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C hapter 2 T he Domesti c and Internati onal Fi nancial Marketpl ace 13th Edition Moyer Solutions Contemporary Financial Management

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CHAPTER 2 THE DOMESTIC AND INTERNATIONAL FINANCIAL MARKETPLACE ANSWERS TO QUESTI ONS: 1. The saving-investm ent cycle consi sts of net savers (surplus spending unit s) transferring funds to net i nvestors (deficit spending unit s). The transfer can be made through eit her financial mi ddlemen or financial int ermediaries. For a given tim e period, actual savings equals actual investm ent. 2. Financial mi ddlemen and int ermediaries facil it ate the transfer of funds during the saving investm ent cycle. W hen financ ial mi ddlemen aid i n the transfer of funds, primary claims are iss ued to s urplus spending unit s. W hen financial int ermediaries are invol ved in t he funds transfer process, secondary claims are iss ued to s urplus spending unit s. These secondary claims are normall y less risky than the primary claims received by the financial int ermediaries. 3. Money markets deal i n short -term securities having maturit ies of approx im ately one year or less, whereas capit al m arkets deal i n longer -term securities having maturit ies greater than one year. Primary markets are financial markets i n which new securities are bought and sold for the first t im e, whereas secondary markets are financial markets i n which ex ist ing securities are offered for resale. 4. Financial int ermediaries: • C omm ercial banks - S ources of funds are demand and ti me deposi ts. Uses of these funds are loans to i ndivi duals, bu sinesses (short -term credit and term l oans), and governments. • Thrift i nsti tut ions - These include savings and loan associations , mut ual savings banks, and credit unions . S ources of funds are demand and ti me deposi ts. S avings and loan associati ons and mut ual savings banks i nvest m ost of their funds in h ome mortgages and credit unions are engaged primarily in consumer loans . 2-1


C hapter 2 T he Domesti c and Internati onal Fi nancial Marketpl ace • Investm ent companies - These include mut ual funds and real estate investm ent t rusts (REIT's). Mutual funds pool t he funds of many savers and invest i n financial assets, such as st ocks, bonds, and money market i nstruments. R EIT's invest i n comm e rcial and residenti al real estate. • P ension funds - These int ermediaries pool t he contribut ions o f empl oyees (and/or empl oyers) and invest t hese funds in b oth financial and real assets. • Insurance companies - S ources of funds are premi ums (payments) from indi viduals and organiz ati ons (policyholders). In ex change for these premi ums, the insurance companies

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C hapter 2 T he Domesti c and Internati onal Fi nancial Marketpl ace agree to m ake certain future contractual payments, such as death and disabil it y benefits and compensati on for financial los ses arising from fire, theft, accident, or il lness. The premi ums are used to bui ld reserves, which are invested in various t ypes of financial and real assets. • Finance companies - These int ermediaries obtain funds by iss uing their own securities and through loans from commercial banks. The funds then are loaned to i ndivi duals and busi nesses. 5. Factors that shoul d be consi dered when determi ning the optim al form of organiz ati on for a busi ness enterprise include the control desires of owner/managers, the future gr owth potential and the need for ex ternal capit al, t he possi bil it y of conflicts between owners and managers, the tax consequences of the organiz ati onal st ructure, and the desire for a li mi ted liabili ty ex posure by the owners. 6. In primary financial markets, new securities from an iss uing firm are bought and sold for the first t im e. Hence, firms actually raise the capit al t hey need in t he primary financial markets. In secondary markets, ex ist ing securities are offered for resale. The iss uing firm does n ot receive any new funds when securities trade in a secondary market, such as the New York Ex change. S econdary markets provide an im portant service of making securities li quid, and thereby the ex ist ence of secondary markets l owers the cost of raisi ng fund s in t he primary markets. 7. The New York St ock Ex change is a physical l ocati on where buyers and sell ers of securities meet t o ex change assets. The New York St ock Ex change works t hrough a specialist system and compl ex comput er linkages that m atch buyer s and sell ers and maintain an orderly market. In contrast, t he over-the -counter markets are not represented by any physical pl ace of doing busi ness. R ather, brokerage firms around the country are li nked together in a comput er network which li sts the secu rities that are for sale (or desired for purchase), by whom, and at what price. W hen an investor wishes to buy or sell stocks over the-counter, that investor’s broker wil l check the comput er network to see what ot her broker has the desired security for sa le, in what quanti ty, and at what price. W hen an agreeable match occurs, the security is bo ught for the investor. 8. In an efficientl y functi oning capit al m arket, security prices will be bid t o a level where the security's ex pected return just equals i t s required return. New informati on about t he ex pected return and risk of a security will be reflected quickly, and in an unbiased fashion , in i ts price. In an efficient capit al m arket, shareholders can measure the performance of a firm's managers by observing the firm's st ock price. Acti ons t hat i ncrease a firm's st ock price are contribut ing directl y to t he goal of max im iz ing shareholder wealt h.

