12/31/11.

Compute the ending inventory for Midori Company for 2009 through 2011 using

Arna, Inc. uses the dollar-value LIFO method of computing its inventory. Data for the past 3
years follow. Year Ended December 31 Inventory at Current-year Cost Price Index 2009 $19,750
100 2010 22,140 108 2011 25,935 114 Compute the value of the 2010 and 2011 inventories
using the dollar-value L

Bienvenu Enterprises reported cost of goods sold for 2010 of $1,400,000 and retained earnings
of $5,200,000 at December 31, 2010. Bienvenu later discovered that its ending inventories at
December 31, 2009 and 2010, were overstated by $110,000 and $35,000, respectively.
Determine the corrected amounts for 2010 cost of g

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Use the information presented in BE7-15 for Horton Corporation. Prepare any entries necessary
to make Horton’s accounting records correct and complete.

Data for Amsterdam Company are presented below. Compute the April 30 inventory and the
April cost of goods sold using the FIFOmethod.

At the balance sheet date Clarkson Company held title to goods in transit amounting to
$214,000. This amount was omitted from the purchases figure for the year and also from the
ending inventory. What is the effect of this omission on the net income for the year as calculated
when the books are closed? What is the effe

Petty Cash The petty cash fund of Teasdale’s Auto Repair Service, a sole proprietorship,
contains the following. The general ledger account Petty Cash has a balance of $300. Prepare the
journal entry to record the reimbursement of the petty cashfund.

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What is the difference between a perpetual inventory and a physical inventory? If a company
maintains a perpetual inventory, should its physical inventory at any date be equal to the amount
indicated by the perpetual inventory records? Why?

FIFO, weighted-average, and LIFO methods are often used instead of specific identification for
inventory valuation purposes. Compare these methods with the specific identification method,
discussing the theoretical propriety of each method in the determination of income and asset
valuation.

Basic Note and Accounts Receivable Transactions Part 1 On July 1, 2010, Wallace Company, a
calendar-year company, sold special-order merchandise on credit and received in return an
interest-bearing note receivable from the customer. Wallace Company will receive interest at the
prevailing rate for a note of this type.
Determine Cash Balance Presented below is a number of independent situations. For each
individual situation, determine the amount that should be reported as cash. If the item(s) is not
reported as cash, explain the rationale. 1. Checking account balance $925,000; certificate of
deposit $1,400,000; cash advance to subsi

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Determining Cash Balance The controller for Weinstein Co. is attempting to determine the
amount of cash and cash equivalents to be reported on its December 31, 2010, balance sheet. The
following information is provided. 1. Commercial savings account of $600,000 and a
commercial checking account balance of $800,000 are

Consider the SDE for the spot rate rt Suppose the parameters a, μ, σ are known, and that as
usual, Wt, is a Wiener process. (a) Show that (b) What do these two equations imply for the
conditional mean and variance of spot rate as s → ∞? (c) Suppose the market price of interest
rate risk is constant at λ (i.e., t

Consider Where Xt is an exponential Wiener process: (a) Calculate the expected value of the
increment dZ(t). (b) Is Zt a martingale? (c) Calculate E[Zt]. How would you change the
definition of Xt to make Zt a martingale? (d) How would E[Zt] then change? Z(t) = e–rtXt, Xt
= cWt.

Wood Incorporated factored $150,000 of accounts receivable with Engram Factors Inc. on a
without-recourse basis. Engram assesses a 2% finance charge of the amount of accounts
receivable and retains an amount equal to 6% of accounts receivable for possible adjustments.
Prepare the journal entry for Wood Incorporated and

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Stallman Company took a physical inventory on December 31 and determined that goods costing
$200,000 were on hand. Not included in the physical count were $25,000 of goods purchased
from Pelzer Corporation, f.o.b. shipping point, and $22,000 of goods sold to Alvarez Company
for $30,000, f.o.b. destination. Both the Pel

Assume that Toni Braxton Company has recently fallen into financial difficulties. By reviewing
all available evidence on December 31, 2010, one of Toni Braxton’s creditors, the National
American Bank, determined that Toni Braxton would pay back only 65% of the principal at
maturity. As a result, the bank decided that

Let Wf be a Wiener process and t denote the time. Are the following stochastic
processesmartingales?

