Questions and Answers of Introduction Finance Markets

Let $f \in L^{2}([0, T])$, and consider a standard Brownian motion $\left(B_{t}ight)_{t \in[0, T]}$.a) Compute the conditional expectation\[ \mathbb{E}\left[\mathrm{e}^{\int_{0}^{T} f(s) d B_{s}}
Consider two assets whose prices $S_{t}^{(1)}, S_{t}^{(2)}$ follow the Bachelier dynamics\[d S_{t}^{(1)}=\mu S_{t}^{(1)} d t+\sigma_{1} d W_{t}^{(1)}, \quad d S_{t}^{(2)}=\mu S_{t}^{(2)} d
a) Compute the moment generating function\[\mathbb{E}\left[\exp \left(\beta \int_{0}^{T} B_{t} d B_{t}ight)ight]\]for all \(\beta
a) Solve the stochastic differential equation\[\begin{equation*}d X_{t}=-b X_{t} d t+\sigma \mathrm{e}^{-b t} d B_{t}, \quad t \geqslant 0 \tag{4.40}\end{equation*}\]where \(\left(B_{t}ight)_{t \in
Given $T>0$, let $\left(X_{t}ight)_{t \in[0, T)}$ denote the solution of the stochastic differential equation\[\begin{equation*}d X_{t}=\sigma d B_{t}-\frac{X_{t}}{T-t} d t, \quad t \in[0, T)
Exponential Vašíček (1977) model (1). Consider a Vasicek process $\left(r_{t}ight)_{t \in \mathbb{R}_{+}}$ solving of the stochastic differential equation\[d r_{t}=\left(a-b r_{t}ight) d
Cox-Ingersoll-Ross (CIR) model. Consider the equation\[\begin{equation*}d r_{t}=\left(\alpha-\beta r_{t}ight) d t+\sigma \sqrt{r_{t}} d B_{t} \tag{4.45}\end{equation*}\]modeling the variations of a
Show that at any time $T>0$, the random variable $S_{T}:=S_{0} \mathrm{e}^{\sigma B_{T}+\left(\mu-\sigma^{2} / 2ight) T}$ has the lognormal distribution with probability density function\[ x
a) Consider the stochastic differential equation\[\begin{equation*}d S_{t}=r S_{t} d t+\sigma S_{t} d B_{t}, \quad t \geqslant 0 \tag{5.23}\end{equation*}\]where $r, \sigma \in \mathbb{R}$ are
Assume that $\left(B_{t}ight)_{t \in \mathbb{R}_{+}}$and $\left(W_{t}ight)_{t \in \mathbb{R}_{+}}$are standard Brownian motions, correlated according to the Itô rule \(d W_{t} \cdot d B_{t}=ho d
Consider the asset price process $\left(S_{t}ight)_{t \in \mathbb{R}_{+}}$given by the stochastic differential equation\[d S_{t}=r S_{t} d t+\sigma S_{t} d B_{t}\]Find the stochastic integral
Consider $\left(B_{t}ight)_{t \in \mathbb{R}_{+}}$a standard Brownian motion generating the filtration $\left(\mathcal{F}_{t}ight)_{t \in \mathbb{R}_{+}}$and the process \(\left(S_{t}ight)_{t \in
Consider $\left(B_{t}ight)_{t \in \mathbb{R}_{+}}$a standard Brownian motion generating the filtration $\left(\mathcal{F}_{t}ight)_{t \in \mathbb{R}_{+}}$, and let $\sigma>0$.a) Compute the
We consider a leveraged fund with factor $\beta: 1$ on an index $\left(S_{t}ight)_{t \in \mathbb{R}_{+}}$modeled as the geometric Brownian motion\[d S_{t}=r S_{t} d t+\sigma S_{t} d B_{t}, \quad
Consider two assets whose prices $S_{t}^{(1)}, S_{t}^{(2)}$ at time $t \in[0, T]$ follow the geometric Brownian dynamics\[d S_{t}^{(1)}=\mu S_{t}^{(1)} d t+\sigma_{1} S_{t}^{(1)} d W_{t}^{(1)}
Solve the stochastic differential equation\[d X_{t}=h(t) X_{t} d t+\sigma X_{t} d B_{t}\]where $\sigma>0$ and $h(t)$ is a deterministic, integrable function of $t \geqslant 0$.Look for a
Let $\left(B_{t}ight)_{t \in \mathbb{R}_{+}}$denote a standard Brownian motion generating the filtration $\left(\mathcal{F}_{t}ight)_{t \in \mathbb{R}_{+}}$.a) Letting \(X_{t}:=\sigma B_{t}+u t,
Stop-loss/start-gain strategy (Lipton (2001) § 8.3.3. Let $\left(B_{t}ight)_{t \in \mathbb{R}_{+}}$be a standard Brownian motion started at $B_{0} \in \mathbb{R}$.a) We consider a simplified
Consider a risky asset valued $S_{0}=\$ 3$ at time $t=0$ and taking only two possible values $S_{1} \in\{\$ 1, \$ 5\}$ at time $t=1$, and a financial claim given at time $t=1$ byIs $C$
Consider a risky asset valued $S_{0}=\$ 4$ at time $t=0$, and taking only two possible values $S_{1} \in\{\$ 2, \$ 5\}$ at time $t=1$. Find the portfolio allocation $(\xi, \eta)$ hedging
Consider a risky asset valued $S_{0}=\$ 4$ at time $t=0$, and taking only two possible values $S_{1} \in\{\$ 5, \$ 2\}$ at time $t=1$, and the claim payoff We assume that the issuer charges
a) Consider the following market model:b) Consider the following market model:c) Consider the following market model: 8(1) b a (1+r)s()
