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FINE 441 Lecture Notes - Lecture 6: Open Market Operation, Fiscal Policy, Monetary Policy

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azuremouse416
15 Dec 2015
School
McGill University
Department
Finance
Course
FINE 441
Professor
Larbi Hammami

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Document Summary

Problems from chapter 16: 3 to 6,9 to 12,14 to 25,27,28 to 32. Fundamental stock valuation: macroeconomic and industry analysis :a. When performing fundamental analysis it is very important to begin the analysis with the economy. The top-down approach calls for analysis of the economy with the goal of identifying industries and companies that will perform well in that economic environment: economic analysis. A top-down analysis of a company begins with an examination of global economic prospects. Factors that may have relevance would include political risk. Exchange rate risk has several elements that are important to global economic analysis. Unfavorable movements in exchange rates will affect a firm"s sales and profits. When investing in foreign markets, analysts must consider the effect that changes in exchange rates will have on return. Most of these variables will have some impact on the prospects of most firms.

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Related Questions

Book: Financial management

1. Review the requirements of the Chapter 3 Mini-Case, parts b through j. Then apply those requirements to do an analysis of Brinker International, which is a real company. Don't complete the minicase itself, just Brinker. Do the analysis on the basis of the figures for the most recent year. For part g, use the 2 most recent years. Download 10K financial statements for the most recent year for Brinker. A good source is the company's home page. Also compare the Brinker ratios to the industry averages and commend on significant differences. You'll note that some of the company's ratios you calculate won't agree with those found on the web page. Ratios are calculated in different ways, however, you should use the formulas in the text. Also, you won't find all of the industry averages, but you will find most of them. You'll need the company's stock price for several of the ratios; use the fiscal year end price. The company's stock symbol is EAT.

(Visit Brinker web site) (Links to an external site.)

(Access industry averages) (Links to an external site.)

Note:

All quantitative work must be done in Excel; Word is not acceptable. You can download Brinker's 10K (annual financial statements they send the Securities and Exchange Commission each year) at the following site:

http://phx.corporate-ir.net/phoenix.zhtml?c=119205&p=irol-sec

You then need to take the various items off the financial statements such as Revenues, Inventory, etc. and calculate the ratios to answer the case questions.

b. calculate the 2014 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2012, 2013, and as projected for 2014? We often think of rations as being useful 1. To managers to help run the business, 2. To bankers for credit analysis, and 3. To stockholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios?

c. Calculate the 2014 inventory turnover, days sales outstanding, fixed assets turnover, and total assets turnover. How does Brinker utilization of assets stack up against that of other firms in its industry?

d. calculate the 2014 debt ratio, liabilities to assets ratio, times-interest-earned, and EBITDA coverage ratios. How does Brinker compare with the industry with respect to financial leverage: what can you conclude from these ratios:

e. Calculate the 2014 profit margin, basic earning power, return on assets, and return on equity. What can you say about these ratios?

f. Calculate the 2014 price/earnings ratio, price/cash flow ratio, and market/book ratio. Do these ratios indicate the investors are expected to have a high or low opinion of the company?

g. Perform a common size analysis and percentage change analysis. What do these analyses tell you about Brinker?

h. use the extended DuPont equation to provide a summary and overview of Brinker’s financial condition as projected for 2014. What are the firm’s major strengths and weaknesses?

i. What are some potential problems and limitations of financial ratio analysis?

j. What are some qualitative factors that analysts should consider when evaluating a company’s likely future financial performance.

Based from the Abstract and conclusion, please give comments andkey points of the article entitled “Computational evidence on thedistributive properties of monetary policy.”

Abstract

Empirical studies have pointed out that monetary policy maysignificantly affect income and wealth inequality. To investigatethe distributive properties of monetary policy the authors resortto an agent-based macroeconomic model where firms, households andone bank interact on the basis of limited information and adaptiverules-of-thumb. Simulations show that the model can replicatefairly well a number of stylized facts, especially those relativeto the business cycle. The authors address the issue using threetypes of computational experiments, including a global sensitivityanalysis carried out through a novel methodology which greatlyreduces the computational burden of simulations. The result emergesthat a more restrictive monetary policy increases inequality, eventhough this effect may differ across groups of households. Inaddition, it appears to be attenuated if the bank’s willingness tolend is lower. The overall analysis suggests that inequality canconstitute valuable information also for central banks.