What are derivatives? How can derivatives be used to reduce risk? Can derivatives be used to
increase risk? Explain.
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Consider the SDE: dSt = .05dt + .1dWt. Suppose dWt, is approximated by the following process:
(a) Consider Intervals of size ∆ = 1. Calculate the values of St, beginning from t = 0 to t = 3.
Note that you need S0 = 1. (b) Let ∆ = .5 and repeat the same calculations. (c) Plot these two
realizations. (d) How would

Suppose D’Leon’s sales manager told the sales staff to start offering 60-day credit terms
rather than the 30-day terms now being offered. D’Leon’s competitors react by offering
similar terms, so sales remain constant. What effect would this have on the cash account? How
would the cash account be affected if s

D’Leon purchases materials on 30-day terms, meaning that it is supposed to pay for
purchases within 30 days of receipt. Judging from its 2008 balance sheet, do you think that
D’Leon pays suppliers on time? Explain, including what problems might occur if suppliers
are not paid in a timely manner.

What does double taxation of corporate income mean? Could income ever be subject to triple
taxation? Explain your answer.

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Describe the different ways in which capital can be transferred from suppliers of capital to those
who are demanding capital.

Let Wt be a Wiener process defined over [0, T] and consider the integral: Use the subdivision of
[0, t] t0, t1,., tn–1, tn in the following: (a) Write the approximation of the above integral as
three different Riemann sums. (b) Write the integral in discrete time using an Ito sum. (c)
Calculate the expectation of

What are the two leading stock markets? Describe the two basic types of stock markets.

Let H be a Wiener process. Consider the geometric process S again: (a) Calculate dSt. (b) What
is the “expected rate of change” of St? (c) If the exponential term in the definition of St,
did not contain the 1/2σ2t term, what would be the dSt? What would then be the expected
change inSt?

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Hermann Industries is forecasting the following income statement: Sales $8,000,000 Operating
costs excluding depr. & amort. 4,400,000 EBITDA $3,600,000 Depreciation & amortization
800,000 EBIT $2,800,000 Interest 600,000 EBT $2,200,000 Taxes (40%) 880,000 Net

Is an initial public offering an example of a primary or a secondary market transaction? Explain.

What is a market? Differentiate between the following types of markets: physical asset markets
versus financial asset markets, spot markets versus futures markets, money markets versus
capital markets, primary markets versus secondary markets, and public markets versus private
markets.

If a “typical” firm reports $20 million of retained earnings on its balance sheet, could its
directors declare a $20 million cash dividend without having any qualms about what they were
doing? Explain your answer.

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We say that Z is exponentially distributed with parameter A > 0 in the distribution function of Z
is given by: P(Z < z) = 1 – e–kz (a) Determine and plot the density function of Z. (b)
Calculate the E[Z]. (c) Obtain the variance of Z. (d) Suppose Z1 and Z2 are both distributed as
exponential and an independent. Cal

You are given the spot-rate model; dr1 = α (k – rt) dt + bdW, where the Wt, is a Wiener
process under the real-world probability. Under this spot rate model, the solution to the PDE that
corresponds to a default-free pare discount bond B(t, T) gives the closed-form bond pricing
formula B(t, T): Where R = k – bÎ

Explain the following statement: While the balance sheet can be thought of as a snapshot of a
firm’s financial position at a point in time, the income statement reports on operations over a
period of time.

Suppose the Wti, i =1, 2 are two Wiener processes. Use Ito’s Lemma in obtaining
appropriate stochastic differential equations for the following transformations. (a) Xt = (Wt1)4
(b) Xt = (Wt1 + Wt2)2 (c) Xt = t2 + eWt2 (d) Xt = et2+Wt2

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Suppose you are given the following SDE for the instantaneous spot rate: drt = σr1dWt, where
the Wt is a Wiener process under the real-world probability and the σ is a constant volatility.
The initial spot rate r0 is known to be 5%. (a) What does this spot rate dynamics imply? (b)
Obtain a PDE for a default-free disc

You are given the representation: Where the equality holds given the sequence of information
sets {It. The underlying process Xt is known to follow the SDE: dXt = μdt + σdWt Determine
the g(-) in the above representation for the case where M(-) is given by: (a) MT(XT) = WT (b)
MT(XT) = W2T (c) MT(XT) =EWT

Which of the following actions are most likely to directly increase cash as shown on a firm’s
balance sheet? Explain and state the assumptions that underlie your answer. a. It issues $2
million of new common stock. b. It buys new plant and equipment at a cost of $3 million. c. It
reports a large loss for the year. d.

Consider the problem above again. Suppose we tossed a coin T times and the resulting zt were
all +1. The reward will be: (a) Show that the conditional expected reward as we just play one
more time is: (b) How does this compare with WT? Should the player then “stop”? (c) But
if the player never stops when he o

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Can we say that this is an application of integration by parts?

