Questions and Answers of Introduction Finance Markets

Compute the financial ratios for Eastnorth Manufacturing’s industry. Using Eastnorth’s ratios from Problem 12, graph the firm’s and industry ratios as we have done in this chapter. Analyze
Compare the reasons for the changes in return on equity for Eastnorth Manufacturing and its industry.
Following are the consolidated financial statements for Eastnorth Manufacturing’s industry. Use DuPont analysis on the industry financial statements to determine why industry return on equity
Below are financial statements for Eastnorth Manufacturing. After computing the ratios we discussed in this chapter, discuss strong and weak points of Eastnorth’s performance. December 31 2017
Genatron wants to estimate what will happen to its income before interest and taxes if its net sales change from the 2017 level of $1,500,000. Refer to Genatron’s 2017 income statement, shown in
This problem uses the financial statements for the Genatron Manufacturing Corporation for the years 2017 and 2016 from Problem 6.Data from Problem 6a. Calculate Genatron’s dollar amount of net
Following are financial statements for the Genatron Manufacturing Corporation for 2017 and 2016.a. Apply DuPont analysis to the 2017 and 2016 financial statements data.b. Explain how financial
Following are selected financial data in $ thousands for the Hunter Corporation:a. Calculate Hunter’s rate of return on total assets in 2017 and in 2016. Did the ratio improve or worsen?b. Diagram
The Dayco Manufacturing Company had the following financial statement results for last year. Net sales were $1.2 million with net income of $90,000. Total assets at year-end amounted to $900,000.a.
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
The Robinson Company has the following current assets and current liabilities for these two years:a. Compare the current ratios between the two years.b. Compare the acid test ratios between 2016 and
What does a firm’s degree of operating leverage (DOL) indicate?
What is the purpose of knowing the break-even point?
What is cost-volume-profit analysis? How can a firm use it?
Explain how internally generated funds are used to reduce the need for external financing to fund asset investments.
How is the DuPont system related to both the balance sheet and the income statement?
What do market value ratios indicate? Identify some market value ratios.
What do profitability ratios indicate? Identify some measures of profitability.
What do asset management ratios indicate? Identify some basic asset management ratios.
What do liquidity ratios indicate? Identify some basic liquidity ratios.
Which type or category of ratios relates stock market information to financial statement items?
Identify the types of ratios that are used to analyze a firm’s financial performance based on its income statements and balance sheets.
List some reasons why financial statement analysis is conducted. Identify some of the participants that analyze firms’ financial statements.
Assume that a corporation purchases a new piece of equipment for $90,000. The equipment qualifies for a three-year class life for depreciation purposes.a. What is the dollar amount of depreciation
Assume a corporation earns $75,000 in net income.a. Determine the firm’s income tax liability.b. Calculate the firm’s average income tax rate.
Find the annual depreciation expenses for the following items:a. Original cost is $35,000 for an asset in the three-year class.b. Original cost is $70,000 for an asset in the five-year class.
What would the tax obligation be for a corporation with pretax earnings of the following?a. $60,000b. $150,000c. $500,000?d. What would be the personal tax obligation of a person fi ling her taxes
Determine the marginal and average tax rates under the tax law for corporations with the following amounts of taxable income:a. $60,000b. $150,000c. $500,000.
What is meant by the statement that depreciation provides a tax shield? Explain how this works.
Corporate tax rates vary with the amount of taxable income. What is the range (lowest and highest) of corporate tax rates in the United States?
Why is it said that the personal income tax rate in the United States is progressive?
Using the financial statements below,a. Compute common-size financial statements.b. Put together a statement of cash flows of the firm. Where did the firm invest funds during the year? How did it
Use the following information to construct an income statement:Cost of goods sold...............................................$684,000Gross
Use your knowledge of income statements to fill in the missing items:SalesCost of goods sold.......................................$575,000Gross
Use your knowledge of balance sheets to fill in the missing amounts:AssetsCash.......................................................................$50,000Accounts
Use your knowledge of balance sheets to fill in the missing amounts:AssetsCash..................................................................$10,000Accounts
Briefly describe the financial responsibilities undertaken by a firm’s treasurer.
What are the responsibilities of a firm’s controller?
What are the two main solutions for reducing the adverse effects of agency problems?
Describe the financial goal espoused by business firms.
What is a statement of cash flows? What are the three standard sections contained in a statement of cash flows?
How do the financial markets accommodate the needs of risky firms and safe firms?
Stevens Incorporated’s stock has a 14 percent return, a beta of 0.85, and the market return is 15 percent.a. What was the risk-free rate in the economy for the year?b. The stock market of another
Using your answers to Problems 4a and 4b, estimate your portfolio’s expected return if the security market line is estimated as E(Ri) = 5.2 + 8.4(????i).a. Estimate the beta of your fund holdings
You’ve collected data on the betas of various mutual funds. Each fund and its beta is listed below:Mutual Fund BetaWeak
As mentioned, spreadsheets can do the work for us of computing beta. Use Excel’s “slope” function to estimate the beta of Microsoft using the data in Table LE12.1. Use the “intercept”
Below is nine months’ return data for Walgreens and the S&P 500.a. Estimate the intercept (alpha) and beta for Walgreens stock using spreadsheet functions.b. Interpret what the slope estimate
Stock market forecasters are predicting the stock market will rise 5 percent next year. Given the beta of each stock below, what is the expected change in each stock’s value?Firm
Based upon your answers to Question 1, which asset appears riskiest based on standard deviation? Based on coefficient of variation? Asset Annual Returns A 5%, 10%, 15%, 4% B -6%, 20%, 2%, –5%, 10%
From the information below, compute the average annual return, the variance, standard deviation, and coefficient of variation for each asset. Annual Returns 5%, 10%, 15%, 4% -6%, 20%, 2%, –5%, 10%
Define a portfolio, and describe how the expected return on a portfolio is computed.
