1. Which of the following statements concerning bonds is incorrect? a. They involve blended payments of principal and interest. b. They have a fixed maturity date, at which time the issuer repays the full principal amount. c. Bondholders are paid a series of fixed periodic amounts before the maturity date. d. The bond indenture is a legal document, specifying payment requirements and so on. 2. Which of the following statements is incorrect? a. Callable bonds give the bond issuer an option to call the bond at a predetermined price. b. All debentures are secured bonds. c. Extendible bonds allow bondholders to extend the maturity date. d. Convertible bonds give the bondholders an option to convert into common shares at a predetermined conversion ratio. 3. What is the price of a 10‐year, 8‐percent, annual coupon bond when the market rate is 6 percent? The face value is $100. a. $114.72 b. $110.57 c. $107.71 d. $113.42 4. Which of the following bond prices is most sensitive to market rate changes? The par value is $100 for all. a. 5‐year, 5‐percent coupon rate, yield 5.5 percent b. 3‐year, 8‐percent coupon rate, yield 5.6 percent c. 7.5‐year, 4.5‐percent coupon rate, yield 5.5 percent d. 10‐year, 4.5‐percent coupon rate, yield 5.5 percent 5. What is the yield to maturity on an eight‐year, 9‐ percent bond that pays interest semi-annually, which is now priced at $980? Use a financial calculator. a. 9.05 percent b. 9 percent c . 4.68 percent d. 9.36 percent 6. Which of the following statements is correct? a . Current yield is the ratio of annual coupon payment divided by the par value. b . When the coupon rate is higher than the market rate, the bond is priced at a discount. c. When the market rate is higher than the coupon rate, the bond is priced at a premium. d. If a bond is at a discount, the coupon rate is less than the current yield, which is less than YTM. 7. Which statement is incorrect? a. The liquidity preference theory states that investors prefer short‐term debt. b. According to the expectations theory, a downward sloping yield curve implies that interest rates are expected to decline in the future. c. The risk premium in the bond yield reflects default risk, liquidity risk, and issue‐specific features. d. A debt rating of AAA is a worse rating than BB for S&P. 8. What is the quoted price of a 182‐day Canadian T‐bill that has a face value of $10,000 and a quoted yield of 3 percent? a. $9,778.67 b. $9,852.62 c. $97.7867 d. $98.5262 9. Which of the following statements is false? a. Zero coupon bonds are deep‐discount bonds. b. Zero coupon bonds are often created when cash flows are stripped from traditional bonds. c. Floating rate bonds provide protection against decreasing interest rates. d. There are two forms of return available for Canada Savings bond buyers: regular interest and compound interest. 10. Which statement is correct according to interest rate parity (IRP) theory? a. IRP states that differences in interest rates between countries cannot be totally offset by expected changes in exchange rates. b. Forward exchange rates may be locked in today to eliminate foreign exchange risk and ensure investors can profit from moving capital to countries with higher interest rates. c. Inflation differentials between countries affect both interest rates and currency exchange rates. d. The country with a higher inflation rate will see its currency appreciate against another country with a lower inflation rate.
> What are the main advantages and disadvantages of the corporation structure?
> What role does the board of directors serve?
> What is the primary goal of the corporation?
> Define agency costs and describe both types.
> Describe the nature of the basic owner-manager agency relationship.
> Should the Government allow one of the Big Six Canadian banks to fail if it loses money on its loan portfolio?
> Explain the cost imposed on society if firms become too big to fail, and discuss whether the government should break up large firms when they pose such risks.
> Distinguish between market and financial intermediaries.
> State the main differences and similarities between sole proprietorships and partnerships.
> Identify and briefly describe the three main channels of savings.
> What is the difference between a positive and a negative covenant provision?
> How do floaters and real return bonds provide protection against inflation?
> Explain why a firm cannot claim CCA recapture and a terminal loss for the same asset class in the same year.
> How is the balance sheet related to the income statement?
> Explain how to calculate the effective rate for any period.
> What are the major provisions of SOX?
> When market interest rates are above the coupon rate on a bond, is it a premium or discount bond?
> Why do income statements differ from tax statements? What is the major difference?
> What is the primary objective of financial reporting under IFRS?
> List and define the four major forms of business organization.
> 1. Which of the following is true about finance? a. Finance is the study of how and under what terms savings (money) are allocated between lenders and borrowers. b. Finance is different from economics because economics does not study how resources are al
> Why does money have a “time value”?