The long rate R and the short rate r are known to have a jointly normal distribution with
variance-covariance matrix ∑ and mean μ. These moments are given by Let the corresponding
joint density be denoted by f (R,r). (a) Using Mathematica or Maple plot this joint density. (b)
Find a function ξ(R,r) such that t

Suppose at time t = 0, you are given four default-free zero-coupon bond prices P(t, T) with
maturities from 1 to 4 years: P(0, 1) = .94, P(0, 2) = .92, P(0, 3) = .87, P(0, 4) .80 (a) How can
you “fit” a spot-rate tree to these bond prices? Discuss. (b) Obtain a tree consistent with
the term structure given above,

Consider the linear SDE that represents the dynamics of a security price: dSt = .01 Stdt + 0.5
StdWt With S0 = 1 given. Suppose a European call option with expiration T = 1 and strike K 1.5
is written on this security. Assume that the risk-free interest rate is 3%. (a) Using your computer,
generate 1hv normally distrib

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What effect did the expansion have on sales, after-tax operating income, net working capital
(NWC), and net income?

Consider a random variable ∆x with the following values and the corresponding probabilities:
{Δx = 1, p(Δx = 1) = .3}, {Δx = –0.5, p(Δx = –0.5) = .2}, {Δx = .2, p(Δx = .2) = .5}. (a)
Calculate the mean and the variance of this random variable. (b) Change the mean of this random
variable to .05 by subtractin

Differentiate between dealer markets and stock markets that have a physical location.

Plot the payoff diagrams fur the following instruments: (a) A caplet with cap rate Rcap = 6.75%
written on 3-wonth Libor Lt, that is about to expire. (b) A forward contract written on a default-
free discount bond with maturity 2 years. The forward contract expires in 3 months. The
contracted price is 895. (c) A 3 by 6

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What is an initial public offering (IPO)?

Consider again the setup of Question 1. Suppose we want to price three European style call
options written on one period (spot) Libor rates Li with i = 0, 1, 2, 3, as in the above case. Let
these option prices be denoted by Ci. Each option has the payoff: Ci = N max[Li – K,0], where
N is a notional amount that we set

What are the three primary ways in which capital is transferred between savers and borrowers?
Describe each one.

Why are financial markets essential for a healthy economy and economic growth?

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Now use this information to show that:

In this exercise we use the Girsanov theorem to price the chooser option. The chooser option is
an exotic option that gives the holder the right to choose, at some future date, between a call and
a put written on the same underlying asset. Let the T be the expiration date, St be the stock price,
K the strike price. If

Suppose you are given the following information on the spot rate rt: The rt follows: dt =μrt +
σrt dWr. The annual drift is μ= .01. 15This is the wise because the forward price, Ft], belt
belong to the same forward date unlike, say, the Ct, which is a value expressed in time t dollar.
The annual volatility is σ = 2

Explain how earnings per share, dividends per share, and book value per share are calculated,
and what they mean. Why does the market price per share not equal the book value per share?

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Describe the three different forms of market efficiency.

Who are some of the basic users of financial statements, and how do they use them?

Consider the following SDE: (a) Write the above SDE in the integral form. (b) What is the value
of theintegral.

Consider a world with two time periods and two possible states at cacti time t = 0, 1. 2. There are
only to assets to invest. One is risk-free burrowing and lending at the risk-free rate ri, i = 0, 1.
The other is to buy a two period bond with current price B0. The bond pays $1 at time t = 2 when
it matures. (a) Set up

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The Davidson Corporation’s balance sheet and income statement are provided here. a.
Construct the statement of stockholders’ equity for December 31, 2008. b. How much money
has been reinvested in the firm over the years? c. At the present time, how large a check could be
written without it bouncing? d. How much mo

Suppose the (vector) Markov process Xt, has the following dynamics, where the error term is
jointly normal and serially uncorrelated Suppose rt, is a short rate, while Rt, is a long rate. (a)
Derive a univariate representation for the short rate rt. (b) According to this representation, is r1
a Markov process? (c

Suppose the bond price B(t, T) satisfies the following PDE: –rtB + Bt + Br(μ – λσB) +
½Brrσ2 = 0 B(T, T) = 1. Define the variable V(u) us (a) Let B(t, T) be the bond price,
Calculate the d(BV). (b) Use the PDE in (93) to get an expression for dB(t, T). (c) Integrate this
expression from t to T and take expe

What effect did the company’s expansion have on its free cash flow?

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Let Y be a random variable with E[Y] < ∞ (a) Show that the Mt defined by Mt = E[Y|It] Is a
martingale. (b) Does this mean that every conditional expection is a martingale given the
increasing sequence of information sets {T0 ≤ . . . It ≤ I t + I . . .}

What is the effect of multinational operations on capital budgeting decisions.

