FIN 3110 Lecture Notes - Lecture 1: Consumer Protection, Securitization, Corporate Finance

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9 Jan 2017

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Role of financial markets and institutions chapter 1. Financial market: a market in which financial assets (securities) such as stocks and bonds can be purchased or sold. Surplus units: participants who receive more money than they spend, such as investors. Deficit units: participants who spend more money than they receive, such as borrowers. Securities: represent a claim on the issuers: debt securities debt (credit, or borrowed funds) incurred by the issuer, equity securities (stocks) represent equity or ownership in the firm. Accommodating corporate finance needs: the financial markets serve as the mechanism whereby corporations (acting as deficit units) can obtain funds from investors (acting as surplus units) Accommodating investment needs: financial institutions serve as intermediaries to connect the investment management activity with the corporate finance activity. Primary markets facilitate the issuance of new securities (original sale of securities) Secondary markets facilitate the trading of existing securities, which allows for a change in the ownership (resale of securities)

Related Questions

The study of finance consists of the following interrelated area(s):

a) Financial markets and institutions

b) Financial services

c) Investments

d) Managerial (business finance)

e) All of the above

The liquidity asset is one that can be easily converted to __________ without significant loss of its original value.

a) Bonds

b) Cash

c) Gold

d) Liquid

e) Silver

A goal of financial intermediaries is to improve the economic well-being. Other benefits include:

a) Diversification (risk)

b) Financial flexibility

c) Funds divisibility/pooling

d) Reduced costs

e) Related services

f) All of the above

4.____________ represents the current value of some future amount.

a)Assumed value

b)Future value

c)Present value

d)Zero value

The cost of money (interest rates) is based on (1) the rate of return that borrowers expect to earn on their investments, (2) saversâ preferences to spend income in the current period rather than delay consumption until some future period, _____________________________, and (4) expected inflation.

a) the level of economic activity

b) the risks associated with investments/loans

c) the trade deficit

d) the yield, or return that is earned on an investment

6.Short-term debt includes all of the following EXCEPT:

a)Bankerâs Acceptances

b)Certificates of Deposits (CDâs)

c)Commercial Paper

d)Eurodollar Deposits

e)Federal Funds

f)Government Bonds

g)Money Market Mutual Funds

h)Repurchase Agreements (Repos)

i)Treasury Bills (T-bills)

7.Common stockholders are usually referred to as the owners of the firm because investors in common stock have certain rights and privileges generally associated with ________________.

a)Contracts

b)Income stocks

c)Property ownership

d)Treaties

8.The concept of reducing the stand-alone risk of an individual investment by combining it with other investments to form a portfolio is called ______________.

a)Correlation coefficient

b)Diversification

c)Realized rate of return

d)Risk aversion

9.A _____________ is defined as the cash flows that could be generated from assets the firm already owns if they are not used for the project in question.

a)Balance Sheet

b)Budget

c)Income Statement

d)Opportunity Cost

e)Sunk Cost

To determine its required rate of return, the firm must compute the cost of each source of funds of capital that investors provide; that is, the firm must compute the ___________, the cost of preferred stock, the cost of retained earnings, and the cost of new common equity.

a) Cost of debt

b) Cost of equity

c) Cost of living

d) Cost of unemployment

ivorybat714

Question 25

1. What does the efficient market hypothesis require?

1. Financial markets to be competitive.

2. Prices to adjust rapidly.

3. Prices of undervalued securities to fall.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

3 points

Question 26

1. Which of the following does the strong form of the efficient market hypothesis suggest?

1. Inside information will not lead to superior investment results.

2. Inside information will lead to superior investment results.

3. Studying financial statements will not lead to superior investment results.

4. Studying financial statements will lead to superior investment results.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 27

1. Which of the following is the least broad-based measure of stock prices?

	a.	NASDAQ market index.
	b.	Dow Jones industrial average.
	c.	S&P 500 stock index.
	d.	AMEX market value index.

3 points

Question 28

1. What is dollar-cost averaging?

	a.	Periodically buying a round lot of stock.
	b.	Periodically investing a specified dollar amount in a stock.
	c.	A means to increase the average cost basis.
	d.	A means to ensure a positive return.

2 points

Question 29

1. Stock dividends cause:

	a.	The price of a share of stock to rise.
	b.	The price of a share of stock to fall.
	c.	The value of the firm to rise.
	d.	The value of the firm to fall.

2 points

Question 30

1. Which of the following occurs when a stock has a two-for-one split?

	a.	The price of the stock doubles.
	b.	The firm's assets increase.
	c.	The firm's liabilities decrease.
	d.	The par value of the stock is reduced.

3 points

Question 31

1. Dividend reinvestment plans offer which of the following advantages?

1. Deferment of federal income taxes.

2. A convenient means to accumulate shares.

3. Dollar-cost averaging.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	2.

3 points

Question 32

1. When the Federal Reserve seeks to expand the money supply, it:

	a.	Sells securities.
	b.	Buy securities.
	c.	Runs a deficit.
	d.	Runs a surplus.

2 points

Question 33

1. The sum of cash, currency, and demand deposits is:

	a.	M1.
	b.	M2.
	c.	M3.
	d.	M4.

3 points

Question 34

1. If the Federal Reserve lowers the target federal funds rate:

	a.	The discount rate rises.
	b.	Liquidity in the banking system is increased.
	c.	Security prices fall.
	d.	Required reserves are also decreased.

3 points

Question 35

1. The anticipation of inflation suggests that the investor should:

	a.	Buy bonds.
	b.	Anticipate higher interest rates.
	c.	Avoid real estate investments.
	d.	Sell stocks of gold companies.

