FINA 2770 Spring 2006 Review for Exam #3 NOTE: These review questions are a limited sample of the materials we covered in class. This is by no means a comprehensive coverage of all the topics you might see on the exam. You are still responsible for topics not covered in this review sheet. Refer to the text, homework assignments, and lecture notes for a complete coverage of the topics for exam #3. Use this review sheet only AFTER you have mastered the text, lecture notes, and homework assignments.Chapter 13 Review Questions 1. What steps should you take before beginning an investment program? Explain each step in details. Be specific. 2. Calculate the amount a person/family needs to establish an emergency fund. How did you calculate this amount? 3. How do most individuals/families fund an investment program? Discuss at least four common approaches. 4. Using the concept of time value of money, explain the “Value of Long-Term Investments Programs” (p.421-422). How does a long-term investment program work? Why do we emphasize the word, “long-term?” 5. Discuss how to evaluate investment alternatives (i.e., stocks, bonds, mutual funds). Use Exhibit 13-3 as part of your discussion. 6. What is a (cash) dividend? 7. Financial planning problems (p.444). #1, 2, 5, 6 8. Financial planning case (p. 446). #1-5. 9. Explain the following risks associated with an investment program. Inflation Risk Interest Rate Risk Business Failure Risk Market Risk Global Investment RiskCHAPTER 13 QUIZ TRUE-FALSE _____1. Long-term objectives are defined as objectives that can be accomplished within one year. _____2. An emergency fund is a certain amount of money that can be obtained quickly in case of immediate needs. _____3. A line of credit is a long-term loan that is approved before the money is actually needed. _____4. There is no relationship between safety and risk when choosing an investment. _____5. A speculative investment is usually defined as one that is made in the hope of earning a relatively large profit in a short time. MULTIPLE CHOICE _____6. Corporate bonds a. are tax exempt from federal taxation. b. must be repaid at maturity. c. pay dividends on a quarterly basis. d. are debt obligations, and, therefore, risk free. _____7. Which of the following investments would have the greatest potential for safety? a. Government bonds b. Stocks c. Corporate bonds d. Mutual funds _____8. Which of the following investments would have the greatest potential for risk? a. Preferred stock b. Corporate bonds c. Common stocks d. Bank accounts _____9. Which of the following statements is false? a. Asset allocation is the process of spreading your assets among several different types of investments. b. Asset allocation eliminates the risk associated with an investment program. c. The time your investments can work for you is a major factor to consider when choosing investment alternatives. d. Your age is a factor that should be considered when establishing an investment program. _____10. Which source of investment information provides the most current data? a. Newspapers b. Corporate reports c. Business periodicals d. Moody’s Investment ReportsChapter 14 Review Questions 1. Why do investors purchase common stocks? Describe at least three reasons. 2. Be able to work out a problem like “Sample Stock Transaction for GM” (p. 456). Understand how transactions costs (i.e., commissions) affect investment returns. 3. What is a 2-for-1 stock split? Give an appropriate example of such split. Why do corporations decide to split their stock? Is a stock split good or bad for investors? 4. What is a preferred stock? Compare and contrast a preferred stock and a common stock? Be specific. Hint: Examine the features of each type of stock. 5. Define and discuss classification of stock investments (p. 460). 6. Know how to read the financial section of the Newspaper (Exhibit 14-4 on p. 461) 7. Explain (1) fundamental analysis (2) technical analysis (3) efficient market theory. 8. Discuss (1) Buy-and-hold technique and (2) Dollar cost averaging. Show how each investment method works. Why are they important in personal financial planning? 9. Financial planning problems #1-9 (p. 487-488)CHAPTER 14 QUIZ TRUE-FALSE _____1. Corporations sell common stock to finance their business start-up costs and help pay for their ongoing business activities. _____2. A corporation must pay dividends to stockholders. _____3. _____4. _____5. The book value for a share of stock is determined by deducting all liabilities from the corporation’s assets and dividing the remainder by the number of outstanding shares of common stock. MULTIPLE CHOICE _____6. A corporation whose stock is owned by relatively few people and is not traded openly in stock markets is called a ____________ corporation. a. public b. private c. called d. converted _____7. A stock split a. always guarantees that the investor will make money. b. enables management to bring a stock’s price into an “ideal” price range. c. is always used to lower the stock’s market price. d. doesn’t affect the value of a share of the corporation’s stock. _____8. A feature that enables preferred stock investors to receive omitted dividends is called a ____________ feature. a. cumulative b. participation c. conversion d. callable _____9. A stock that follows the business cycle of advances and declines in the economy is called a(n) ____________ stock. a. blue-chip b. income c. growth d. cyclical _____10. When stocks are traded between investors, they are traded in the ____________ market. a. investment banking b. primary c. secondary d. efficient.Chapter 15 Review Questions 1. Graphically show how a 10-year corporate bond (worth $10,000,000) issued by General Electric that pays 7.5% interest work. Be sure to discuss corporate bond, face/par value, coupon payments, maturity date, and a sinking fund provision in your answer. 2. What is a zero-coupon bond? How does it differ from the above GE bond? 3. Define and discuss the following types of bonds: a. Debenture bond b. Mortgage bond c. Subordinated bond d. Convertible bond e. Callable bond 4. Compare and contrast (1) Treasury Bills (2) Treasury Notes (3) Treasury Bonds. 5.