Part 1: The Company and Its Environment
a. Mutual fund; money market fund
b. Physical location exchanges; computer/telephone networks
c. Open outcry auction; dealer market; electronic communications network (ECtii
d. Production opportunities; time preferences for consumption
e. Foreign trade deficit
1. What are the three principal forms of business organization? What are the advantages and disadvantages of each?
2. What is a firm's fundamental, or intrinsic, value? What might cause a firm's intrinsic value to be different from its actual market value?
3. Edmund Enterprises recently made a large investment to upgrade its technology. Although these improvements won't have much of an impact on performance in the short run, they are expected to reduce future costs significantly. What impact will this investment have on Edmund Enterprise's earnings per share this year? What impact might this investment have on the company's intrinsic value and stock price?
4. Describe the ways in which capital can be transferred from suppliers of capital to those who are demanding capital.
5. What are financial intermediaries, and what economic functions do they perform?
6. Is an initial public offering an example of a primary or a secondary market transaction?
7. Differentiate between dealer markets and stock markets that have a physical location.
8. Identify and briefly compare the two leading stock exchanges in the United States today.
Part 2:
Essay Problems 1-6
1. An investor recently purchased a corporate bond that yields 9%. The investor is in the 36% combined federal and state tax bracket. What is the bond's after-tax yield?
2. Corporate bonds issued by Johnson Corporation currently yield 8%. Municipal bonds of equal risk currently yield 6%. At what tax rate would an investor be indifferent between these two bonds?
3. Molteni Motors Inc. recently reported $6 million of net income. Its EMT was $13 million, and its tax rate was 40%. What was its interest expense? (Hint: Write out the headings for an income statement, and then fill in the known values. Then divide $6 million net income by 1 - T = 0.6 to find the pre-tax income. The difference between BIT and taxable income must be the interest expense. Use this procedure to work some of the other problems.)
4. Talbot Enterprises recently reported an EBITDA of 58 million and net income of $2.4 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization?
5. Kendall Corners Inc. recently reported net income of $3.1 million and depreciation of $500,000. What was its net cash flow? Assume it had no amortization expense.
6. In its most recent financial statements, Del-Castillo Inc. reported $70 million of net income and $900 million of retained earnings. The previous retained earnings were $855 million. How much in dividends did the firm pay to shareholders during the year?