Exam 14: The Basic Tools of Finance: Part A

Suppose the Johnson Corporation releases an earnings report that beats the market's expectations.What does the efficient markets hypothesis predict will happen to Johnson's stock price.

Write the formula to find the present value of $x to be paid in n years.

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2.Is Dave risk averse? Explain.

List two ways a risk adverse person may attempt to reduce risks.

Write the formula for finding the future value of $1,000 today in 10 years if the interest rate is 4 percent.

You are a financial advisor and a client tells you he is concerned about the amount of risk in his portfolio.Assuming your client hasn't already done them,what two things can you suggest to reduce your client's risk? What additional information about reducing risk should you provide?

What is meant by an asset bubble?

According to the efficient markets hypothesis,what changes the price of a share of a corporation's stock? Make up an example.

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years.If the interest rate is 7%,should the firm undertake the project? Show evidence to support your answer.

A payment of $10,000 is to be made in the future.The interest rate 3%.Is this payment worth more if it is paid in 5 years or 10 years? How much more is it worth?

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2.Use the following diagram to graph Dave's utility function for 0 $\leq$ W $\leq$ 25

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet,should you be skeptical? Explain.

Describe the shape of the utility function of a risk averse person.

Define the efficient markets hypothesis.

Give two conditions that are important to the efficient market theory.List one implication of the efficient market theory.

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2.Suppose Dave is faced with a choice between two options.With option A Dave receives a guaranteed $2 million.With option B Dave faces a lottery that pays $10 million with probability P and pays $0 with probability (1-P).Given Dave's utility function,how high does P need to be before he will prefer option B over option A?

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

Write the formula to find the present value of $750 to be paid in 5 years if the interest rate is 3 percent.

Anthony closes out his account in which he deposited $500 five years ago at an interest rate of 5%.Mark closes out his account in which he deposited $500 ten years ago at an interest rate of 5%.Who had more in their account? About how much more did he have?

Scenario 27-1 Lisa has a utility function where W is Lisa's wealth in millions of dollars and U is the utility she obtains. -Refer to Scenario 27-1.Is Lisa risk averse? Explain.