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Finance 100

In business, ethical dilemmas or situations occur frequently. Laws and regulations exist to define what unethical behavior is. However, the practicing of high- quality ethical behavior often goes beyond just meeting laws and regulations. Indicate how you would respond to the following situations.

  1. Your boss has just told you that tomorrow the Federal Drug Administration will announce its approval of your firm’s marketing of a new breakthrough drug. As a result of this information, you are considering purchasing shares of stock in your firm this afternoon. What would you do?

 

  1. In the past, your firm has been in compliance with regulatory standards relating to product safety. However, you have heard through the company grapevine that recently some of your firm’s products have failed resulting in injuries to customers. You are considering quitting your job due to personal moral concerns. What would you do?

 

Chapter 2: P2 & P5

2) Determine the size of the M1 money supply using the following information.

  1. a.       Currency $ 700 billion
  2. b.      Money market mutual funds $ 2,000 billion
  3. c.       Demand deposits $ 300 billion
  4. d.      Other checkable deposits $ 300 billion
  5. e.       Traveler’s checks $ 10 billion

 

5) The following information is available to you: travelers’ checks $ 1 million; coin and paper currency =$ 30 million; repurchase agreements and Eurodollars =$ 15 million; demand deposits =$ 25 million; retail money market mutual funds =$ 60 million; savings accounts at depository institutions =$ 40 million; checkable deposits at depository institutions = $ 35 million; large- denomina-tion time deposits =$ 50 million; institutional money market mutual funds =$ 65 million; and small- denomination time deposits =$ 45 million. Using Fed definitions, determine the dollar sizes of the:

a. M1 money supply

b. M2 money supply

c. M3 money supply

 

Chapter 3: questions 1& 5

1)      The following three one- year “ discount” loans are available to you:

Loan A: $ 120,000 at a 7 percent discount rate

Loan B: $ 110,000 at a 6 percent discount rate

Loan C: $ 130,000 at a 6.5 percent discount rate

 

a. Determine the dollar amount of interest you would pay on each loan and indicate the amount of net proceeds each loan would provide. Which loan would provide you with the most upfront money when the loan takes place?

 

b. Calculate the percent interest rate or effective cost of each loan. Which one has the lowest cost?

 

5) Following are selected balance sheet accounts for Third State Bank: vault cash =$ 2 million; U. S. government securities =$ 5 million; demand deposits $ 13 million; nontransactional accounts =$ 20 million; cash items in process of collection =$ 4 million; loans to indi-viduals =$ 7 million; loans secured by real estate =$ 9 million; federal funds purchased =$ 4 million; and bank premises =$ 11 million.

 

a. From these accounts, select only the asset accounts and calculate the bank’s total assets.

b. Calculate the total liabilities for Third State Bank.

c. Based on the totals for assets and liabilities, determine the amount in the owners’ capital account.

 

Chapter 4: P5 question

5) The Friendly National Bank holds $ 50 million in reserves at its Federal Reserve District Bank. The required reserves ratio is 12 percent.

 

  1. If the bank has $ 600 million in deposits, what amount of vault cash would be needed for the bank to be in compliance with the required reserves ratio?

 

  1. If the bank holds $ 10 million in vault cash, determine the required reserves ratio that would be needed for the bank to avoid a reserves deficit.

 

  1. If the Friendly National Bank experiences a required reserves deficit, what actions can it take to be in compliance with the existing required reserves ratio?

 

 

 

6. If the U. S dollar value of a British Pound is $ 1.95 and a euro is $ 1.55, calculate the implied value of a euro in terms of a British Pound.

 

Chapter 5: P1 and P6

  1. 1.      Assume that Banc One receives a primary deposit of $ 1 million. The bank must keep reserves of 20 percent against its deposits. Prepare a simple balance sheet of assets and liabilities for Banc One immediately after the deposit is received.

6. Assume a financial system has a monetary base of $ 25 million. The required reserves ratio is 10 percent, and there are no leakages in the system. a. What is the size of the money multiplier? b. What will be the system’s money supply?

 

Chapter 6: P9

9. Assume that last year the Australian dollar was trading at $. 5527, the Mexican peso at $. 1102, and the United Kingdom ( British) pound was worth $ 1.4233. By this year the U. S. dollar value of an Australian dollar was $. 7056, the Mexican peso was $. 0867, and the British pound was $ 1.8203. Calculate the percentage appreciation or depreciation of each of these three currencies between last year and this year.

 

Chapter 7: P4

4. Assume personal income was $ 28 million last year. Personal outlays were $ 20 million and personal current taxes were $ 5 million. a. What was the amount of disposable personal income last year? b. What was the amount of personal saving last year? c. Calculate personal saving as a percentage of disposable personal income.

