1- When a company needed funds, it decided to get a bank loan instead of issuing bonds or new shares. If the possible reason had nothing to do with increasing returns for the shareholders or with transaction costs of issuing bonds or stocks, provide an alternative plausible reason.
2-Moody’s downgraded the city of Chicago citing problems pertaining to meeting its _________________ obligations. Consequently the city of Chicago apparently retaliated by ____________________________________
3- A Japanese company did an analysis for a project. The NPV turned out to be negative and the IRR turned out to be below the cost of capital. Yet the company decided to take the project. Assuming there were no business strategy component involved in the decision-making what could have been the justification for such an action.
5-Let us say that you are in a country insider trading is not illegal. You are among a handful of people who knows that company AAA is going to announce earnings tomorrow that will be way higher than expected. Consequently you take a large long position in the stock. You will sell your holding tomorrow after the public release of information. Will you be making arbitrage profit?
11- What simple interest rate would a bank have to offer a client to compete with another bank that offers 20% return compounded daily?
12- Why is it that even though banks have very low profit margin, the shareholders still end up making a good return on their equity investment. (Answer in a sentence or two only).
13- Recently the cost of steel has been rising and so has the value of the dollar. What will be the impact of these trends on the three big auto manufacturers in the US? Which of the two trends are detrimental to these companies’ profitability abroad? What should they do to minimize the effect of these trends?
14- What was your real return on investment if you bought something for $200 and sold for $240 and if CPI (consumer price index) rose from 124 to 134 during the same period.
15 – Why would it ever be in the shareholder’s best interests for the management to reject a takeover offer at a price 50% over and above the last traded price on the stock market?
16- You are friends with the VP of sales of PKM ShoeSource. You go out for a drink and each of you ends up discussing your day. Your friend says that it is has been a tough day because he has had to deal with irate customers all day. His company just launched a high-profile shoe that has been advertised as a shoe with a rare spring. There is lot of hype surrounding the shoe but he has not been able to sell the shoes because the company has not been making enough number of shoes. He has had to send back customers all day saying that because of supply issues his company has only been manufacturing 500 pairs every week. You know that the key feature of the new shoe, the spring, is made of a rare metal found in Mongolia. You just came back from Mongolia where you were delayed for number of days because of landslides in the northwest region. These landslides have caused several mines to be shut and all roads have been rendered non-navigable. You determine that based on the extent of damage to the mines and roads the supply issues will have an irreparable impact on the company’s sales so you take a short position in the stock and profit handsomely. Has insider trading taken place. Explain using appropriate terminology.
17- Your friend is VP of finance for AAPL and he knows that AAPL is not doing well. While visiting you for dinner the discussion moves to smartphones. You think that they are the best thing that happened to mankind and that the smartphone industry is going to grow by leaps and bounds for the foreseeable future. On the other hand, he thinks that the industry has already run its course. To support his argument your friend says that he knows that AAPL, the pioneer in this industry, is going to announce its earnings tomorrow evening and that they are going to be well below expectations. Your friend continues to argue with you. The argument gets heated and you ask your friend to leave. The next day you call your friend and apologize for your behavior and take a sizeable short position in AAPL to show your friend that you value his opinion and patch up. Should your friend worry about going to jail if the authorities find out. Explain using appropriate terminology
18- Why should a company like LinkedIn have higher required rate of return?
20- Why do hedge funds have lower regulatory requirements than mutual funds?