You are given a function f(x, z, y) of three variables, x, z, y. The following PDE is called
Laplace’s equation: According to this, in Laplace’s equation, the sum of second partials
with respect to the variables in the function must equal zero. Do the following equations satisfy
Laplace’s equation? fxx +fyy + fzz

Consider a policy maker who uses and instrument kt, to control the path followed by some target
variable Y,. The policy maker has the following Objective function The environment imposes
the following constraint on this policy maker: Yt = .2kt + .6Yt-1. The initial Y0 is known to be
60. (a) What is the best choice o

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What types of changes have financial markets experienced during the last two decades? Have
they been perceived as positive or negative changes? Explain.

Suppose you are given the following data: • Risk-free interest rate is 6% • The stock price
follows: dSt = μSt + σStdWt Volatility is 12 % a year • The stock pays no dividends anti the
current stock price is 100. Using these data you are asked to approximate the current value of an
American call option on the s
W.C. Cycling had $55,000 in cash at year-end 2007 and $25,000 in cash at year-end 2008. Cash
flow from long-term investing activities totaled –$250,000, and cash flow from financing
activities totaled #$170,000. a. What was the cash flow from operating activities? b. If accruals
increased by $25,000, receivables and

Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 million, and its tax
rate was 40%. What was its interest expense?

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In its most recent financial statements, Newhouse Inc. reported $50 million of net income and
$810 million of retained earnings. The previous retained earnings were $780 million. How much
in dividends were paid to shareholders during the year? Assume that all dividends declared were
actually paid.

Laiho Industries’ 2007 and 2008 balance sheets (in thousands of dollars) are shown. a. Sales
for 2008 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation and
amortization were 11% of net fixed assets, interest was $8,575,000, the corporate tax rate was
40%, and Laiho pays 40% of its net income

Consider the equation below that gives interest rate dynamics in a setting where the time axis [0,
T] is subdivided into it equal intervals, each of length ∆: rt+∆ = rt + αrt + σt(Wt+∆ –
Wt) + σ2(Wt – Wt–∆) where the random error terms ∆Wt = (Wt+∆ - Wt) are
distributed normally as ∆Wt ≈ N (0,â

Financial ratio analysis is conducted by three main groups of analysts: credit analysts, stock
analysts, and managers. What is the primary emphasis of each group, and how would that
emphasis affect the ratios they focus on?

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In this exercise we work with the Black-Scholes setting applied to foreign currency denominated
assets. We will see a different use of Girsanov theorem. [for more detail see Musiela and
Rutkowski (1997).] Let r,f denote the domestic and the foreign risk-free rates. Let St be the
exchange rate, that is, the price of 1 u

Computer World Inc. paid out $22.5 million in total common dividends and reported $278.9
million of retained earnings at year-end. The prior year’s retained earnings were $212.3
million. What was the net income? Assume that all dividends declared were actually paid.

Consider the geometric SDE: dSt = μStdt + σStdWt, where St is assumed to represent an
equity index. The current value of the index is S0 = 940 It is known that the annual percentage
volatility is 0.15. The risk-free interest rate is constant at 5%. Also, as is the case in practice, the
effect of dividends is eliminat
We consider the random process St, which plays a fundamental role in BIack-Scholes analyses:
St = S0e[μ1+σWt] Where Wt is a Wiener process with W0 = 0, μ is ‘a “trend” factor,
and (Wt – Ws) ≈ N(0, (I – s)), Which says that the increments in Wt have zero mean and
a variance equal to t – S Thus, at t the

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How does the deductibility of interest and dividends by the paying corporation affect the choice
of financing (that is, the use of debt versus equity)?

Suppose at time t = 0, we are given four zero-coupon bond prices {B1, B2, B3, B4} that mature
at times t = 1, 2, 3, 4. This forms the term structure of interest rates. We also have one-period
forward rates {f0, f1, f2, f3), where each fi is the rate contracted at time t = 0 on a loan that
begins at time t = i and ends

What does it mean for a market to be efficient? Explain why some stock prices may be more
efficient than others.

Given the representation: Can you determine the g(-) if the MT(XT) is the payoff of an plain
vanilla European call option at expiration? That is, if MT(XT) is given by: MT(XT) = max [XT
– K, 0], Where 0 < K < ∞ is the strike price. Where is thedifficulty?

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Explain briefly the tax treatment of (1) interest and dividends paid, (2) interest earned and
dividends received, (3) capital gains, and (4) tax loss carry-back and carry-forward. How might
each of these items affect D’Leon’s taxes?

Show that given t0, t1,., tn–1, tn and Wt0, Wt1,.,Wtn–1, Wtn, We can always write: How is
this different from the standard formula for the differentiation of products: d(uv) = (du)v + u(dv)

A function f(x, z, y, t) of four variables, x, z, y, t, that satisfy the following PDE is called the heat
equation: Where a is a constant. According to the heat equation, firs partial with respect to t is
proportional to the sum of second partials with respect to the variables in the function. Do the
following functio

Bailey Corporation’s financial statements (dollars and shares are in millions) are provided
here. a. What was net working capital for 2007 and 2008? b. What was Bailey’s 2008 free
cash flow? c. Construct Bailey’s 2008 statement of stockholders’equity.

