Monday February 18, 2008Finance 301 SI1. What are the three largest stock exchanges?a. NYSE, NASDAQ, AMEX2. What are the 10 financial institutions discussed in your text?a. Investment Banking Houses- underwrites and distributes new investment securities and helps businesses obtain $. i. Merrill Lynchii. Help them create securities that are attractive, buy the securities, then resell them to savers. 1. actually primary b/c the investment banking house is a facilitator.b. Commercial banks- “department store” of finance. i. Initially were responsible for checking accounts, now offer more services such as stock brokerage and insurance.c. Financial Services Corporations- firm that offers wide range of financial services including investment banking, brokerage operations, insurance, and commercial banking.i. American Expressd. Savings and Loan Associations- take funds of many small savers and lending this money to home buyers and other types of borrowers.i. Had problems in 1980’s and had to combine with larger institutions.e. Mutual Savings Banks- similar to S & L’s but operate mostly in NE states. Lend mainly on a long term basis.f. Credit Unions- cooperative associations whose members are supposed to have a common bond. Member’s $ only loaned to other members. i. Usually cheapest form of $$.g. Pension Funds- retirement plans funded by corporations or gov’t agencies for their workers.h. Life Insurance Companies- take savings in form of annual premiums and invest the $ and then make payments to beneficiaries of insured parties. i. Mutual Funds- organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification.j. Hedge Funds- similar to mutual funds, but are not regulated by the SEC. Usually have minimum investment of $1 million +)3. What does the efficient markets hypothesis state?a. Securities are typically in equilibrium—they are fairly priced in the sense that the price reflects all publicly available information on each security. 4. What are the three levels of market efficiency?a. Weak form- states that all information contained in past stock price movements is fully reflected in current market prices. i. Actually can’t profit from looking at past trends. b. Semistrong-form- states that current stock prices reflect all publicly available information. So if this is true, it would do no good to look over annual reports, or Wall Street Journal. i. This is largely true, but you can still profit from finding and using new information. c. Strong form- states that all information, even private is reflected in stock pices. i. If this is true, even insiders would find it impossible to earn very high returns. ii. NOT TRUE!! Many insiders have benefited from insider trading which is usually illegal. 5. Bailey Corporation’s income statement is given here: (in thousands)Sales----------------------------------------------------$14,000,000Operating costs (not including D/A)----------------$7,000,000EBITDA-------------------------------------------------$7,000,000Depreciation/Amortization---------------------------$3,000,000EBIT-----------------------------------------------------$4,000,000Interest-------------------------------------------------- $1,500,000EBT------------------------------------------------------ $2,500,000Taxes----------------------------------------------------- $1,000,000NI--------------------------------------------------------- $1,500,000It’s total operating capital is $20 billion, and its total after tax dollar cost operating capital is $2 billion. During the year, they invested $1.3 billion in net operating capital. a. What is NOPAT?a. = EBIT (1-Tax) b. = $4,000,000,000 * (.6) = $2,400,000,000b. What is its net cash flow?a. = NI + DEP and AMORTb. = $1,500,000,000 + $3,000,000,000= $4,500,000,000c. What is its operating cash flow?a. = NOPAT + DEP and AMORTb. = $2,4o0,000,000 + (3,000,000,000)= $5,400,000,000d. What is its free cash flow?a. =NOPAT – Net Investment in Operating Capitalb. = $2,400,000,000 - $1,300,000,000 =