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C hapter 2 T he Domesti c and Internati onal Fi nancial Marketpl 9. It i s much easier and cheaper for a firmace t o raise capit al i n the marketpl ace if that m arketpl ace operates in an informati onall y efficient m anner. W hen the capit al m arkets are informationally efficient, all relevant i nformation regarding the prospects of a firm’s securities is reflected in the price of those securities. Investors can buy securities with t he comfort of knowing that these securities are li kely to be “fairly� priced, given their risk and return characterist ics. 10. a. A multi nati onal corporati on is a firm t hat has investm ents i n manufacturing and/or

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C hapter 2 T he Domesti c and Internati onal Fi nancial Marketpl ace dist ributi on facil it ies in m ore than one country. b. The spot exchange rat e is t he rate of ex change for currencies being bought and sold for im mediate deli very. c. The forw ard exchange rat e is t he rate of ex change between currencies to be deli vered at a future date, such as 30, 90, or 1 80 days from t oday. d. A direct quot e is t he come currency price of one unit of a foreign currency. An indirect quote is t he foreign currency price of one unit of home currency. e. An opti on is a contract or security that gives the opti on buyer th e right , but not the obli gati on, to either buy or sell a fix ed amount of another good or security, such as foreign currency, at a fix ed price at a tim e up to, or at, t he ex pirati on date of the option.. f. The L ondon int erbank off er rat e (L IBOR) is t he i nterest rate at which banks i n the Eurodoll ar market l end to each other. g. The Euro is a compos it e currency whose value is based on the weighted value of 17 European currencies. On J anuary 1, 2002, the euro replaced the indivi dual currencies of the original 11 member European countries and became a comm on currency of these 11 counti es. S ince 2002, 6 other European countries have adopted the euro as their currency.

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C hapter 2 T he Domesti c and Internati onal Fi nancial Marketpl ace

SOLUTI ONS TO PROBLEMS:

