Part A: Answer each of the following questions.
1. What are the main forms of business ownership in the United States? What are the advantages and disadvantages of using each type of ownership structure?
2. When managing a firm's balance sheet, finance managers must consider a number of issues that apply to items reported on the firm's balance sheet. What are three of these Issues?
3. When the prevailing interest rates in the economy rise, what happens to the price of bonds, and why does it happen?
4. At any given time, the market value of a stock depends on a variety of factors. What are two of these factors? What are two models used for valuing stocks?
5. What does modern portfolio theory show and what does it describe to achieve? What's the name of the portfolio used to achieve this goal?
6. How can financial managers minimize exchange rate risk to some extent?
7. Who are the monitors of managerial behavior outside a public firm, and how do they help the monitoring of managers?
Part B:
Answer each of the following questions. Show all calculations where necessary. Each answer Is worth 20.5 points.
1. Lucky Lenders, Inc., has current liabilities of $200 million, long-term debt of $110 million, current assets of $322 million, fixed assets of $619 million, and total equity of $631 million. The market value of the firm s current assets is $330 million, and the market value of as fixed assets is $645 million. The market value of its current liabilities is $200 million, and the market value of its long-term debt is $110 million. The firm's tax rate is 30 percent, and it pays 6 percent interest on its long-term debt. The company has 10 million common shares outstanding that trade at $22 per share. There s no preferred stock, and net income available to common shareholders was $15 million. Calculate Lucky Lenders, Inc.'s, Debt ratio, Debt-to-equity ratio, and Price-earnings (PE) ratio.
2. Consider a bond with a 6.2 percent coupon rate, paid semiannually, that has 20 years until it matures. If the current market interest rate is 7.4 percent, and the bond is priced at $925, what's the bond's present value? Should you buy this bond? Explain why or why not.
3. At the start of the year, you owned $8,300 of IBM stock, $12,900 of GE stock, $22,000 of Apple stock, and $5,600 of Bank of America stock. During the year, IBM, GE, Apple, and Bank of America returned 8.4 percent, -2.6 percent, -11 percent, and 9.9 percent, respectively. What's your portfolio's overall return for the year?