Do not just state facts.  Explain the interaction of the facts briefly. You should have a minimum of 2-3 paragraphs with 4-5 sentences.  Be clear but brief!  Any answer over 4 paragraphs with more than 6 sentences each will receive 0 credit.  Do not answer more than 5 essay’s or you will lose credit for the entire section.

 

 

1. What are the different forms of business organization and briefly discuss each ones advantages and disadvantages?

 

2. Describe the science of finance and briefly discuss each of the four areas of finance.

 

3.  List three requirements of SEC financial performance reporting and describe each one of them along with their potential impact on shareholders.

 

4. What factors affect the rate paid by consumers for an auto loan? Provide some examples.  Would someone with bad credit pay a different rate than someone with really good credit for the same auto loan?  Is this fair and what type of premium might this be and why?

 

5. When does a loan amortize the fastest and slowest and why?  What is working for one type of loan and against the other type of loan (be specific)?

 

6. Describe the three different types of loan payment methods and discuss the advantages, disadvantages and potential uses of each one.

 

7. Describe diversification and what it tries to accomplish for a portfolio.  Also discuss the role of correlation with risk and return within this context.

 

8. Discuss the major assumptions behind SML and beta.  How do these measures help in building a diversified portfolio of investments that maximizes return and minimizes risks?

 

9. How would you use the tools from this class to construct a portfolio of stocks that performs equal to or better than the S&P 500?

 

1. Describe the risk return relationship and the different risk measures.  Why are these important in constructing a diversified portfolio?

 

1. Explain the components of the dividend discount model (key drivers) and why it can be solved as perpetuity?

 

2. Describe the key characteristics of stocks and bonds and contrast a couple of key characteristics that make them so different?

 

3. Describe preferred stock and its general characteristics.  What are some of the key difference between common and preferred stocks?

 

4. Describe efficient markets and the three different forms of them.  Do think the markets are efficient? If so to what degree and explain your reasoning.

 

5. What are mutual funds, describe the different types and why they differ?  What is the difference between closed end mutual fund (EFT) and an open ended mutual fund?  How do mutual funds benefit investors within the context of portfolio theory and diversification?

 

 

            Short Answers: please answer all of these questions!

 

1. Basic agency problem involves conflicting__________between_____________and __________?

 

2. Portfolio theory indicates that diversification can maximize _______  and minimize_________?

 

3. ___________defines the residual value of total assets minus total liabilities?

 

4. ____________describes the economic value that a company owns?

 

5. ___________oversees the financial activity of business or corporation?

 

6. What is worth more, a dollar today or tomorrow?________

 

7. Discount rate brings __________money to present

 

8. _______rate paid for investing a $ today?

 

9. _________brings present money to the future?

 

1. __________describes a series of equal cash flows at regular intervals?

 

1. __________loans pay not principal until maturity?

 

2. __________premium for potential credit loses?

 

3. __________premium for borrowing money longer term?

 

4. __________diversifies a portfolio from general economic risk?

 

5. __________is firm specific risk?

 

6. Beta equal to____ will move exactly like the market index?

 

7. Who gets paid first in the event that a firm liquidates__________?

 

8. What claim is residual value on the assets of the firm____________?

 

9. An offering in the primary markets (stocks/bonds) is called an_________?

 

1. ________bonds are offered by state and local governments?

 

1. __________preferred pays all dividends in the rear that might have been skipped.

 

2. How many votes does a preferred stock get compared to common stock_______?

 

3.   ______is the stated amount paid at maturity by the bond issuer?

 

4. A______provision allows the bond issuer to receive back the bond before maturity?

 

5. _________ is the rate of return for holding a bond purchased at current market price if held to maturity?

 

 

Time Value of Money Problems /Please show your work!

Please answer 5 of these 8 problems. 

(Please include a properly setup Excel spreadsheet that has a tab labeled Q1..Q10 for each problem.  Also, use cell referencing as in the lectures!)

 

1. You want to buy a car for $25,000 and finance it for 60 months at the current rate of 3.00%, what is your monthly payment?
   1. What would be the payment if you put $5,000 down with the same financing terms?
   2. What would the interest rate needed to finance $20,000 for 60 months and have the payment equal $350 per month?  (solve for rate with –PV)

 

1. You want to save $5,000 per year for the next 30 years and you will receive a 4.00% rate of return.  How much will this stream of cash flows be worth in the future? (FV problem)
   1. How much would it worth if the rate of return were reduced to 2%?
   2. How much would it worth if the rate of return were increased to 6%?

 

1. Calculate the monthly payment for a $100,000 30 year mortgage with a rate of 3.00% assuming the loan amortizes?
   1. What would be the principal balance of loan after 12 and 24 months?
   2. What would be the payment of the same loan assuming that the loan does not amortize?

 

1. Assume that you have an available monthly budget of $900 to spend on a mortgage payment.  If you want to finance the loan for 30 years at a rate of 3.50%, how large of a mortgage can you afford? (PV)
   1. If you decided that the largest mortgage that you can handle is $180,000 but you still want the payments to be $900 per month, how many months could you finance this mortgage for? (solve for Nper use -PV)

 

1. You want to retire in 30 years and have $1,000,000 and you will receive a 4.00% annual return.  How much do you have to save each year to achieve this goal?
   1. If you achieve your goal and now want to retire, assuming you will get paid out for 20 years with a 2.00% return rate, what will be your annual income?  (pmt….)
2. Using the constant dividend model for valuation, what would be the value of stock that is expected to pay a $5.00 annual dividend if you required return is 10.00%?
   1. What would be the stock value if the dividend increased by 50%?
   2. What would be the stock value if the dividend increased by 20% and the required return decreased to 5.00%?

 

1. What is the current value of bond that pays $3,000 per year for the next 20 years and then returns par value of $100,000 if the discount rate is 2.00%?

(Set this up and solve for PV as thought a standard FV, PV, Nper, rate, pmt problem)

1. What would be the current value if the discount rate were 4.00%?
2. What would be the current value if the discount rate were 3.00%?

 

1. What would be the current value of bond that pays $42.50 semi-annual, will return $1,000 par value at maturity, has 27 coupon payments remaining and has a current yield-to-maturity of 5.437%?  (Value in two parts: pv(par) and pv(pmts…))
   1. What would be the value if the yield to maturity were 9.00%?
   2. What would be the value if the yield to maturity were 4.00%?

 

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