Question

6. Explain why it is so important for a company to have good forecast in the future.

7. Explain the term “ Depreciation is a NON cash expense” and how do company’s use it.

8. List a few advantages and disadvantages for opening up a company as a corporation.

9. Why do companies issue more stock (do equity financing), and tell why they might want to sell bonds (debt financing) instead.

10. Explain why online trading has become so big. Tell both why there are advantages and disadvantages to it.

11. If you invest $ 10,000 into a stock growing at 13 % how much will you have in 1 year, how much in 2 years and how much in 3 years?

12. If you put $ 100,000 into a bond paying 6 % , how much should you return a year?

Answer 1

12) In a year, return = 100,000 x 6% = 6,000 in coupons

11) In one year, Value = P x (1 + r)^n = 10,000 x (1 + 13%) = 11,300

In two year, Value = 10,000 x 1.13^2 = 12,769

In three year, Value = 10,000 x 1.13^3 = 14,429

10) Online trading

Advantages - Ease of trading, Better liquidity, Less information arbitrage, transparent process

Disadvantages - Higher turnover in portfolio, Higher volatility

9) Companies issue more stock because that provides them long term financing. They might want to opt for debt financing because it provides cheaper cost of financing than equity.