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Consider the PDE: fx + .2fy = 0, with X ε[0, 1] and y ε [0,1]. (a) What is the unknown in this
equation? (b) Explain this equation using plain English. (c) How many functions f(x, y) can you
find that will satisfy such an equation? (d) Now suppose you know the boundary condition: f(0,
Y) = 1 Can you find a solution

Financial statements are based on generally accepted accounting principles (GAAP) and are
audited by CPA firms. Therefore, do investors need to worry about the validity of those
statements? Explain your answer.

Assume that the return Rt of a stock has the following log-normal distribution for fixed t: log
(Rt) ~ N(μ, σ2). Suppose we let the density of log(Rt) be denoted by f(Rt) and hypothesize that
μ = .17. We further estimate the variance as σ2 = .09. (a) Find a function ξ(Rt) such that
under the density, ξ(Rt)f(Rt),

Indicate whether the following instruments are examples of money market or capital market
securities. a. U.S. Treasury bills b. Long-term corporate bonds c. Common stocks d. Preferred
stocks e. Dealer commercial paper

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Investors expect a company to announce a 10% increase in earnings; instead, the company
announces a 1% increase. If the market is semi-strong form efficient, which of the following
would you expect to happen? (Hint: Refer to Footnote 13 in this chapter.) a. The stock’s
price will increase slightly because the company

If D’Leon starts depreciating fixed assets over 7 years rather than 10 years, would that affect
(1) the physical stock of assets, (2) the balance sheet account for fixed assets, (3) the
company’s reported net income, and (4) the company’s cash position? Assume the same
depreciation method is used for stockholder

Suppose the stock discussed above pays dividends. Assume all parameters are the same.
Consider these three forms of dividends paid by the firm. (a) The stock pays a continuous,
known stream of dividends at a rate of 4% per time. (b) The stock pays 5% of the value of the
stock at the third node, No other dividends are p

Which one(s) of the following are assets traded in financial markets: (a) 6-month Libor (b) A 5-
year Treasury bond (c) A FRA contract (d) A caplet (e) Returns on 30-year German Bonds (f)
Volatility of Federal Funds rate (g) An interest rate swap

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Consider the PDE: fxx + .2ft = 0, With the boundary condition f(x, 1) = max[x – 6, 0]. Let 0 â
‰¤ x ≤ 12 And 0 ≤ t ≤ 1. (a) Is the single boundary condition sufficient for calculating
a numerical approximation to f(x, t)? (b) Impose additional boundary conditions of your choice
on f(0, t) and f (12, t). (c) Cho
She has read a number of newspaper articles about a huge IPO being carried out by a leading
technology company. She wants to get as many shares in the IPO as possible and would even be
willing to buy the shares in the open market immediately after the issue. What advice do you
have for her?

The exercises in this section prepare the reader for the next three chapters instead of dealing with
the PDEs. An interested reader will find several useful problems in Betounes (1998). Let Xt be a
geometric Wiener process, Xt = eY, Where Yt ≈ N(μt, σ2t). (a) Consider the definition And
the trivaial equality Usi

What is free cash flow? If you were an investor, why might you be more interested in free cash
flow than net income?

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A player confronts the following situation. A coin will be tossed at every time t, t = 1, 2, 3, . ., T
and the player will get a total reward W1,. He or she can either decide to step or to continue to
play. If he or she continues, a mew coin ill be tossed at time t + 1, and so on. The question is,
what is the best time

Briefly describe each of the following financial institutions: commercial banks, investment
banks, mutual funds, hedge funds, and private equity companies.

This exercise deals with obtaining martingales. Suppose Xt is a geometric process with drift μ
and diffusion parameter σ. (a) When would the e-rt Xt be a martingale? That is, when would the
following equality hold. (b) More precisely, remember from the previous derivation that Or,
again, Which selection of μ would

Financial information for Powell Panther Corporation is shown here. a. What was net working
capital for 2007 and 2008? b. What was the 2008 free cash flow? c. How would you explain the
large increase in 2008dividends?

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Let the random variable Xn have a binomial distribution: Where each Bi is independent and i
distributed according to We can look at Xn as the cumulated sum of a series of events that occur
over time. The events are the individual Bi. Note that there are two parameters of interest here.
Namely, the p and the n. Th

Show that as n →∞

Explain whether the following statements are true or false. a. Derivative transactions are
designed to increase risk and are used almost exclusively by speculators who are looking to
capture high returns. b. Hedge funds typically have large minimum investments and are
marketed to institutions and individuals with high
Would it be possible for a company to report negative free cash flow and still be highly valued
by investors; that is, could a negative free cash flow ever be a good thing in the eyes of
investors? Explain your answer.