> a . Suppose the Finns believe they can increase revenues to $2,600 in year 3. Use this figure and the percentage of sales balance sheet (Practice Problem 27) to forecast the company ’ s balance sheet at the end of year 3. Remember that the “financing” co
> It is now May 1, 2015, and Peter has just purchased a five‐year U.S. government bond (FV = $1,000) with a quoted price of 93.863. This bond has a 6‐percent coupon rate, and the last semi‐annual coupon payment was made on January 1, 2015. a . How much wil
> The following is data for two bonds at a time when the market yield is 7 percent. These bonds are otherwise identical (FV = $1,000, five years to maturity, semi‐annual coupon payments). Which bond’s price will change m
> Suppose that, several years ago, the Canadian government issued three very similar bonds; each has a $1,000 face value and a 10‐percent coupon rate and will mature in five years. The only difference between the bonds is the frequency of the coupon paymen
> Calculate the price of a bond with FV of $1,000, a coupon rate of 8 percent (paid semi‐annually), and five years to maturity when: a . k b = 10 percent. b . kb = 8 percent. c . kb = 6 percent.
> In the DuPont system, there are two components of ROA. Determine whether efficiency or productivity (or both) is responsible for the increase in ROA for Finns ’ Fridges from year 1 to year 2.
> Using the Fisher relationship, calculate the exact real interest rate and the approximate real rate, given a Tbill rate of 8 percent and an expected inflation rate of 3.6 percent.
> The following values are the spread for corporate bond yields. a . One‐year T‐bills are trading with a YTM of 6 percent. What yield would you expect to find on A‐rated corporate bonds maturing in one
> Describe why financial and market intermediaries exist in our financial system.
> Calculate the cash price of the following bond, sold on September 21: par = $1,000; coupon rate = 4 percent, paid on January 1 and July 1; quoted price = $956. Explain why the cash price is different from the quoted price.
> State three of the most basic principles of IFRS.
> Find Finns ’ Fridges ’ return on equity (ROE) for years 1 and 2, using the owners ’ equity figure at the end of each year. Did this ratio improve or get worse between year 1 and year 2?
> What are secondary market transactions? How do secondary markets facilitate the primary markets?
> Identify the main components of a firm’s balance sheet and income statement.
> What complications arise when dealing with mortgage loans in Canada?
> Who is responsible for the preparation of a company’s financial statements?
> Identify the major sources of financing used by: (a) governments and (b) businesses.
> What does IFRS stand for? What types of Canadian companies must prepare their financial statements in accordance with IFRS (or U.S. GAAP)?
> What are some of the key corporate financing decisions made by firms?
> Explain how banks, pension funds, insurance firms, and mutual funds work in the financial system.
> Explain what is meant by the matching principle. How is this principle related to the use of accrual accounting?
> 1. Which of the following businesses is the least likely to be operated as a partnership? a. accounting firm b. doctors ’ office c. lawyers ’ office d. steel foundry 2. Which of the following statements is false? a. The limited liability partnership (LLP
> 1. Which of the following is not classified as cash flow from financing? a. issuance of long‐term debt b. repurchase of capital stock c. payment of dividends d. purchase of inventory 2. Which of the following is a cash outflow? a. decrease in inventorie
> 1. Which of the following is correct? a. IFRS are the primary accounting standards for publicly accountable enterprises in Canada. b. Canadian private companies are required to use IFRS. c. Canadian GAAP is issued by the International Accounting Standard
> 1. What is the total amount accumulated after six years if someone invests $ 1,000 today with a simple annual interest rate of 8 percent? How about with a compound annual interest rate of 8 percent? a. $ 1,400, $ 1,469 b. $ 1,469, $ 1,400 c. $ 1,480, $ 1
> 1. Which of the following statements about consistent financial analysis is correct? a. Accounting standards are different across countries. b. If the input data are the same, the ratios for companies across countries are the same. c. We can directly com
> 1. Which of the following statements is incorrect? a. An ordinary annuity has payments at the end of each year. b. An annuity due has payments at the beginning of each year. c. A perpetuity is considered a perpetual annuity. d. An ordinary annuity has a
> What is a corporate spread?
> You are planning on buying your first home and need to borrow $ 250,000 from the bank. The manager offers you two mortgages: the long option will take 25 years to be paid off, and your annual payments will be $ 17,738. The short option will take only 10
> List the four major financial sectors in the financial system and discuss how they relate to one another.