1 . Ret u rns o ve r th e p a st 1 2 m o n th s: a . +6 .2 % b . +7 .1 % c. +3 .6 % d . +8 .4 % 2 . P e rcen ta ge Ho ldin g P e rio d (HP ) Re tu rn = [ (44 0 0 - 4 0 0 0 + 4 (40 ))/4 0 0 0 ] x 1 0 0 % = 14% Not e : T h is p rob lem ign o res tra n sa ctio n co sts. A lso, sin ce t h e st o ck h a s b e e n so ld, n e xt ye a r’s e xp e cte d p rice p e rf o rm a n ce is irre leva n t. 3. P e rcen ta ge HP Re tu rn = [(9 5 0 0 - 1 0 ,0 0 0 + 2 (60 0 ))/1 0 ,0 0 0 ] x1 0 0 % = 7% Not e : T h is so lut ion ign o res int e rest t h e in ve sto r m a y h a ve rece ive d f rom re inve stin g t h e f irst $ 6 0 0 in te rest p a ym e n t. T h e in f o rm a tio n a b o u t th e co m m o n st o ck p u rcha se s is n o t rele va n t in co m p u tin g b o n d re tu rns. 4 . P e rcen ta ge Ho ldin g P e rio d Re tu rn: = [ ($1 0 0 ,0 0 0 - $ 9 9 ,5 0 0 )/$ 9 9 ,5 0 0 ] x 1 0 0 % = 0 .5 0 2 5 % On a n a n n u a l b a sis, t h is is sligh tly grea te r th a n 6 %. 5 . P e rcen ta ge Ho ldin g P e rio d Re tu rn: = [ ($1 ,0 0 0 - $ 9 7 5 + $ 6 0 )/$ 9 7 5 ] x 1 0 0 % = 8 .7 2 % 6 .a . E xp e cte d P e rcen ta ge Ho ldin g P e rio d Re tu rn = [(6 5 - 6 0 + 4 )/6 0 ] x 1 0 0 % = 1 5 .0 % b. Rea lize d P e rcen ta ge Ho ldin g P e rio d Re tu rn = [(7 5 - 6 0 + 4 )/6 0 ] x 1 0 0 % = 3 1 .6 7 % c. Rea lize d P e rcen ta ge Ho ldin g P e rio d Re tu rn = [(5 8 - 6 0 + 4 )/6 0 ] x 1 0 0 % = 3 .3 3 % 2-6


C hapter 2 T he Domesti c and Internati onal Fi nancial Marketpl d. Rea lize d P e rcen ta ge Hold ingace P e rio d Re tu rn = [(5 0 - 6 0 + 4 )/6 0 ] x 1 0 0 % = -1 0 .0 % 7 . P e rcen ta ge Ho ldin g P e rio d (HP ) Re tu rn = [ ($1 2 ,8 0 0 - $ 1 4 ,0 0 0 )/$ 1 4 ,0 0 0 ] x 1 0 0 % = -8 .5 7 % Not e : T h e in f o rm a tio n a b o u t T rea su ry b ill yield s is n o t n e e d e d t o so lve t h is p rob lem . 8 . P e rcen ta ge Ho ldin g P e rio d (HP ) Re tu rn (b a se d o n e qu ity in ve stm e n t o n ly) = [ ($1 9 0 ,0 0 0 - $ 1 1 0 ,0 0 0 )/$ 3 3 ,0 0 0 ] x 1 0 0 % = 2 4 2 .4 2 % f or 6 months

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C hapter 2 T he Domesti c and Internati onal Fi nancial Marketpl ace P e rcen ta ge Ho ldin g P e rio d (HP ) Re tu rn (b a se d o n t o ta l o rigina l co st) = [ ($1 9 0 ,0 0 0 - $ 1 1 0 ,0 0 0 )/$ 1 1 0 ,0 0 0 ] x 1 0 0 % = 7 2 .7 3 % 9 . P e rcen ta ge Ho ldin g P e rio d Re tu rn = [ ($4 5 - $ 3 5 )/$ 3 5 ] x 1 0 0 % = 2 8 .5 7 % T h e st o ck a p p e a rs to b e a go o d in ve stm e n t b e ca u se t h e e xp e cte d retu rn e xce e d s t h e re qu ire d ra te o f re tu rn. Cost s of A u to m o b ile 10. Dat e E xch a n ge Rat e U.S . Dollar Ja p a n e se Ye n Ma rch 9 , 2 0 1 0 $ 0 .0 1 1 1 1 3 /Ye n $ 2 0 ,0 0 0 1 ,7 9 9 ,6 9 4 * Fe b 2 5 , 2 0 1 3 $ 0 .0 1 0 8 9 1 /Ye n $ 1 9 ,6 0 0 ** 1 ,7 9 9 ,6 9 4 * $ 2 0 ,0 0 0 ÷ $ 0 .0 1 1 1 1 3 /Ye n = 1 ,7 9 9 ,6 9 4 Ye n ** 1 ,7 9 9 ,6 9 4 Ye n x $ 0 .0 1 0 8 9 1 /Ye n = $ 1 9 ,6 0 0