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Consider the random variable: Where each Bi is obtained as a result of the toss of a fair coin:
We let n = 4 and consider X4. (a) Calculate the E [X4| I1], E [X4| I2], E [X4| I4] (b) Let Zi = E
[X4| Ii] Is Zi, I = 1. . . 4, a martingale? (c) Now define: Vi = Bi + √i And Is Vi a martingale?
(d) Can you conver

A random variable Z ahs Poisson distribution if p(k) = P(Z < k) = λke–k / k! For k = 0, 1,
2 . . . (a) Use the expansion To show that (b) Calculate the mean E[Z] and the varianceVar(Z)

Select ten standard, normal random numbers using Mathematica, Maple or Matlab. Suppose
interest rates follow the SDE: drt = .02rtdt + .06rtdWt. Assume that the current spot rate is 6%.
(a) Discretize the SDE given above. (b) Calculate an estimate for the following expectation using
a time interval ∆ = .04, and the

Briefly explain what is meant by the term efficiency continuum.

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Differentiate the following functions with respect to the Wiener process Wt, and if applicable,
with respect tot.

Find the future values of the following ordinary annuities: a. FV of $400 paid each 6 months for
5 years at a nominal rate of 12% compounded semiannually b. FV of $200 paid each 3 months
for 5 years at a nominal rate of 12% compounded quarterly c. These annuities receive the same
amount of cash during the 5-year period

You want to buy a house that costs $100,000. You have $10,000 for a down payment, but your
credit is such that mortgage companies will not lend you the required $90,000. However, the
realtor persuades the seller to take a $90,000 mortgage (called a seller take-back mortgage) at a
rate of 7%, provided the loan is paid o

Pearson Brothers recently reported an EBITDA of $7.5 million and net income of $1.8 million. It
had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for
depreciation and amortization?

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If Apple Computer decided to issue additional common stock and Varga purchased 100 shares of
this stock from Smyth Barry, the underwriter, would this transaction be a primary or a secondary
market transaction? Would it make a difference if Varga purchased previously outstanding Apple
stock in the dealer market? Expla

How does a cost-efficient capital market help reduce the prices of goods and services?

Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3.5%
compounded daily. a. Based on the EAR (or EFF%), which bank should you use? b. Could your
choice of banks be influenced by the fact that you might want to withdraw your funds during the
year as opposed to at the end of the year? Assume that

Find the future values of these ordinary annuities. Compounding occurs once a year. a. $400 per
year for 10 years at 10% b. $200 per year for 5 years at 5% c. $400 per year for 5 years at 0% d.
Rework Parts a, b, and c assuming they are annuities due.

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Find the interest rates earned on each of the following: a. You borrow $700 and promise to pay
back $749 at the end of 1 year. b. You lend $700 and the borrower promises to pay you $749 at
the end of 1 year. c. You borrow $85,000 and promise to pay back $201,229 at the end of 10
years. d. You borrow $9,000 and promise

You have $42,180.53 in a brokerage account, and you plan to deposit an additional $5,000 at the
end of every future year until your account totals $250,000. You expect to earn 12% annually on
the account. How many years will it take to reach your goal?

Calculate the 2009 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and
total assets turnover. How does D’Leon’s utilization of assets stack up against other
firms in its industry?

Your parents will retire in 18 years. They currently have $250,000, and they think they will need
$1,000,000 at retirement. What annual interest rate must they earn to reach their goal, assuming
they don’t save any additional funds?

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Starting next year, you will need $10,000 annually for 4 years to complete your education. (One
year from today you will withdraw the first $10,000.) Your uncle deposits an amount today in a
bank paying 5% annual interest, which will provide the needed $10,000 payments. a. How large
must the deposit be? b. How much wil

a. Find the present values of the following cash flow streams at 8% compounded annually. b.
What are the PVs of the streams at 0% compoundedannually?

Suppose you were comparing a discount merchandiser with a high-end merchandiser. Suppose
further that both companies had identical ROEs. If you applied the DuPont equation to both
firms, would you expect the three components to be the same for each company? If not, explain
what balance sheet and income statement items

You want to buy a car, and a local bank will lend you $20,000. The loan will be fully amortized
over 5 years (60 months), and the nominal interest rate will be 12% with interest paid monthly.
What will be the monthly loan payment? What will be the loan’s EAR?

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What is the present value of a $100 perpetuity if the interest rate is 7%? If interest rates doubled
to 14%, what would its present value be?

