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theory of corporate finance

Questions and Answers of Theory Of Corporate Finance

Examine the Market-to-Book ratios you calculated for each firm. Which, if any, of the two firms can be considered “growth firms” and which, if any, can be considered “value firms”?6 . Compare
Obtain industry averages for each firm from Reuters.com (http://www.reuters.com/finance/stocks). Enter the stock symbol on top of the page in the “Symbol lookup” and then click the“Ratios”
For each of the four years of statements, compute the following ratios for each firm:Valuation Ratios Price-Earnings Ratio (for EPS use Diluted EPS Total)Market-to-Book Ratio Enterprise
Find historical stock prices for each firm from Yahoo! Finance (http://finance.yahoo.com). Enter your stock symbol, click “Historical Prices” in the left column, and enter the proper date range
Download the annual income statements, balance sheets, and cash flow statements for the last four fiscal years from MarketWatch (www.marketwatch.com). Enter each company’s stock symbol and then go
Find online the annual 10-K report for Peets Coffee and Tea (PEET) for 2008.a. Which auditing firm certified these financial statements?b. Which officers of Peet’s certified the financial
Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for 2008. Answer the following questions from the notes to their financial statements:a. What was Peet’s inventory of green
The balance sheet information for Clorox Co. (CLX) in 2004—2005 is shown here, with data in $ thousands:a. What change in the book value of Cloroxs equity took place at the end of 2004?b. Is
See the cash flow statement here for H. J. Heinz (HNZ) (in $ thousands):a. What were Heinz’s cumulative earnings over these four quarters? What were its cumulative cash flows from operating
Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for 2008. Answer the following questions from their cash flow statement:a. How much cash did Peet’s generate from operating
Repeat the analysis of parts (a) and (b) in Problem 17 for Starbucks Coffee (SBUX). Use the DuPont Identity to understand the difference between the two firms’ ROEs.
Find online the annual 10-K for Peets Coffee and Tea (PEET) for 2008.a. Compute Peet’s net profit margin, total asset turnover, and equity multiplier.b. Use this data to compute Peet’s ROE using
You are analyzing the leverage of two firms and you note the following (all values in millions of dollars):a. What is the market debt-to-equity ratio of each firm?b. What is the book debt-to-equity
Suppose a firms tax rate is 35%.a. What effect would a $10 million operating expense have on this years earnings? What effect would it have on next year’s earnings?b. WTiat effect would a $10
Suppose that in 2010, Global launches an aggressive marketing campaign that boosts sales by 15%. However, their operating margin falls from 5-57% to 4.50% . Suppose that they have no other income,
Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for 2008. Answer the following questions from the income statement:a. What were Peet’s revenues for 2008? By what percentage
In November 2007, Abercrombie and Fitch (ANF) had a book equity of $1458 million, a price per share of $75.01, and 86.67 million shares outstanding. At the same time, The Gap (GPS) had a book equity
In July 2007, Apple had cash of $7.12 billion, current assets of $18.75 billion, current liabilities of $6.99 billion, and inventories of $0.25 billion.a. What was Apple’s current ratio?b. What was
In March 2005, General Electric (GE) had a book value of equity of $113 billion, 10.6 billion shares outstanding, and a market price of $36 per share. GE also had cash of $13 billion, and total debt
Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for 2008. Answer the following questions from their balance sheet:a. How much cash did Peet’s have at the end of 2008?b. What
What was the change in Global Conglomerate’s book value of equity from 2008 to 2009 according to Table 2.1? Does this imply that the market price of Globals shares increased in 2009? Explain.6 .
Consider the following potential events that might have occurred to Global Conglomerate on December 30, 2009. For each one, indicate which line items in Globals balance sheet would be affected and by
Find the most recent financial statements for Starbucks’ corporation (SBUX) using the following sources:a. From the company’s Web page www.starbucks.com (Hint: Search for “investor
WTio reads financial statements? List at least three different categories of people. For each category, provide an example of the type of information they might be interested in and discuss why.
What it is the difference between a firm's gross profit and its net income?
The following quote on Yahoo! stock appeared on February 11, 2009, on Yahoo! Finance:If you wanted to buy Yahoo!, what price would you pay? How much would you receive if you wanted to sell Yahoo!?
What is the difference between a public and private corporation?
What is the most important difference between a corporation and all other organization forms?
What advantage does a stock market provide to corporate investors?
TVD of a Model Problem Analyze whether the upwind scheme (6.22), the Lax–Friedrichs scheme (6.25)and the Lax–Wendroff scheme (6.30) applied to the scalar partial differential equation ut + aux,
Upwind Scheme Apply von Neumann’s stability analysis to∂u∂t + a∂u∂x = b∂2u∂x2 , b> 0 using the upwind scheme for the left-hand side and the centered second-order difference quotient for
PDEs for Asian Optionsa) Use the higher-dimensional Itˆo-formula (→ Appendix B2) to show that the value function V (S,A,t) of an Asian option satisfies dV =∂V∂t + S ∂V∂A + μS ∂V∂S +1
In the three-dimensional (x,y,w)-space let the plane w(x,y) = c1+c2 x+c3 y interpolate the three points (xi, yi, wi), i = 1, 2, 3. Show By inversion, establish a formula for ∇w = (c2,c3)tr.