> Two friends, Abe and Betty, are planning for their retirement. Both are 20 years old and plan on retiring in 40 years with $1 million each. Betty plans on making annual deposits beginning in one year (total of 40 deposits) while Abe plans on waiting and
> A 65‐year‐old man intends to use his retirement funds to purchase an annuity from a life insurance company. Given the amount of money the man has available to invest, the insurance company is able to offer two alternatives. The first option is to receive
> GG Co. shows the following information on its financial statements: interest‐bearing debt is $900,000; shareholders ’ equity (SE) is $2,500,000; sales are $5,050,000; net income is $685,750; dividends are $200,000; and sales growth (g) is 5 percent. Calc
> A firm has just declared that its dividend next year will be $3 per share. That rate of payment will continue for an additional four years, after which the dividends will fall back to their usual $2 per share. The discount rate is 12 perc
> Use the following information to create a revised forecast of the year 3 balance sheet for Finns ’ Fridges. Cash will increase by the forecast EBITDA amount (see Practice Problem 29); it will be reduced by $1,050 to purchase new equipment, $552 for year
> Paul and Maria want to have enough money to travel around the world when they retire. They both just turned 30 and will retire when they turn 60. They earn a total of $ 9,000 after taxes each month. Their monthly expenditures include $ 3,000 in mortgage
> Timmy sets himself a goal of amassing $1 million in his retirement fund by the time he turns 61. He begins saving $ 3,000 at the end of each year, starting on his 21st birthday (40 years of saving). a. If his savings earn 10 percent per year, will Timmy
> A lakefront house in Kingston, Ontario, is for sale with an asking price of $499,000. The real estate market has been quite active, so the house will almost certainly attract several offers, and may sell for more than the asking price. Charlie is very ea
> Josephine needs to borrow $ 180,000 to purchase her new house in Yarmouth, Nova Scotia. She would like to pay off the mortgage in 20 years, making monthly payments. For the initial three‐year term, Providence Bank has offered her a quoted annual rate of
> After losing money playing online poker, Scott visits a loan shark for a $750 loan. To avoid a visit from the “collection agency,” he will have to repay $800 in just one week. a. What is the nominal interest rate per week? Per year? b. What is the effect
> You are examining the economy of a very small, completely isolated island nation. There are only three people on this island: Fred, Robinson, and Friday. Fred owns a house valued at $1,000 and owes Friday $500. Robinson owns a house valued at $3,000 and
> After living in a university residence for one year, Mary‐Beth decides to rent an apartment for the remaining three years of her degree. She has found a nice location that will cost $550 per month. Rent for the first and last month must be paid up front.
> Refer to the bonds appearing in Figure 6.1. a. What is the coupon rate and year of maturity for the Qualcomm and Time Warner bonds? b. How much would you have had to pay to buy one Bank of America bond at the closing trade? c. Why is the yield-to-matu
> Zheng Enterprises, a multinational drug company specializing in Chinese medicines, issued $100 million of 15 percent coupon rate bonds in January 2011. The bonds had an initial maturity of 30 years. The bonds were sold at par and were callable in five ye
> World Tobacco has issued preferred stock ($10 par value) that pays an annual dividend of $0.84. The preferred stock matures in five years. At that time, holders of the stock will receive, at their option, either $10 or one share of common stock with a va
> Waters, Inc., has outstanding a $100 million (face value) issue of bonds. The bonds pay a coupon rate of interest of 8 percent per annum. At the time the bonds were first issued, they sold at face value of $1,000 per bond. The bonds have 12 years remaini
> Zabberer Corporation bonds pay a coupon rate of interest of 12 percent annually and have a maturity value of $1,000. The bonds are scheduled to mature at the end of 14 years. The company has the option to call the bonds in 8 years at a premium of 12 perc
> Dooley, Inc., has outstanding $100 million (par value) bonds that pay an annual coupon rate of interest of 10.5 percent. Par value of each bond is $1,000. The bonds are scheduled to mature in 20 years. Because of Dooley’s increased risk, investors now re
> Hooks Athletics, Inc., has outstanding a preferred stock with a par value of $30 that pays a dividend of $2.50. The preferred stock is redeemable at the option of the stockholder in 10 years at a price equal to $30. The stock may be called for redemption
> BCC has bonds that trade frequently, pay a 7.75 percent coupon rate, and mature in 2021. The bonds mature on March 1 in the maturity year. Suppose an investor bought this bond on March 1, 2016, and assume interest is paid annually on March 1. Calculate t
> Consider again the BCC 8⅛ percent debentures that mature on July 15, 2036 (see problem 6). Determine the yield to call if the bonds are called on July 15, 2022, at $1,016.55.