Six years from today you need $10,000. You plan to deposit $1,500 annually, with the first
payment to be made a year from today, in an account that pays an 8% effective annual rate. Your
last deposit, which will occur at the end of Year 6, will be for less than $1,500 if less is needed to
reach $10,000. How large will

If you deposit money today in an account that pays 6.5% annual interest, how long will it take to
double your money?

You have saved $4,000 for a down payment on a new car. The largest monthly payment you can
afford is $350. The loan will have a 12% APR based on end-of-month payments. What is the
most expensive car you can afford if you finance it for 48 months? for 60 months?

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Why would the inventory turnover ratio be more important for someone analyzing a grocery
store chain than an insurance company?

Does it appear that inventories could be adjusted? If so, how should that adjustment affect
D’Leon’s profitability and stock price?

Harrelson Inc. currently has $750,000 in accounts receivable, and its days sales outstanding
(DSO) is 55 days. It wants to reduce its DSO to 35 days by pressuring more of its customers to
pay their bills on time. If this policy is adopted, the company’s average sales will fall by
15%. What will be the level of accoun

Bartley Barstools has an equity multiplier of 2.4, and its assets are financed with some
combination of long-term debt and common equity. What is its debt ratio?

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What are some qualitative factors analysts should consider when evaluating a company’s
likely future financial performance?
In 2008, the company paid its suppliers much later than the due dates; also it was not maintaining
financial ratios at levels called for in its bank loan agreements. Therefore, suppliers could cut the
company off, and its bank could refuse to renew the loan when it comes due in 90 days. On the
basis of data provided,

Why are ratios useful? What are the five major categories of ratios?

Doublewide Dealers has an ROA of 10%, a 2% profit margin, and an ROE of 15%. What is its
total assets turnover? What is its equity multiplier?

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Lloyd Inc. has sales of $200,000, a net income of $15,000, and the following balance sheet: The
new owner thinks that inventories are excessive and can be lowered to the point where the
current ratio is equal to the industry average, 2.5#, without affecting sales or net income. If
inventories are sold off and not repl

Ebersoll Mining has $6 million in sales, its ROE is 12%, and its total assets turnover is 3.2(. The
company is 50% equity financed. What is its net income?

Why is it sometimes misleading to compare a company’s financial ratios with those of other
firms that operate in the same industry?

A farmer can spend $60/acre to plant pine trees on some marginal land. The expected real rate of
return is 4%, and the expected inflation rate is 6%. What is the expected value of the timber after
20 years?

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Find the following values using the equations and then a financial calculator.
Compounding/discounting occurs annually. a. An initial $500 compounded for 1 year at 6% b.
An initial $500 compounded for 2 years at 6% c. The present value of $500 due in 1 year at a
discount rate of 6% d. The present value of $500 due in 2

If a company’s sales are growing at a rate of 20% annually, how long will it take sales to
double?

Your client is 40 years old; and she wants to begin saving for retirement, with the first payment
to come one year from now. She can save $5,000 per year; and you advise her to invest it in the
stock market, which you expect to provide an average return of 9% in the future. a. If she follows
your advice, how much money

What’s the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this
was an annuity due, what would its future value be?
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Use the DuPont equation to provide a summary and overview of D’Leon’s financial
condition as projected for 2009. What are the firm’s major strengths and weaknesses?

What annual interest rate would cause $100 to grow to $125.97 in 3 years?

Jan sold her house on December 31 and took a $10,000 mortgage as part of the payment. The 10-
year mortgage has a 10% nominal interest rate, but it calls for semiannual payments beginning
next June 30. Next year Jan must report on Schedule B of her IRS Form 1040 the amount of
interest that was included in the two paymen

Your firm sells for cash only; but it is thinking of offering credit, allowing customers 90 days to
pay. Customers understand the time value of money, so they would all wait and pay on the 90th
day. To carry these receivables, you would have to borrow funds from your bank at a nominal
12%, daily compounding based on a

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Banks and other lenders are required to disclose a rate called the APR. What is this rate? Why
did Congress require that it be disclosed? Is it the same as the effective annual rate? If you were
comparing the costs of loans from different lenders, could you use their APRs to determine the
loan with the lowest effective

What is its present value?

What’s the difference between an ordinary annuity and an annuity due? What type of annuity
is shown here? How would you change it to the other type ofannuity?

