the equity it currently has in its
15. None of the following statements are correct. In each case, identify the error and correct the statement.
14. What is meant by the dynamic financial system? What trends appear to be reshaping the system?
13. What are some of the forces that appear to tie all the financial markets together and often result in common movements in prices and interest rates across the whole financial system?
12. If we follow the money and capital markets around the world each day it soon becomes apparent that interest rates and asset prices in different markets tend to move together, albeit with leads
11. Can you distinguish between the following institutions? Money market versus capital market Open market versus negotiated market Primary market versus secondary market Spot market versus forward
10. Can you explain what factors determine the current volume of financial wealth and net financial wealth each of us has?
9. What is net financial wealth? What does it reveal about each of us?
8. What exactly do we mean by the term wealth? Why is it important?
7. Why is each function of the financial system important to households, businesses, and governments? What kinds of lives would we be living today if there were no financial system or no financial
6. What seven vital functions does the financial system of money and capital markets perform?
How and why are savings and investment important determinants of economic growth? Do they impact our standard of living? How?
What exactly is savings? Investment? Are these terms often misused by people on the street? Why do you think this happens?
What are the principal functions or roles of the global financial system? How do the money and capital markets fulfill those roles or functions?
What are the principal links between the financial system and the economy? Why is each important to the other?
Why is it important for us to understand how the global financial system works?
The Dynamic Financial System: Key Emerging Trends
Factors Tying All Financial Markets Together
Types of Financial Markets within the Global Financial System
Wealth, Liquidity, Credit, Payments, Risk Protection, and Pursuing Public Policy
Functions of the Money and Capital Markets: Savings,
The Nature of Financial Claims and Money and Capital Markets

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