> Why should each of the following be familiar with compounding and present value concepts? a. A marketing manager b. A personnel manager
> What is the relationship between EVA and MVA?
> Determine the value of a share of DuPont Series A $4.50 cumulative preferred stock, no par, to an investor who requires a 9 percent rate of return on this security. The issue is callable at $120 per share plus accrued dividends. However, the issue is not
> Determine the value of a share of DuPont Series A $3.50 cumulative preferred stock to an investor who requires the following rates of return: a. 9 percent b. 10 percent c. 12 percent
> In 2006, BCC issued 8⅝ percent debentures that will mature on December 1, 2046. a. If an investor purchased one of these bonds ($1,000 denomination) on December 1, 2016, for $1,050, determine the yield-to-maturity. Explain why investors would be willing
> If you purchase a zero coupon bond today for $225 and it matures at $1,000 in 11 years, what rate of return will you earn on that bond (to the nearest 1/ 10 = of 1 percent)?
> Consider the Leverage Unlimited, Inc., zero coupon bonds of 2020. The bonds were issued in 2002 for $100. Determine the yield-to-maturity (to the nearest 1 10 = of 1 percent) if the bonds are purchased at the: a. Issue price in 2002. (Note: To avoid a f
> BCC has issued 8⅛ percent debentures that will mature on July 15, 2036. Assume that interest is paid and compounded annually. If an investor purchased a $1,000 denomination bond for $1,025 on July 15, 2016, determine the bond’s yield to-maturity. Explain
> Adams Food Service has issued 7⅜ percent bonds that mature on July 15, 2048. The bonds are callable at $1,037.08 on July 15, 2023. Assume that interest is paid and compounded annually. Determine the yield-to-maturity (to the nearest 10th of 1 percent) if
> Creative Financing, Inc., is planning to offer a $1,000 par value 15-year maturity bond with a coupon interest rate that changes every 5 years. The coupon rate for the first 5 years is 10 percent, 10.75 percent for the next 5 years, and 11.5 percent for
> Consider Fulton Manufacturing Company’s 8¾ percent bonds that mature on April 15, 2028. Assume that the interest on these bonds is paid and compounded annually. Determine the value of a $1,000 denomination Fulton bond as of April 15, 2016, to an investor
> Recently the high and low market prices of Canadian Pacific Limited’s debentures (see problem 1) were $790 and $475, respectively. Determine the yield-to-maturity of one of these debentures if it was purchased under the following conditions: a. At the h
> The Farmers State Bank recently has been earning an “above average” (compared to the overall banking industry) return on total assets of 1.50 percent. The bank’s return on common equity is only 12 percent, compared with an industry average of 15 percent.
> What effect does more frequent compounding have on present values?
> Determine the value of a $1,000 Canadian Pacific Limited perpetual 4 percent debenture (bond) at the following required rates of return: a. 4 percent b. 5 percent c. 6 percent
> Compare the potential for agency problems in sole proprietorships, partnerships, and corporations. In light of your analysis, why is the corporate form of organization so popular?
> How can the adherence to high standards of ethical business practice contribute to the goal of shareholder wealth maximization?
> In 2012 Kodak declared bankruptcy. How can you reconcile a bankruptcy declaration with a management pledged to maximize shareholder wealth?
> Under pressure from outside investors including corporate raider Carl Icahn, USX Corporation, the parent corporation for U.S. Steel and Marathon Oil, announced a plan to split its stock into separate steel and energy issues. The market response to this a
> What are the major factors that determine the value of a firm’s stock?
> Metropolitan Life Insurance Company, Swiss Bank Corporation, and several other holders of RJR Nabisco bonds filed suit against the company to prevent it from completing the leveraged buyout acquisition from Kohlberg Kravis Roberts. Why do you think the b
> Why is EPS not a consistently good measure of a firm’s performance?
> Explain the relationship between financial management and (a) microeconomics and (b) macroeconomics.
> Many large corporations, such as General Motors, have written off large amounts of their nonperforming (or poorly performing) assets as they have shrunk their operations. What is the impact of these asset write-offs on the future return on assets, future
> Explain the differences in the responsibilities of the treasurer and the controller in a large corporation.
> What type of contract might require the use of annuity due computations?
> What is the source of potential agency conflicts between owners and bondholders? Who is the agent and who is the principal in this relationship?