A firm has been experiencing low profitability in recent years. Perform an analysis of the
firm’s financial position using the DuPont equation. The firm has no lease payments but has
a $2 million sinking fund payment on its debt. The most recent industry average ratios and the
firm’s financial statements are as fol

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Shalit Corporation’s 2008 sales were $12 million. Its 2003 sales were $6 million. a. At what
rate have sales been growing? b. Suppose someone made this statement: “Sales doubled in 5
years. This represents a growth of 100% in 5 years; so dividing 100% by 5, we find the growth
rate to be 20% per year.” Is that sta

How does inflation distort ratio analysis comparisons for one company over time (trend analysis)
and for different companies that are being compared? Are only balance sheet items or both
balance sheet and income statement items affected?
Baker Brothers has a DSO of 40 days, and its annual sales are $7,300,000. What is its accounts
receivable balance? Assume that it uses a 365-day year.

Assume the following relationships for the Brauer Corp.: Sales/total assets 1.5# Return on assets
(ROA) 3% Return on equity (ROE) 5% Calculate Brauer’s profit margin and debt ratio.

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Find the following values. Compounding/discounting occurs annually. a. An initial $500

compounded for 10 years at 6% b. An initial $500 compounded for 10 years at 12% c. The
present value of $500 due in 10 years at 6% d. The present value of $1,552.90 due in 10 years at
12% and at 6% e. Define present value and illustr

Calculate the 2009 operating margin, profit margin, basic earning power (BEP), return on assets
(ROA), and return on equity (ROE). What can you say about these ratios?

Midwest Packaging’s ROE last year was only 3%; but its management has developed a new
operating plan that calls for a total debt ratio of 60%, which will result in annual interest charges
of $300,000. Management projects an EBIT of $1,000,000 on sales of $10,000,000, and it
expects to have a total assets turnover rat

Fontaine Inc. recently reported net income of $2 million. It has 500,000 shares of common stock,
which currently trades at $40 a share. Fontaine continues to expand and anticipates that 1 year
from now, its net income will be $3.25 million. Over the next year, it also anticipates issuing an
additional 150,000 shares of

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Draw time lines for (1) a $100 lump sum cash flow at the end of Year 2, (2) an ordinary annuity
of $100 per year for 3 years, and (3) an uneven cash flow stream of -$50, $100, $75, and $50 at
the end of Years 0 through 3.

a. Set up an amortization schedule for a $25,000 loan to be repaid in equal installments at the end
of each of the next 3 years. The interest rate is 10% compounded annually. b. What percentage of
the payment represents interest and what percentage represents principal for each of the 3 years?
Why do these percentages

What is the future value of a 3-year, $100 ordinary annuity if the annual interest rate is 10%?

If a firm’s ROE is low and management wants to improve it, explain how using more debt
might help.

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What’s the present value of $100 to be received in 3 years if the interest rate is 10%, annual
compounding?

Find the present values of these ordinary annuities. Discounting occurs once a year. a. $400 per
year for 10 years at 10% b. $200 per year for 5 years at 5% c. $400 per year for 5 years at 0% d.
Rework Parts a, b, and c assuming they are annuities due.

Data for Barry Computer Co. and its industry averages follow. a. Calculate the indicated ratios
for Barry. b. Construct the DuPont equation for both Barry and the industry. c. Outline
Barry’s strengths and weaknesses as revealed by your analysis. d. Suppose Barry had
doubled its sales as well as its inventories, acco

A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 10%. He has
been offered three possible 4-year contracts. Payments are guaranteed, and they would be made
at the end of each year. Terms of each contract are as follows: As his adviser, which contract
would you recommend that heaccept?

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An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4,
$300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn
8% annually, what is its present value? its future value?

Explain whether the following statement is true or false: $100 a year for 10 years is an annuity;
but $100 in Year 1, $200 in Year 2, and $400 in Years 3 through 10 does not constitute an
annuity. However, the second series contains an annuity.

Simon recently received a credit card with an 18% nominal interest rate. With the card, he
purchased a new stereo for $350. The minimum payment on the card is only $10 per month. a. If
Simon makes the minimum monthly payment and makes no other charges, how many months
will it be before he pays off the card? Round to th

You want to buy a house within 3 years, and you are currently saving for the down payment.
You plan to save $5,000 at the end of the first year, and you anticipate that your annual savings
will increase by 10% annually thereafter. Your expected annual return is 7%. How much will
you have for a down payment at the end o

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If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in
your account after 5 years?

A company has an EPS of $2.00, a cash flow per share of $3.00, and a price/cash flow ratio of
8.0#. What is its P/E ratio?
Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he
retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at
the time he retires as $40,000 has today. (The real value of his retirement income will decline
annually after he retires.)

If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growth
would be 100%, but the annual growth rate would be less than 10%. True or false? Explain.

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Which of the following statements is most correct? a. If a firm’s expected basic earning
power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, adding
assets and financing them with debt will raise the firm’s expected return on common equity
(ROE). b. The higher a firm’s tax rate