1 1 . Cost per wa tch

Dat e

E xch a n ge rate

No . o f wa tch e s

U.S . Dollar

S wiss Fran cs

a . 0 3 /0 9 $ 0 .9 2 9 9 /f 1 0 ,0 0 0 1 1 7 .1 7 1 2 6 /1 0 ran c ** .0 b . 0 2 /2 5 /1 3 $ 1 .0 7 2 8 /f ran c 1 2 ,0 0 0 1 1 7 .1 7 † 1 2 6 .0 T o ta l Cost U. S. Dollars S wiss Fra n cs a . $ 1 ,1 7 1 ,6 7 4 * 1 ,2 6 0 ,0 0 0 b . $ 1 ,6 2 2 ,0 4 0 †† 1 ,5 1 2 ,0 0 0 * 1 ,2 6 0 ,0 0 0 f ran cs x $ 0 .9 2 9 9 /f ran c = $ 1 ,1 7 1 ,6 7 4 **$ 1 ,1 7 1 ,6 7 4 /1 0 ,0 0 0 wa tch e s = $ 1 1 7 .1 7 /wa tch 2-8


C hapter 2 T he Domesti c and Internati onal Fi nancial Marketpl ace † 1 2 6 .0 f ran cs x $ 1 .0 7 2 8 /f ran c = $ 1 3 5 .1 7 /wa tch † † $ 1 3 5 .1 7 /wa tch x 1 2 ,0 0 0 wa tch e s = $ 1 ,6 2 2 ,0 4 0

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C hapter 2 T he Domesti c and Internati onal Fi nancial Marketpl ace 12. E xch a n ge Ra te 3 /9 /1 0 2 /2 5 /1 3 Cou n try Curre n cy a . In d ia Rup e e 0 .0 2 1 9 0 .0 1 8 4 3 5 b . UK P o u n d 1 .4 9 9 5 1 .5 1 6 5 c.

Ja p a n Ye n

d.

E u roA rea E u ro

e.

Can a d a Dollar

0 .0 1 1 1 13 1 .3 6 0 0 0 .9 7 4 4

0 .0 1 0 8 91 1 .3 0 6 2 0 .9 7 4 5

a . [ (0.0 1 8 4 5 - 0 .0 2 1 9 3 ) (10 0 )]/0 .0 2 1 9 3 = -1 5 .8 7 % b . [ (1.5 1 6 5 - 1 .4 9 9 5 )(1 0 0 )]/1 .4 9 9 5 = +1 .1 3 % c. [ (0.0 1 0 8 9 1 - 0 .0 1 1 1 1 3 )(1 0 0 )]/0 .0 1 1 1 1 3 = -2 .0 0 % d . [ (1.3 0 6 2 – 1 .3 6 0 0 )(1 0 0 )]/1 .3 6 0 0 = -3 .9 6 % e . [(0 .9 7 4 5 - 0 .9 7 4 4 )(1 0 0 )]/0 .9 7 4 4 = +0 .0 1 %

13. Hold ing P e rio d Re tu rn (HPR):

HPR = [ $ 4 5 ,0 0 0 - $ 1 5 ,0 0 0 - 1 0 ($5 0 0 ) - $ 4 0 0 ] / $ 1 5 ,0 0 0 = 164%

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C hapter 2 T he Domesti c and Internati onal Fi nancial Marketpl ace 13th Edition Moyer Solutions Contemporary Financial Management

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Contemporary financial management 13th edition moyer solutions manual  

Download: http://testbanklive.com/download/contemporary-financial-management-13th-edition-moyer-solutions-manual/ Contemporary Financial Man...

Contemporary financial management 13th edition moyer solutions manual  

Download: http://testbanklive.com/download/contemporary-financial-management-13th-edition-moyer-solutions-manual/ Contemporary Financial Man...

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