Exam 1 390 pt 2

when a corporation is formed, it is granted which of the following rights?

legal powers to sue, provincial citizenship for jurisdictional purposes, & the ability to issue stock

what are you looking for in balance sheet analysis

liquidity (w/o significant loss in value), debt vs equity, & value vs cost (GAAP --> book & market value)

Beta

market beta is always 1 higher than 1 shows that it is risker than the market. lower than 1 shows that it is less risky than the market.

which of the following, according to the textbook, are possible financial goals for a company

minimize costs, survival, maximize profits

you find a zero coupon bond with a par value of 10,000 and 13 years to maturity. if the yield to maturity on this bond is 4.5%, what is the dollar price of the bond? assume semiannual compounding periods

n=26 i/y= 2.25% fv= 10000 --> pv= -5607.2997

agency relationship

principal hires an agent to represent his/her interest stockholders (principals) hire managers (agents) to run company

the 1934 securities exchange act deals with the important issue of __________trading

insider

you own a stock portfolio invested 20% in stock q, 30% in stock r, 15% in stock s, and 35% in stock t. the beta for these stocks are .75, 1.90, 1.38, & 1.16. what is the portfolio beta?

(.20*.75)+.(30*1.90)+(.15*1.38)+(.35*1.16) = 1.333

Regulations- Securities Act ('33) & Securities Exchange Act ('34)

-issuances of securities ('33) -creation of SEC & reporting requirements ('34)

a stock has an expected return of 10.9%. its beta is .9. the expected return on the market is 11.8%. what is the risk free rate?

.109 = r + .9 * (.118-r) ..109 = r + .1062 - .9r .0028 = .1r =2.8%

cash flows from the acquisition and sale of fixed assets are located in the ________ activities section of the accounting statement of cash flows

investing

the real rate is 2.25% and the inflation rate is 3.2%. what rate would you expect to see on a treasury bill?

5.52% (1+ nominal rate) = (1.0225) * (1.032) -1

what is the price of a 20 year zero coupon bond paying 1000 at maturity assuming semiannual compounding if the ytm is 6%, 8%, 10%

6% fv=1000, i/y=3% n=40 --> pv=306.56 8% = 208.29 10% = 142.05

a stock has a beta of 1.15, the expected return on the market is 11.1%, and the risk free rate is 3.8%. what must the expected return on the stock be?

= (.038) + (.111-.038) * 1.15 = 12.195%

you own a portfolio that has 3100 invested in stock a and 4600 invested in stock b. if the expected return on these stocks are 9.8% and 12.7%, what is the expected return on the portfolio

A: 3100/(3100+4600) = .402597 B: 4600/(3100+4600) = .597403 return on portfolio: .402597 (.098) + .597403 (.127) = 11.5325%

What types of bonds are most sensitive to interest rate changes?

LT bonds & low coupon bonds

the fisher effect hypothesizes that the real rate of return _______

is invariant to the rate of inflation

laurel inc. and hardy corp both have 5.8% coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The laurel inc., bond has 3 years to maturity, whereas the hardy corp bond has 20 years to maturity. if the interest rates suddenly rise by 2%, what is the % change in the price of these bonds? if the interest rates were to suddenly fall by 2% instead, what would the % change in the price of these bonds be then?

a. laurel: i/y= 3.9% n=6 pmt=29 fv= 1000 --> pv= -947.41 (947.41-1000)/1000 = -5.259% hardy: i/y= 3.9% n= 40 pmt= 29 fv=1000 --> pv= -799.09 (799.09-1000)/1000 = -20.091% b. laurel: i/y=1.9% n=6 pmt=29 fv=1000 --> pv= -1056.20 (1056.20-1000)/1000 = 5.62% hardy: i/y= 1.9% n= 40 pmt= 29 fv= 1000 --> pv= - 1278.41 (1278.41-1000)/1000 = 27.831%

alesha inc. has current assets of 6000, net fixed assets of 23,200, current liabilities of 5600, and long-term debt of 13,600. what is the value of shareholders equity account for this firm? how much is net working capital?

a. 10,000 = (6000+23200)-(5600+13600) b. 400 = 6000-5600

a portfolio invested in 15% in stock g, 60% in stock j, and 25% in stock k. the expected returns on these stocks are 9%, 11%, and 14%. what is the expected return

g: 15% * 9% = 1.35% j: 60% *11% = 6.60% k: 25% * 14% = 3.5% expected return: 1.35% + 6.60% + 3.50% = 11.45%

what does a balance sheet reflect about a firm

accounting value on a specific date

what does the normal return depend on

all relevant info available to shareholders

liquidity refers to the ease of changing ____

assets into cash

What are junk bonds and why are investors interested in them?