 

Chapter 8: P4

4. A thirty- year U. S. Treasury bond has a 4.0 percent interest rate. In contrast, a ten- year Treasury bond has an interest rate of 3.7 percent. If inflation is expected to average 1.5 percentage points over both the next ten years and thirty years, determine the maturity risk premium for the thirty- year bond over the ten- year bond.

 

Chapter 9: P6

6. Determine the present values if $ 5,000 is received in the future ( i. e., at the end of each indicated time period) in each of the follow-ing situations:

  1. 5 percent for ten years
  2. 7 percent for seven years
  3. 9 percent for four years.

 

 

Chapter 10: P22, P23, P24

22) The Fridge- Air Company’s preferred stock pays a dividend of $ 4.50 per share annually. If the required rate of return on compara-ble quality preferred stocks is 14 percent, calculate the value of Fridge- Air’s preferred stock.

 

23. The Joseph Company has a stock issue that pays a fixed dividend of $ 3.00 per share annually. Investors believe the nominal risk- free rate is 4 percent and that this stock should have a risk premium of 6 percent. What should be the value of this stock?

 

24. The Lo Company earned $ 2.60 per share and paid a dividend of $ 1.30 per share in the year just ended. Earnings and dividends per share are expected to grow at a rate of 5 percent per year in the future. Determine the value of the stock: a. if the required rate of return is 12 percent. b. if the required rate of return is 15 percent. c. Given your answers to ( a) and ( b), how are stock prices affected by changes in investor’s required rates of return?

 

Chapter 11: P2

11. 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.

 

BIDDER              BID PRICE                NUMBER OF SHARES

Matthew          $ 50.25                                               15 million

Kevin                 49.75                                                            20 million

Amy                   49.45                                                            20 million

Megan                            49.00                                                            10 million

 

  1. a.       What will be the clearing price?

 

  1. b.      How many shares will each bidder receive if Bagel’s allocates shares on a pro rata basis to all the successful bidders?

 

Chapter 12: P6 and P8

 

6. Find the real return on the following investments:

 STOCK                  NOMINAL INFLATION                    RETURN

A                             10%                                                   3%

B                            15%                                                   8%

C                              – 5%                                                       2%

 

8. The countries of Stabilato and Variato have the following average returns and standard deviations for their stocks, bond, and short-term government securities. What range of returns should you expect to earn 95 percent of the time for each asset class if you invested in Stabilato’s securities? From investing in Variato’s securities?

STABILATO                                AVERAGE                           STANDARD

ASSET                                           RETURN                             DEVIATION

 

Stocks                                                  8%                                             3%

Bonds                                                  5%                                             2%

Short- term government debt            3%                                             1%

 

VARIATO                                   AVERAGE                           STANDARD

ASSET                                          RETURN                            DEVIATION

Stocks                                                15%                                           13%

Bonds                                                10%                                            8%

Short- term government debt           6%                                             3%

 

Chapter 15: P1

 

Chapter 16: P3 and P4

3Obtain a current issue of the Federal Reserve Bulletin, or review a copy from the Fed’s Web site ( http:// www. federalreserve. gov) or the St. Louis Fed’s Web site ( http:// www. stlouisfed. org), and determine the changes in the prime rate that have occurred since the end of 2000. Comment on any trends in the data.

 

4. Compute the effective cost of not taking the cash discount under the following trade credit terms:

a. 2/ 10 net 40

b. 2/ 10 net 50

c. 3/ 10 net 50

d. 2/ 20 net 40

 

Chapter 17: P1, and P7

  1. 1.      Find the NPV and PI of a project that costs $ 1,500 and returns $ 800 in year one and $ 850 in year two. Assume the project’s cost of capital is 8 percent.

 

7. AA Auto Parts Company has a corporate tax rate of 34 percent and depreciation of $ 19,180. Compute its depreciation tax shield.

 

Chapter 18: P8

8. The Nutrex Corporation wants to calculate its weighted average cost of capital. Its target capital structure weights are 40 percent long- term debt and 60 percent common equity. The before- tax cost of debt is estimated to be 10 percent and the company is in the 40 percent tax bracket. The current risk- free interest rate is 8 percent on Treasury bills. The expected return on the market is 13 percent and the firm’s stock beta is 1.8.

a. What is Nutrex’s cost of debt?

 

b. Estimate Nutrex’s expected return on common equity using the security market line.

 

c. Calculate the after- tax weighted average cost of capital.

 

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