3 points

Question 36

1. The current ratio is unaffected by:

	a.	Using cash to pay a dividend.
	b.	The collection of an account receivable.
	c.	Selling inventory for a profit.
	d.	Selling bonds and using the funds to finance inventory.

2 points

Question 37

1. Which of the following are true as the debt ratio increases?

1. Fewer assets are debt financed.

2. More assets are debt financed.

3. The ratio of debt equity increases.

4. The ratio of debt equity decreases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

2 points

Question 38

1. The technical approach suggests that future stock prices are forecasted by:

	a.	Past stock rates.
	b.	Financial ratios.
	c.	Accounting statements.
	d.	Monetary policy.

2 points

Question 39

1. The Dogs of the Dow strategy:

	a.	Forecasts the direction of the Dow Jones averages.
	b.	Suggests buying the Dow stocks with the highest dividend yields.
	c.	Outperforms the S&P 500.
	d.	Suggests buying the lowest-priced Dow stocks.

3 points

Question 40

1. Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?

	a.	Accounting and finance.
	b.	Finance and psychology.
	c.	Physics and finance.
	d.	Finance and marketing.

cyanant553

Please read the article and answer these THREE questions:

1. Why are conditions currently favorable for firms to issue debt and pay out the proceeds to stockholders?

2. What are dangerous impacts of issuing additional debt mentioned in the article?

3. TransDigm used the proceeds of their debt issue to pay a one-time dividend while Intel used the proceeds to repurchase shares. How does a repurchase differ from a one-time dividend? Why do you think the two firms chose different approaches to distributing cash to shareholders?

___________

"Borrowing for Dividends Raises Worries" at the Wall Street Journal on 10/06/2009

Rock-bottom interest rates and thawed credit markets are emboldening some companies to use bond-sale proceeds to go on the offensive, even if that means rewarding shareholders at the expense of bondholders.

The nascent trend is controversial because corporate borrowers are sinking themselves deeper into debt to pay out special dividends, buy back stock or finance acquisitions. While such moves were all the rage during the credit boom, most corporate-bond offerings during the recession have been used to reduce debt or stockpile cash.

Eric Felder, global head of credit trading at Barclays Capital, says the lure of low rates and companies' stables of cash increases "the risk of non-bondholder friendly events."

Last week's sale of $425 million of bonds by aircraft-parts manufacturer TransDigm Group Inc. is one of the back-to-the-past corporate-bond deals causing concern among some analysts. More than $360 million of the proceeds will be used to pay a special cash dividend to shareholders and management of the Cleveland company.

The added debt increased TransDigm's borrowings to 4.3 times its earnings before interest and taxes, compared with 3.1 times before last week's deal. The expected dividend of $7.50 to $7.70 a share is equal to nearly all of the net income that TransDigm reported since the end of fiscal 2003, according to Moody's Investors Service.

Moody's said the dividend "illustrates the company's aggressive financial policy." Moody's gave the new debt a junk rating of B3, even though the ratings firm said TransDigm's "strong operating performance will enable the company to service the increased debt level."

Sean Maroney, director of investor relations at TransDigm, says the "stability of our business, high profit margins and consistent cash flow" give the company "the ability to support this level of leverage."

Borrowing from bondholders to pay shareholder dividends is "a hallmark of an earlier credit era," Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

Companies like Dex Media Inc. DEX -0.18% took on debt to pay dividends to its private-equity owners, including Carlyle Group and Welsh, Carson, Anderson & Stowe, before taking the companies public. Dex Media filed for bankruptcy earlier this year under a mountain of debt.

With the federal-funds rate at 0% for nine months now and confidence returning to the stock and debt markets, investors have been driven to take on more risk. That is flooding the corporate-bond market with cash. Investors poured $43 billion into investment-grade corporate-bond funds in the second quarter and nearly $40 billion in the third quarter -- almost double previous peak quarters, according to Lipper AMG Data Services.

The wave of buying drove down borrowing costs for the average highly rated corporation to about 5%, according to Merrill, a level not seen since 2005. In the heat of the crisis last October, such rates averaged 9%. Through the end of September, more than 1,000 high-rated companies borrowed a record $860 billion, according to Dealogic.

In July, Intel Corp. INTC 0.33% sold $1.75 billion of convertible bonds, planning to use $1.5 billion of the proceeds to buy back shares. A spokesman for Intel declined to comment.

The computer-chip giant has a strong credit rating of single-A, so it doesn't carry a burdensome debt load. Still, the deal raised eyebrows among some analysts and investors, who say floating debt to buy back stock could become more common as companies regain confidence.

And as merger-and-acquisition activity revs up, the cheaper cost of debt compared with equity is tempting companies to use bond sales as a deal-making war chest.

Analysts are watching Kraft Foods Inc. in anticipation that the company would finance its proposed purchase of U.K. chocolate, candy and chewing gum maker Cadbury PLC by raising tons of debt. Last month's unsolicited bid by Kraft was then valued at about $16.7 billion, but it could be weeks before Kraft submits a formal offer.

Three major credit-ratings agencies have warned Kraft that they could slash the company's debt ratings if the company reaches a deal agreement with Cadbury. At the current offering price, Kraft would need to shell out at least $6 billion in cash, much of it likely from the debt markets, according to corporate-bond research firm Gimme Credit.

"Kraft is committed to maintaining an investment-grade rating," a Kraft spokesman said, declining to comment further.

So far in 2009, returns to high-grade bond investors are 19%, according to Merrill. "We've seen a feeding frenzy" because of low interest rates, says Kathleen Gaffney, portfolio manager at Loomis, Sayles & Co. She sold some bonds recently to take profits from the rally. Loomis Sayles wants to have cash on the sidelines in case the Fed raises rates soon or Treasury bonds sell off.

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FIN 3110 Lecture Notes - Lecture 1: Consumer Protection, Securitization, Corporate Finance

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