Assume that you recently graduated with a degree in finance and have just reported to work as
an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is
Michelle DellaTorre, a professional tennis player who has just come to the United States from
Chile. DellaTorre is a highly ranked tennis player who would like to start a company to produce
and market apparel that she designs. She also expects to invest substantial amounts of money
through Balik and Kiefer. DellaTorre is very bright, and, therefore, she would like to under-
stand in general terms what will happen to her money. Your boss has developed the following
set of questions which you must ask and answer to explain the U.S. financial system to Della-
Torre.
a. Why is corporate finance important to all managers?
b. (1) What are the alternative forms of business organization?
(2) What are their advantages and disadvantages?
c. What should be the primary objective of managers?
(1) Do firms have any responsibilities to society at large?
(2) Is stock price maximization good or bad for society?
(3) Should firms behave ethically?
d. What factors affect stock prices?
e. What factors determine cash flows?
f. What factors affect the level and risk of cash flows?
g. What are financial assets? Describe some financial instruments.
h. Who are the providers (savers) and users (borrowers) of capital? How is capital transferred
between savers and borrowers?
i. List some financial intermediaries.
j. What are some different types of markets?
k. How are secondary markets organized?
(1) List some physical location markets and some computer/telephone networks.
(2) Explain the differences between open outcry auctions, dealer markets, and electronic
communications networks (ECNs).
(t 1). The liquidity premium for the corporate bond is estimated to be 0.7 percent. Finally,
you may determine the default risk premium, given the company’s bond rating, from the default
risk premium table in the text. What yield would you predict for each of these two investments?
b.Given the following Treasury bond yield information from the September 28, 2001, Federal
Reserve Statistical Release, construct a graph of the yield curve as of that date.
Maturity Yield
3 months 2.38%
6 months 2.31
1 year 2.43
2 years 2.78
3 years 3.15
5 years 3.87
10 years 4.58
20 years 5.46
30 years 5.45
c.Based on the information about the corporate bond that was given in part a, calculate yields
and then construct a new yield curve graph that shows both the Treasury and the corporate
bonds.
d.Using the Treasury yield information above, calculate the following forward rates:
(1)The 1-year rate, one year from now.
(2)The 5-year rate, five years from now.
(3)The 10-year rate, ten years from now.
(4)The 10-year rate, twenty years from now.
52 CHAPTER 1 An Overview of Corporate Finance and the Financial Environment
See Ch 01 Show.pptand
Ch 01 Mini Case.xls.
50 An Overview of Corporate Finance and the Financial Environment