Prove the equivalence of (5.26) and (5.27).
Prove Lemma 5.9, and for u ∈ C2 the assertion u − wh1 = O(h).
Cubic B-Spline Suppose an equidistant partition of an interval be given with mesh-size h = xk+1 − xk. Cubic B-splines have a support of four subintervals. In each subinterval the spline is a piece
Analytic Method for the American Put(Project) Implement both the Algorithm 4.16 and Algorithm 4.17. Think of how to combine them into a single hybrid algorithm.
Extrapolation of Higher Order Similar as in Section 4.7 assume an error modelη∗ = η(Δ) − γ1Δ2 − γ2Δ3 and three calculated valuesη1 := η(Δ) , η2 := ηΔ2, η3 := ηΔ4.Show
Brennan–Schwartz Algorithm Let A be a tridiagonal matrix as in (C1.5), and b and g vectors. The system of equations Aw = b is to be solved such that the side condition w ≥ g is obeyed
Front-Fixing for American Options Apply the transformationζ := S Sf(t) , y(ζ,t) := V (S,t)to the Black–Scholes equation (4.1).a) Show∂y∂t + σ2 2 ζ2 ∂2y∂ζ2 + $(r − δ) − 1 Sf dSf
Semidiscretization For a semidiscretization of the Black–Scholes equation (1.2) consider the semidiscretized domain 0 ≤ t ≤ T, S = Si := iΔS , ΔS := Smax m, i = 0, 1,...,m for some value
Smooth Pasting of the American Put Suppose a portfolio consists of an American put and the corresponding underlying. Hence the value of the portfolio is Π := V Am P + S, where S satisfies the SDE
Perpetual Put Option For T → ∞ it is sufficient to analyze the ODEσ2 2 S2 d2V dS2 + (r − δ)S dV dS − rV = 0 .Consider an American put with high contact to the payoff V = (K − S)+ at S =
Gauß–Seidel as Special Case of SOR Let the n×n matrix A = ((aij )) additively be partitioned into A = D−L−U, with D diagonal matrix, L strict lower triangular matrix, U strict upper
Boundary Conditions of a European Call Prove (4.19).Hints: Either transform the Black–Scholes equation (4.1) with S := S¯ exp(δ(T − t))into a dividend-free version to obtain the dividend
Crank–Nicolson Order Let the function y(x,τ ) solve the equation yτ = yxx and be sufficiently smooth. With the difference quotientδ2 xwiν := wi+1,ν − 2wiν + wi−1,ν
Continuous Dividend Flow Assume that a stock pays a dividend D once per year. Calculate a corresponding continuous dividend rate δ under the assumptions S˙ = (μ − δ)S,μ = 0, S(1) = S(0) − D
Monte Carlo for European Options Implement a Monte Carlo method for single-asset European options, based on the Black–Scholes model. Perform experiments with various values of N and a random number
Moments of Itˆo Integrals for Weak Solutionsa) Use the Itˆo isometry E⎡⎣ b af(t,ω)dWt 2⎤⎦ = b aEf 2(t,ω)dt to show its generalization Exercise 3.5 By transformation of two
Integration by Parts for Itˆo Integralsa) Show t t0 s dWs = tWt − t0Wt0 − t t0 Ws ds Hint: Start with the Wiener process Xt = Wt and apply the Itˆo Lemma with the transformation y = g(x,t) :=
Itˆo Integral in Equation (3.9)Let the interval 0 ≤ s ≤ t be partitioned into n subintervals, 0 = t1 < t2
Time-Changed Wiener Process For a time-changing function τ (t) set τj := τ (j Δt) for some time incrementΔt.a) Argue why Algorithm 1.8 changes to Wj = Wj−1 + Z√τj − τj−1 (last line).b)
Quality of Fibonacci-Generated Numbers Analyze and visualize the planes in the unit cube, on which all points fall that are generated by the Fibonacci recursion Ui+1 := (Ui + Ui−1) mod 1 .Exercise
Testing the Distribution Let X be a random variate with density f and let a1 < a2 < ... < al define a partition of the support of f into subintervals, including the unbounded intervals xal. Recall
Algorithm for the Radical-Inverse Function Use the idea i = dkbk−1 + ... + d1b + d0 to formulate an algorithm that obtains d0,d1,...,dk by repeated divison byb. Reformulate φb(i) from Definition
Programming Assignment: Normal Deviatesa) Write a computer program that implements the Fibonacci generator Ui :=Ui−17 − Ui−5 Ui :=Ui + 1 in case Ui < 0 in the form of Algorithm 2.7.Tests:
Uniform Distribution For the uniformly distributed random variables (V1, V2) on [−1, 1]2 consider the transformation
Lattice of the Linear Congruential Generatora) Show by induction over j Ni+j − Nj = aj (Ni − N0) mod Mb) Show for integer z0,z1,...,zm−1
Deficient Random Number Generator For some time the generator Ni = aNi−1 mod M, with a = 216 + 3, M = 231 was in wide use. Show for the sequence Ui := Ni/M Ui+2 − 6Ui+1 + 9Ui is integer!What does
Consider the random number generator Ni = 2Ni−1 mod 11. For (Ni−1,Ni) ∈{0, 1,..., 10}2 and integer tupels with z0 + 2z1 = 0 mod 11 the equation z0Ni−1 + z1Ni = 0 mod 11 defines families of
