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FI515 Homework#1

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Problems pg 79: 2-6
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 was paid to shareholders during the year?

2-7
The Talley Corporation had a taxable income of $365,000 from operations after all operating costs but before (1) interest charges of $50,000, (2) dividends received of $15,000, (3) dividends paid of $25,000, and (4) income taxes. What are the firm’s in- come tax liability and its after-tax income? What are the company’s marginal and average tax rates on taxable income?

2-9
The Shrieves Corporation has $10,000 that it plans to invest in marketable secu- rities. It is choosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield 5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. Shrieves’s corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities.

Mini Case pg 45
Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle DellaTorre, a professional tennis player who has just come to the United States from Chile. DellaTorre is a highly ranked tennis player who would like to start a company to produce and market apparel she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. DellaTorre is very bright, and she would like to understand in general terms what will happen to her money. Your boss has developed the following set of questions you must answer to ex- plain the U.S. financial system to DellaTorre.

A. Why is corporate finance important to all managers?

B. Describe the organizational forms a company might ha ve as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form
C. How do corporations go public and continue to grow? What are agency problems? What is corporate governance?
D. What should be the primary objective of managers?
1 Do firms have any responsibilities to society at large?
2 Is stock price maximization good or bad for society?
3 Should firms behave ethically?
E. What three aspects of cash flows affect the value of any investment?
F. What are free cash flows?
G. What is the weighted average cost of capital?
H. How do free cash flows and the weighted average cost of capital interact to determine a firm’s value?
I. Who are the providers (savers) and users (borrowers) of capital? How is capital transferred between savers and borrowers?
J. What do we call the price that a borrower must pay for debt capital? What is the price of equity capital? What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy?
K. What are some economic conditions (including international aspects) that affect the cost of money?
L. What are financial securities? Describe some financial instruments.
M. List some financial institutions
N. What are some different types of markets?
O. How are secondary markets organized?
1 List some physical location markets and some computer/telephone networks
2 Explain the differences between open outcry auctions, dealer markets, and electronic communications networks (ECNs).
P. Briefly explain mortgage securitization and how it contributed to the global economic crisis.
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