Conclusion

Recent empirical studies have pointed out that monetary policymay significantly affect income and wealth inequality throughseveral channels. This influence is exerted not only becausemonetary policy can affect different income sources in differentways, but also because households are heterogeneous with regards tothe relative size of their income sources. Despite its relevance,this subject has gone relatively ignored by economic theory, mainlybecause the use of representative agents makes mainstream modelsinadequate to assess distributions and inequality (with the recentexception of the HANK models). To properly investigate thedistributive properties of monetary policy, therefore, in thispaper we resort to agent-based techniques in which agents’heterogeneity plays a fundamental role. The theoretical frameworkwe set up is an agent-based macroeconomic model where firms,households and one bank interact on the basis of limitedinformation and adaptive rules-of-thumb. Simulations show that themodel is able to replicate fairly well a number of stylized facts,especially those relative to the business cycle. Subsequently, weemploy the model as a computational laboratory through which we cansimulate changes in monetary policy and assess their influence onincome and wealth inequality. Our analysis is three-fold. As apreliminary step we simulate a monetary policy shock that consistsin a rise of the policy interest rate occurring in the course of asingle simulation. The second step is to perform Monte Carloexperiments involving the policy rate only. Finally, we carry out aglobal sensitivity analysis exercise in order to control for otherparameters, in particular to evaluate possible interactions betweenthe monetary policy and the credit policy adopted by the bankingsystem. We point out that the last kind of analysis is implementedthrough a novel methodology which greatly reduces the computationalburden of simulations. Consistently with part of the empiricalliterature, from all the three experiments the robust resultemerges that a more restrictive monetary policy increases economicinequality, the main reasons being increasing unemployment andincreasing capital income. This is an interesting result as itsuggests that the social responsibility of central banks may gobeyond their role of keeping price stability and that inequalitycan be a very important information for central bankers when theyset their policy goals. Moreover, our finding could even constitutean argument in favor of a more democratic control of monetarypolicy actions. Moreover, we find that the effect of monetary policyon inequality seems to be smaller when the bank’s willingness tolend is lower. This entails that the ability of monetary policy toaffect inequality may be reduced during recessions, when “creditcrunches” are more likely to occur. As a consequence, fears ofpossible distortionary effects caused by expansionary monetarypolicy interventions may be unmotivated if the economy is inrecession. Finally, our analysis highlights that the influence ofmonetary policy on inequality is asymmetric, as different groups ofhouseholds are hit by policy shocks in different ways. Inparticular, a restrictive monetary policy appears to increaseinequality for the lower and middle-income classes, but not for thetop class. This additional insight hints that it could be usefulfor empirical studies to focus not only on the whole population ofhouseholds but also on sub-groups. Although rich enough to providenon-trivial insights, we concede that our model suffers from someimportant limitations such as the absence of households’ debts andmore diversified portfolio investment opportunities. However, theintroduction of these features is left for future works.

Question 1

The correlation of stock market returns between the U.S. and Japan is ____ and ____.

High, increasing.

High, decreasing.

Low, increasing.

Low, decreasing.

Low, remaining constant.

Question 5

Which of the following is not a reason given for why forecaster are so often incorrect?

There is a temptation for economic forecasters to stay fairly close to the "norm," that is, "group think."

Many analysts are simply too short-sighted.

Economists and economic forecaster often suffer from information overload.

Some economic forecasters are too broad-minded, trying to include a number of ideas in their forecasts.

None of the above (that is, all are reasons cited for why forecasters are often incorrect)

Question 6

Which of the following statements concerning asset allocation is false?

Diversification across international boundaries can improve risk-adjusted portfolio returns.

Economies expected to grow at an above-average rate with above-average profit growth should be considered as candidates to overweight in a global portfolio.

Severe currency blockages should not impact global diversification selections.

Portfolio allocation among asset classes may provide higher portfolio returns while lowering portfolio risk levels.

None of the above (that is, all statements are true).

Question 17

Defensive companies are firms where

Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.

Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.

Sales, earnings and cash flows are heavily influenced by aggregate business activity.

Sales, earnings and cash flows are growing exponentially.

None of the above.

Question 18

Speculative companies are firms where

Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.

Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.

Sales, earnings and cash flows are heavily influenced by aggregate business activity.

Sales, earnings and cash flows are growing exponentially.

None of the above.

Question 19

A firm that follows a defensive competitive strategy could

Lower production costs.

Create a strong brand image.

Use its buying power to obtain price concessions.

a and b

b and c

Question 22

A growth company can invest in projects that generate a return greater than the firm's

Return on equity.

Cost of debt.

Cost of equity.

Cost of capital.

Return on assets.

Question 33

A bond denominated in U.S. dollars and sold in Japan to Japanese investors is called a

Samurai bond.

Eurobond.

Yankee bond.

Euroyen bond

Foreign bond.

Question 43

Futures contracts are similar to forward contracts in that they both

Have volatile price movements and strong interest from buyers and sellers.

Give the holder the option to make a transaction in the future.

Have similar liquidity.

Have similar credit risk.

None of the above.

Question 46

Which of the following is not considered a "cost of carry"?

Commissions for physical storage

An opportunity cost for the net amount of invested capital

A premium for the convenience of consuming the asset now

A risk premium for uncertainty

All of the above are considered costs of carry.

Question 48

The most popular financial futures in terms of average daily volume is the

OEX contracts.

S&P 500 contracts.

LIBOR contracts.

T-bill contracts.

T-bond contracts.

Question 49

The bond that maximizes the difference between the invoice price and the delivery price is referred to as the

Cheapest-to-deliver.

Conversion bond.

Delivery bond.

Cheapest to substitute.

Cost-of-carry.

Question 50

An investor who wants a long position in a ____ must first place the order with a broker, who then passes it on to the trading pit or electronic network. Details of the order are then passed on to the exchange clearinghouse.

Call option

Put option

Forward contract

Futures contract

None of the above