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Financial Management

by: Mr. Sonia Ruecker

Financial Management FINN 3120

Mr. Sonia Ruecker
GPA 3.72


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This 5 page Class Notes was uploaded by Mr. Sonia Ruecker on Sunday October 25, 2015. The Class Notes belongs to FINN 3120 at University of North Carolina - Charlotte taught by Staff in Fall. Since its upload, it has received 46 views. For similar materials see /class/228897/finn-3120-university-of-north-carolina-charlotte in Finance at University of North Carolina - Charlotte.


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Date Created: 10/25/15
Homework 2 Due J an28 39 Q1 TRUE or FALSE Please explain no full credit without correct 39 quot 5 points each a Financial markets exist in order to allocate savings in the economy to the demanders of C those savings TRUE Financial markets help transfer money from savingssurplus units to savings deficit units Transactions in common stock occur in the money market due to the large amount of money involved in such transactions FALSE Transactions in common stock occur in the capital market Money market refers to transactions in shortterm debt instruments Investors expect to receive the highest returns from governmentissued securities because the government will not default on securities that it has issued FALSE Principle 3 Risk Requires a Reward Without assuming default risk return from governmentissued security returns at least miss defaultrisk premium comparing to their corporateissued counterparty Q2 Multiple Choice Please choose the M answer from the four 5 points each a 57 The investment banker does n0t underwrite the securities to be issued in which of the following A Best efforts B Competitive bid C Negotiated Purchase D None of the above Answer A In both best efforts investment bankers only has to give his or her best effort without underwriting The real rate of interest does not involve which of the following A In ation risk premium B Maturity risk premium C Default risk premium D Liquidity risk premium Answer A Nominal interest rate Real interest rate Inflation Risk Premium Other risk premiums belong to real interest rate C A quotDutch auctionquot was used by Google to raise money in 2004 A Dutch auction involves A selling bonds in Europe B allowing investors to submit bids saying how many shares they d like to buy and at what price C allowing investment banking rms to submit bids on how many shares they are willing to sell and at what price D hiring a Dutch rm to sell a company39s securities at auction Answer B Distribution methods 7 Dutch Auction Please see notes Q3 Assuming there is no liquidity risk in the market In 1990 you are given the 3month treasury bill interest rate is 75 the in ation rate is 61 the 30year treasury bond rate is 861 and the 30year Aaa Corporate bond rate is 932 Answer the following questions 10 points each sue057 Ans 057 F D What is the real riskfree interest rate What is in ation risk premium What is maturity risk premium What is default risk premium Provide a reasonable estimate of the nominal interest rate for a new issue of 30year Aaa rated bond Real riskfree interest rate 75 6114 In ation risk premium 61 simply the in ation rate Maturity risk premium 861 750u111 If you want to calculate maturity premium you should fix the type of the bond Here you use both treasury bonds with different maturities NOTE always use treasury bill and treasury bond to calculate maturity risk premium if these two are given in the question Because governmentissued bonds don t have liquidity risk and default risk Default risk premium 9320086100071 If you want to calculate default risk premium you should x maturity So we re using 30year Aaa Corporate bond and 30year treasury bond Nominal interest ratereal riskfree interest rate in ation premium default risk liquidityrisk premium maturityrisk premium premium 7 14610711110 932 Q4 The current rate of return on a oneyear US Government security is 3 The rate of return on a twoyear US Government security is 5 According to the unbiased expectations theory what is the return on a oneyear US Government security purchased one year from today 20 points Ans Suppose the investor has 1000 to invest at the very beginning First choice by holding a twoyear US Government security the investor will have 1000 X 1052 110250 at the end oftwo years Second choice instead the investor can invest for one year now at 3 and invest for another year with money in hand in the end of year 1 at the prevailing oneyear rate at that moment The investor will have 1000 X 103 1030 at the end of year one In order to get 110250 at the end of two years the investor will need to have 110250 1030 7250 interest in year 2 Therefore the return on a oneyear US government security purchased one year from today would be 7250l030 704 Or similar to the solution on the slides by unbiased expectations theory we need to have the following equivalence hold 1052 103 X 1r which also gives an r 704 Another short and dirty way to solve this is 5 05 X 3 r which gives an r 7 Homework 1 Due Jan21quot Q1 TRUE or FALSE Please explain no full credit without correct 39 quot each a 57 0 F F 10 points The fundamental goal of a business is to maximize the retained earnings available to the corporation s shareholders The chief nancial officer CFO is responsible for overseeing nancial planning corporate strategic planning and controlling the rm s cash ow Its ability to raise capital by selling stock makes the corporation the best form of organization in terms of raising capital An investment project is acceptable if the total cash received over the life of the project exceeds the total cash spent over the life of the project Investors will be indifferent between two investments if both investments have the same expected return Q2 Multiple Choice Please choose the Lst answer from the four 10 points each a All of the following forms of business organizations provide limited liability to all owners EXCEPT A limited liability company B Stype corporation C corporation D limited partnership b 0 F 9 Suppose XYZ Corporation is traded on the New York Stock Exchange XYZ s closing price on Monday is 20 per share After the market closes on Monday XYZ makes a surprise announcement that it has obtained a major new customer XYZ s stock will likely A open at 20 per share on Tuesday and then increase as more investors read the announcement in the Wall Street Journal B remain at 20 per share because in ef cient markets the price already re ects all information C open above 20 because the positive news will result in a higher valuation even though the stock has not yet traded D open below 20 because the surprise announcement creates more uncertainty Investors want a return that satis es the following eXpectations A A return for delaying consumption B An additional return for taking on risk C An additional return for accepting dividends rather than capital gains D Both A and B All of the following statements about agency problems are true EXCEPT A Agency problems interfere with the goal of maximizing shareholder value B Agency costs are paid by the managers who do not act in the shareholders best interest C Agency problems result from the separation of management and the ownership of a rm D The root cause of agency problems is con icts of interest The three basic types of issues addressed by the study of nance are A capital budgeting capital structure decisions and working capital management B capital budgeting working capital management and investment analysis C capital structure decisions working capital management and sustained pro tability D capital budgeting investment analysis and cash management


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