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1) Explain the key component ratios in a three-phase DuPont formula. What potential insight could a five-year historical DuPont analysis provide?
1) Explain the key component ratios in a three-phase DuPont formula. What potential insight could a five-year historical DuPont analysis provide? How—and why—is a historical review of the DuPont components linked to the concept of trend analysis?
2) True or False and if true, explain. A financial analyst would likely suggest that she is indifferent between two firms each generating a 15 percent ROE if she is provided the past 10 years of the DuPont components.
3) Why are effective rates of return (or equivalent annual returns) employed in finance? What is the difference between a zero coupon bond, a junk bond, and a Treasury-Inflation Protected Security (TIPS)? Which would you likely prefer today? Why?
4) Discuss in a sentence the relevance of historic, industry, competitive, and market benchmarking with respect to financial ratios (i.e., advantages and challenges for each of the four). What, if anything, is revealed in the analysis? What makes benchmarking difficult?
5) Why is discounting used when describing PV and compounding used when depicting FV? What is the difference between simple and continuous compounding?
6) With respect to $388.38 = PV (I, N, 0, FV) in Excel, what does the $388.38 represent? (Note: The third element is a zero.) How do I explain the $338.38 to a colleague?
7) With respect to $3888.38 = FV (I, N, PMT, PV) in Excel, what does the $3888.38 represent? (Note: The third element is a payment.) How do I explain the $3338.38 to a colleague?
8) What is an annuity? Annuities due and ordinary annuities have a significant definitional difference. What is the difference? What is the difference between a perpetuity and an annuity?
9) What purpose does determining a PV or a FV or a PVA or a FVA serve? In essence, what am I trying to accomplish by discounting everything back to a PV or PVA? What am I trying to accomplish by compounding everything forward to a FV or FVA? Give an example of how you may someday use these concepts to make a decision.
10) What is the difference, if any, between a municipal bond and a US government bond? What is similar; what is different? Do municipal bonds have any risks? If so, explain. Does a US government bond have any risks? If so, explain.
11) True or False and if false, explain. US government bonds generally have a maturity date. True or False and if false, explain. Corporate call provisions are found in the bond covenant and are usually initiated by the purchaser of the bond.
12) Using the present-value formula introduced in chapter 1 and reestablished in chapter 5, label the components of the formula for the valuation of a fixed income security. What can you conclude—very simply—from the fact that the chapter 1 and chapter 5 formula are similar in construction?
13) What causes a bond to trade at a discount from its issuance price? What causes a bond to trade at a premium to its issuance price? Would a AAA bond issued in 2006 with a 9% coupon and a 30-year maturity likely be trading at a discount or premium today? Why? At what price do bonds purchased at premiums and bonds purchased at discounts each trade at maturity?
14) Explain the elements of total return with respect to a discount bond. Explain the elements of total return with respect to a premium bond. In the latter, why would one be willing to pay a premium over the par value that she will receive at maturity?
15) What is the difference between the yield to maturity and the "realized" yield to maturity assumptions? Why might the realized yield to maturity be more realistic to any investor? Are either of these measures related to the current yield? If not, why?
16) Using the formula for quoted market interest rates, build up the theoretical 20-market interest rate for a US government bond and for a 20-year BBB corporate bond. How does your theoretical rate build compare to today's rates? Explain your thoughts, andthoughts and explain why they may be different.
17) What is a normal yield curve? What is an inverted yield curve? What is the yield curve specifically designed to represent? (Hint: Think government, mortgage, AAA, and municipal bonds.) What does the inverted US Treasury Bond yield curve generally suggest about the upcoming economic environment?
18) Describe the use of scenario analysis in the expected return generation exercise. What is the goal of scenario analysis? State the one word that academics generally use to describe the concept of risk. What metric(s), sometimes referred to as a second moment, is used by econometricians to describe this risk?
19) Explain the link between covariance, correlation, and diversification in portfolio theory. Why does Buffett suggest that "diversification is the only free lunch"? Why, in sum, is correlation so important in the discussion of diversification? In the end, what is the goal of diversification?
20) Equity portfolio risk, per the academics, can be broken down into two components. What are the two? What risk(s), if any, remains if you purchase 30 semiconductor technology stocks? What risk(s), if any, remains if you purchase three different stocks from each of the S&P 500's 10 sectors?
21) What function does the CAPM fulfill? What is the role of Beta? Explain the role that Beta plays in determining the return on a stock? If the market is up 10 percent and the Beta of the stock is 2, what is suggested regarding the expected return on that stock? What if the market is down 10 percent; what then is the expected return on that stock?
22) Define the market risk premium with respect to the CAPM. Why is this necessary to include in the CAPM model? Historically, what level of premium have analysts used in the CAPM to represent the market risk premium?
23) What does the Efficient Market Hypothesis suggest about picking individual stocks for a portfolio? What does a market bubble, similar to that of 1998-2000 and concept technology, suggest about the efficient markets hypothesis? How may your answer to #26, part 2, link to the question of efficient markets?
The CAPM uses one Beta (i.e., a systematic market beta). Can more than one Beta be used in a multifactor capital asset pricing model? If yes, explain why and give two examples of such a model.