Explain the historical relationships between return and risk for common stocks versus corporate bonds.
What sources of risk does a firm face, and which of those sources are reflected on the firm’s income statement?
Business risk has three possible sources. What are they?
What is the coefficient of variation? How is it used as a measure of risk?
Boneyard Biscuits’ Dutch auction for an IPO was a great success. The firm offered 100 million shares. Bids appear below.a. What is the clearing price?b. What options do Boneyard and its
Below are the results of a Dutch auction for an IPO of Bagel’s Bagels, a trendy bagel and coffee shop chain. Bagel’s is offering 50 million shares.a. What will be the clearing price?b. How many
Between 2007 and 2014, the costs of unethical behavior in investment banks (fines, lawyer costs, trading losses) were estimated at over $100 billion, about 6.6 percent of industry revenue. Will this
Describe buying on margin.
What risk does a zero-coupon bond address?
Following are the cash flows for three investments (originally presented in end-of-chapter problem 25) that actually occur at the beginning of each year rather than at the end of each year.a. Find
Use a financial calculator to solve for the interest rate involved in the following future value of an annuity due problem. The future value is $57,000, the annual payment is $7,500, and the time
What is the present value of a five-year lease arrangement with an interest rate of 9 percent that requires annual payments of $10,000 per year with the first payment being due now?
Describe the process for solving for the time period in present and future value problems.
What role did individuals play in the development of the 2007–08 financial crisis?
Identify and briefly describe the financial functions in the financial system.
Determine the intrinsic values of the following put options when the stock is selling at $63 just prior to expiration of the options.a. $55 put priceb. $65 put pricec. $75 put price
Determine the profit (or loss) to a call buyer and a call writer for the following call options when the stock is selling at $32 just prior to expiration of the options and the option premium is
Determine the profit (or loss) to a put buyer and a put writer for the following put options when the stock is selling at $63 just prior to expiration of the options and the option premium is $3.a.
Currently, the price of Mattco stock is $30 a share. You have $30,000 of your own funds to invest. Using the maximum margin allowed, what is your percentage profit or loss under the following
The four stocks below are part of an index. Use the information below:a. Compute a price-weighted index by adding their prices at time t and time t + 1. What is the percentage change in the index?b.
The Quad Index is comprised of four stocks: Uno, Dos, Tres, and Fore.a. Given the data below on the number of shares outstanding and their share prices at time (t) and time (t + 1), what is the
A U.S. firm wants to raise $10 million of capital so it can invest in new technology. How much will it need to raise to net $10 million using the average costs of raising funds in the chapter?
In late 2014, you purchased the common stock of a company that has reported significant earnings increases in nearly every quarter since your purchase. The price of the stock increased from $12 a
Briefly describe what is meant by a derivative security.
Determine the intrinsic values of the following call options when the stock is selling at $32 just prior to expiration of the options.a. $25 call priceb. $30 call pricec. $35 call price
Briefly describe how securities are valued.
What is meant by the yield to maturity (YTM) on a bond?
Lerman Company has preferred stock outstanding. It pays an annual dividend of $10. If its current price is $70, what discount rate will investors use to value the stock?
What is a round lot of common stock?
How does a Treasury Inflation Protected Security (TIPS) bond diff er from the typical U.S. Treasury security?
Given the information below, compute annualized returns: Income Purchase Price Сштеnt Time Asset Price Received Period $ 20 $ 26 18 75 weeeks 3 months 2 years 8 months $2 15 0.40 150 130 3.00 D
Can only large institutional investors purchase bonds? Explain.
Given the information below, compute annualized returns: Price Initial Price Time Period 15 months 11 months Income Asset Change $ 2 $ 6 10 $29 40 B 70 30 7 years 24 months 50 20 -8 D
A credit card advertisement states that the annual percentage rate is 21 percent. If the credit card requires quarterly payments, what is the effective annual rate of interest on the loan?
You have recently seen a credit card advertisement stating that the annual percentage rate is 12 percent. If the credit card requires monthly payments, what is the effective annual rate of interest
Describe how the present value of an annuity can be found.
What is an ordinary annuity? What is an annuity due?
Assume you are planning to invest $5,000 each year for six years and will earn 10 percent per year. Determine the future value of this annuity if your first $5,000 is invested at the end of the
Describe the process for solving for the interest rate in present and future value problems.
Explain simple interest.
Assume you are planning to invest $5,000 each year for six years and will earn 10 percent per year. Determine the future value of this annuity due problem if your first $5,000 is invested now.
Go to the Federal Reserve website, http://www.federalreserve.gov. Go to “Economic Research and Data,” and access “Consumer Credit.” Determine current interest rates charged by finance
Assume you are planning to invest $100 each year for four years and will earn 10 percent per year. Determine the future value of this annuity due problem if your first $100 is invested now.
How can a default risk premium change over time?
What is meant by default risk and a default risk premium?
Describe the process by which inflation took place historically before modern times.
The interest rate on a 20-year Treasury bond is 9.25 percent. A comparable maturity, Aaa-rated corporate bond is yielding 10 percent. Another comparable maturity, but lower-quality corporate bond has
What is the tax status of income from federal securities?
Describe the dealer system for marketable U.S. government securities.

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