General Black–Scholes Equation Assume a portfolioΠt = αtSt + βtBt consisting of αt units of a stock St and βt units of a bond Bt, which obey dSt = μ(St,t)dt + σ(St,t)dWt dBt = r(t)Bt dt
Positive Itˆo Process Let Xt be a positive one-dimensional Itˆo process for t ≥ 0.Show that there exist functions α and β such that dXt = Xt(αt dt + βt dWt)
Anchoring the Binomial Grid at K The equation (1.10) has established a kind of symmetry for the grid. As an alternative, one may anchor the grid in another way by choosing (for even M)S0uM/2dM/2 = K
Solution to the Binomial Model Derive from equations (1.5), (1.9) and ud = γ for some constant γ (not necessarily γ = 1 as in (1.10)) the relation u = β + β2 − γ for β := 1 2(γe−rΔt +
Return of the Underlying Let a time series S1,...,SM of a stock price be given (for example data in the domain www.compfin.de).The simple return
Analytical Solution of Special SDEs Apply Itˆo’s lemma to showa) Xt = expλWt − 1 2λ2t solves dXt = λXt dWtb) Xt = exp(2Wt − t) solves dXt = Xt dt + 2Xt dWt Hint: Use suitable functions g
a) Suppose that a random variable Xt satisfies Xt ∼ N (0,σ2). Use (B1.4)to show E(X4 t )=3σ4 .b) Applya) to show the assertion in Lemma 1.9,
Limiting Case of the Binomial Model Consider a European Call in the binomial model of Section 1.4. Suppose the calculated value is V (M)0 . In the limit M → ∞ the sequence V (M)0 converges to the
Implementing the Binomial Method Design and implement an algorithm for calculating the value V (M) of a European or American option. Use the binomial method of Algorithm 1.4.INPUT: r (interest rate),
Implied Volatility For European options we take the valuation formula of Black and Scholes of the type V = v(S,τ,K,r,σ), where τ denotes the time to maturity, τ := T −t.For the definition of
Calculating the Sample Variance An estimate of the variance of M numbers x1,...,xM is s2 M := 1 M − 1 Mi=1(xi − x¯)2, with ¯x := 1 MM i=1 xi The alternative formula
Put-Call Parity Consider a portfolio consisting of three positions related to the same asset, namely, one share (price S), one European put (value VP), plus a short position of one European call
8%. Using the information provided in Questions 1 and 2, can you identify an arbitrage opportunity? What is the potential gain for the arbitrageur?
8%–3
A market trader is offering a $500m loan agreement in 3 months, for a period of 3 months on the following terms: 3
8%.e The euro is currently trading at $1.0210/20.e The euro is trading at 6 months at $1.0150/60.
Calculate the 6-month interest rate of the dollar on the basis of the following information:e The 6-month euro rate is equal to 4
8–4%.e The euro is currently trading at $1.0210/20.
8%.e The 3-month dollar rate is equal to 3
8–4
Calculate the future buy and sell price, at 3 months (dollar against euro) using the following information:e The 3-month euro rate is equal to 4
Should traders take advantage of any arbitrages that they may detect on the markets?
Should corporate treasurers take advantage of any arbitrages that they may detect on the markets?
Can you provide examples or hedging products used by ordinary people?
What role does a clearinghouse play?
A Portuguese company imports maize from Mexico, which it in turn exports to Canada. The company pays and is paid at 3 months (the maize is in fact shipped direct from Mexico to Canada). Should it buy
What are the four financial risks that companies are exposed to?
What do you think of the following statement: ‘‘off-balance-sheet financing only fools those who want to be fooled’’?
What is a long-term debt? What is a long-term operating lease? Explain why accounting regulators are seeking to harmonise the treatment of long-term operating leases.
In the area of off-balance-sheet financing, is the predominance of form over substance a feature of IASB or US GAAP?
What is the main difference between property leasing and equipment leasing?
What advantages are there, on a macroeconomic level, to off-balance-sheet financing?
Balzac was already using off-balance-sheet financing by discounting bills. However, consolidated balance sheets only came into being in the early 20th century. State your views.
Is off-balance-sheet financing a fraudulent practice?
Does off-balance-sheet financing create value?
Give countries which have creditor-friendly bankruptcy procedures.
What are for shareholders the pros of the creditor-friendly bankruptcy procedure?
How can bankruptcy play a role in the survival of the company?
Can an LBO be carried out on a cereals trader?
Can an LBO be carried out on an Internet company?

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