bonds with low bond ratings. investors are interested because a high level of risk has the potential for a high return

on the balance sheet, assets are listed at their ____ value

book

why would you not what a perfectly positive correlation between stocks?

both stocks moving in the same direction indicates that there would be no benefits of diversification

which of the following are true about expected return?

can be calculated as the average of the returns in previous periods. actual return can be higher/lower than expected return. reflects an estimate that can be based on sophisticated forecasts of future outcomes

which of the following are general ways stockholders control the agency relationship with management

compensation & replacement

agency problem

conflict interest between principal & agent --> direct impact on value

which of the following generally report to the CFO

controller & treasurer

two ways to measure the relationship between the returns of two securities are ______ and ______.

covariance : correlation

hacker software has 5.9% coupon bonds on the market with 13 years to maturity. the bonds make semiannual payments and currently sell for 104% of par. what is the current yield on the bonds? what is the ytm? what is the effective annual yield?

current yield: pv= 1040 pmt=59 59/1040 = 5.6731% ytm: n= 26 pv= -1040 fv=1000 pmt=29.5 --> i/y = 2.73306% * 2 =5.46612% effective annual yield: ((1+(.0547/2))^(2)-1) = 5.5448%

The difference between ROA and ROE reflects the use of ______ financing

debt

a one time profit from an asset sale makes it _____ to compare financial statements

difficult

why are the deviations of returns squared when computing variance?

ensures that the sum of the deviations is a positive number

two ways to measure beta

equation & regression analysis

Rhiannon corporation has bonds on the market with 11.5 years to maturity, a ytm of 6.8%, a par value of 1000, and a current price of 1055. the bonds make semi annual payments. what must the coupon rate be on these bonds

fv= 1000 pv= -1055 n = 23 i/y = 3.4 --> pmt=37.49 *2 = 74.97 74.97/1000 = 7.50%

a Japanese company has bond outstanding that sells for 106% of its 100,000 par value. the bond has coupon rate of 2.8% paid annually and matures in 17 years. what is the ytm of this bond?

fv= 100000 n=17 pmt=2800 pv= -106000 --> i/y = 2.3672%

yan yan corp has a 2000 par value bond outstanding with a coupon rate of 4.9% pain semiannually and 13 years to maturity. The yield to maturity of the bond is 5.4%. what is the dollar price of the bond

fv= 2000 pmt=49 i/y= 2.7% n= 26 --> pv= 1907.45

watters umbrella corp issued 15 year bonds two year ago at a coupon rate of 6.2%. the bonds make semi annual payments. if these bonds currently sell for 98% of par value, what is the ytm

pv= -980 fv=1000 pmt=31 n=26 --> i/y = 3.21466 *2 = 6.429%

Treasury bills are currently paying 4.15% and the inflation rate is 2.7%. what is the approximate real rate of interest? what is the exact real rate?

real rate of interest = 1.45% --> 4.15-2.7 exact real rate = (1.0415)/(1.027)-1 = 1.41188%

because shareholders get paid last after all other obligations are satisfied, they are often called

residual owners

what are the portfolio weights for a portfolio that has 145 shares of stock a that sell for 47 per share and 130 shares of stock b that sell for 86 per share

stock a: 145*$47 = 6815 6815/17995 = 37.8716% stock b: 130*$86 = 11180 11180/17995 = 62.1284% Total value of stock: 6815+11180 = 17995

what type of risk is neve going to be fully gone with diversification and why?

systematic & there is always going to be some form of systematic (market) risk.

what does the yield curve represent

term structure

what can too much liquidity be an indication of?

that there is not enough investing (LT assets) going on within the company there is little to no return (liquid assets earn an lower return - ST assets)

which of the following are needed in order to compute the variance of a portfolio consisting of two stocks, a and b?

the market value in dollars of the investments in stocks a and b. that variance of both stocks the covariance of both stocks

why is the determination of the efficient set for 50 securities more complex than the determination of the efficient set for two securities?

the number of variance, return, and correlation calculations increases dramatically

what does the security market line represent

the relationship between beta and expected return

what is the expected return on a bond

the return based on the current price and future cash flows adjusted for default risk

why is there more risk associated with stocks than bonds?

there is a higher standard deviaiton. standard deviation is a measure of risk

standard deviation measures ______- risk while beta measures ______ risk

total : systematic

what does TIPS stand for

treasury inflation-protected securities

when the us government what to borrow money for the long-term it issues

treasury notes and bonds