In a market model with two time instants $t=0$ and $t=1$ and risk-free interest rate $r$, consider- a riskless asset valued $S_{0}^{(0)}$ at time $t=0$, and value \(S_{1}^{(0)}=(1+r)
We consider a riskless asset valued $S_{1}^{(0)}=S_{0}^{(0)}$, at times $k=0$, 1 , with risk-free interest rate is $r=0$, and a risky asset $S^{(1)}$ whose return
a) Consider the following binary one-step model $\left(S_{t}ight)_{t=0,1,2}$ with interest rate $r=0$ and $\mathbb{P}\left(S_{1}=2ight)=1 / 3$.b) Consider the following ternary one-step model
Consider a one-step market model with two time instants $t=0$ and $t=1$ and two assets:- a riskless asset $\pi$ with price $\pi_{0}$ at time $t=0$ and value $\pi_{1}=\pi_{0}(1+r)$ at time
A company issues share rights so that ten rights allow one to purchase three shares at the price of €6.35. Knowing that the stock is currently valued at €8, estimate the price of the right by the
Consider a stock valued $S_{0}=\$ 180$ at the beginning of the year. At the end of the year, its value $S_{1}$ can be either $\$ 152$ or $\$ 203$, and the risk-free interest rate is \(r=3
How do mutually exclusive projects and independent projects differ?
Why is proper management of fixed assets crucial to the success of a firm?
Identify some capital budgeting considerations unique to multinational corporations.
Describe the payback period method for making capital budgeting decisions.
What kinds of financial data are needed to conduct project analysis?
What kinds of nonfinancial information are needed to conduct project analysis?
What is meant by a project’s net present value? How is it used for choosing among projects?
Identify the internal rate of return method and describe how it is used in making capital budgeting decisions.
Find a project’s IRR and MIRR if it has estimated cash flows of $5,500 annually for seven years, if its year-zero investment is $25,000, and the firm’s minimum required rate of return on the
What is a risk-adjusted discount rate (RADR)? How are RADRs determined for individual projects?
Why is depreciation considered a tax shield?
“Our bank will finance the product expansion project with at a loan interest rate of 10 percent. Make sure the project’s cash flow estimates include this interest expense.” Do you agree or
What are the three types of relevant cash flows to be considered in analyzing a project?
How is the stand-alone principle applied when evaluating whether to invest in projects?
What types of cash flows are considered irrelevant when analyzing a project?
Using the income statements from the Mount Lewis Copy Centers for 2016 and 2017 in Problem 17, find the percentage change in sales, EBIT, and net income. Use them to compute the DOL, DFL, and degree
Income statements for Mount Lewis Copy Centers for 2016 and 2017 appear below. Data are in thousands of dollars.a. Compute and interpret the DOL, DFL, and DCL in 2016. Assume the components of the
The following information is from the fi nancial statements of Bagle’s Biscuits:Current Balance Sheet (all numbers are in millions)Total
Below are items from recent financial statements from Moss and Mole Manufacturing:Current Balance Sheet (all numbers are in thousands)Total
The following are balance sheets for the Genatron Manufacturing Corporation for the years 2016 and 2017:a. Calculate the WACC based on book value weights. Assume an after-tax cost of new debt of 8.63
Here are the income statements for Genatron Manufacturing Corporation for 2016 and 2017:Assuming one-half of the general and administrative expenses are fixed costs, estimate Genatron’s DOL, DFL,
Faulkner’s Fine Fries Inc. (FFF) is thinking about reducing its debt burden. Given the following capital structure information and an expected EBIT of $50 million (plus or minus 10 percent) next
Stern’s Stews Inc. is considering a new capital structure. Its current and proposed capital structures are the following:Stern’s Stews’ president expects next year’s EBIT to be $20 million,
If a firm is eligible to receive tax credits, how might that affect its debt use?
How do corporate control concerns affect a firm’s capital structure?
What is meant by the degree of combined leverage?
How is financial leverage created? Describe how the degree of financial leverage is calculated.
Describe how a firm’s business risk can be measured, and indicate how operating leverage impacts business risk.
Describe the term “indifference level” in conjunction with EBIT/eps analysis.
What is EBIT/eps analysis? What information does it provide managers?
Should book value weights or market value weights be used to evaluate a firm’s current capital structure weights? Why?
How does the cost of new common stock differ from the cost of retained earnings?
Describe how the cost of preferred stock is determined.
What is the relationship between a firm’s cost of capital and investor required rates of return?
How did the Fed’s loose money policies after the 2007–2009 Great Recession affect investors?
Explain why determining a firm’s optimum debt/equity mix is important.
The No-Shoplift Security Company is interested in bidding on a contract to provide a new security system for a large department store chain. The new security system would be phased into ten stores
Casey’s Baseball Bats is planning to export their product to the Asian market. They estimate up-front expenses of $1 million this year (year 0) and $3 million next year (year 1). Operating cash
Bart and Morticia, owners of the prestigious Gomez-Addams Office Towers, are concerned about high heating and cooling costs and client complaints of temperature variation within the building. They
Preston Industries’ current sales volume is $100 million a year. Preston is examining the advantages of electronic data interchange (EDI). The technology will allow Preston to electronically
Lisowski Laptops (LL) is examining the possibility of manufacturing and selling a notebook computer that is compatible with PC and Macintosh systems and that can receive television signals. Its
Hammond’s Fish Market purchased a $30,000 fork lift truck. It has a five-year useful life. The firm’s tax rate is 25 percent.a. If the fork lift is straight-line depreciated, what is the firm’s
Suppose the Quick Towing Company purchases a new tow truck. The old truck had a book value of $1,000 and was sold for $1,420. If Quick Towing is in the 34 percent marginal tax bracket, what is the
Explain the process to estimating a bid price by estimating zero NPV cash flow needs.
Explain the process to estimating cash flows for a cost-saving project.
Explain the process to estimating cash flows for a revenue enhancing project.
Why might there be tax implications when an asset is sold at the termination of a capital budgeting project?
What information sources are used to develop estimates for these project components:a. initial outlays?b. operating life?c. salvage value?
When a business firm uses its inventory as collateral for a bank loan, how is the problem of storing and guarding the inventory handled for the bank?
Why would a business use a factor’s services?
Describe how a factor differs from a commercial finance company in terms of accounts receivable financing.
When might a business seek accounts receivable financing?
Under what circumstances would a business secure its financing through a commercial finance company?
What is meant by an unsecured loan? Are these loans an important form of bank lending?
What is net working capital? Briefly describe the financing implications when net working capital is positive.
Of its monthly sales, The Kingsman Company historically has had 25 percent cash sales with the remainder paid within one month. Each month’s purchases are equal to 75 percent of the next month’s
Eastnorth’s suppliers are upset that Eastnorth takes two months to pay its accounts payable; they demand that in the following year Eastnorth pay its bills within 30 days, or one month after
Suppose Eastnorth Manufacturing is planning to change its credit policies next year. It anticipates that 10 percent of each month’s sales will be for cash, two-thirds of each month’s receivables
The following are financial statements for the Genatron Manufacturing Corporation for the years 2016 and 2017:Selected Balance Sheet InformationSelected Income Statement InformationCalculate
Suppose the Robinson Company had a cost of goods sold of $1,000,000 in 2016 and $1,200,000 in 2017.a. Calculate the inventory turnover for each year. Comment on your findings.b. What would have been
The Robinson Company from Problem 2 had net sales of $1,200,000 in 2016 and $1,300,000 in 2017.a. Determine the receivables turnover in each year.b. Calculate the average collection period for each
The Robinson Company has the following current assets and current liabilities for these two years:If sales in 2016 were $1.2 million, sales in 2017 were $1.3 million, and cost of goods sold was 70
What are the benefits to a firm of reducing its working capital?
What characteristics should an investment have to qualify as an acceptable marketable security?
What are the sources of cash outflows from a firm over any time frame?
What are the sources of cash inflows to a firm over any time frame?
Why might firms want to maintain minimum cash balances?
Three sets of information are needed to construct a cash budget. Explain what they are.
What affects the amount of financing provided by accounts payable as viewed in terms of the cash conversion cycle?
Explain how the length of the operating cycle affects the amount of funds invested in accounts receivable and inventories.
Describe how the length of the cash conversion cycle is determined.
Explain how the cash conversion cycle differs from the operating cycle.

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