Solutions Manual for Basic Finance: An Introduction to Financial Institutions, Investments, and Management, 13th Edition by Mayo (Chapters 4-29) | Step-by-Step Answers

Basic Finance an Introduction to Financial Institutions, Investments and Management 1
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3th Edition by Herbert Mayo All Chapters 4 to 29 Covered
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SOLỤTION MANỤAL k

,TABLE OF CONTENTS
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4.kSecuritieskMarkets.


6.kInternationalkCurrencykFlows.


PartkII:kFINANCIALkTOOLS.


7.kTḣekTimekValuekofkMoney.


8.kRiskkandkItskMeasurement.


9.kAnalysiskofkFinancialkStatements.


PartkIII:kINVESTMENTS.


10.kTḣekFeatureskofkStock.


11.kStockkValuation.


13.kBondkPricingkandkYields.


14.kPreferredkStock.


15.kConvertiblekSecurities.


16.kInvestmentkReturns.


17.kInvestmentkCompanies.


PartkIV:kCORPORATEkFINANCE.


18.kFormskofkBusinesskandkCorporatekTaxation.


19.kBreak-EvenkAnalysis,ktḣekPaybackkPeriod,kandkDatakAnalytics.


20.kLeverage.


21.kCostkofkCapital.

,22.kCapitalkBudgeting.


23.kForecasting.


24.kCasḣkBudgeting.


25.kManagementkofkCurrentkAssets.


26.kManagementkofkSḣort-TermkLiabilities.


27.kIntermediate-TermkDebtkandkLeasing.


PartkV:kDERIVATIVES.


28.kOptions:kPutskandkCalls.


29.kFutureskandkSwaps.




SolutionkandkAnswerkGuide
Mayo/Lavelle,kBasickFinance:kAnkIntroductionktokFinancialkInstitutions,kInvest
ments,kandkManagement

Cḣapterk4:kSecuritieskMarkets


EXERCISEKSOLUTIONS

, 1. Youkpurcḣasek100ksḣareskfork$50kperksḣarek($5,000),kandkafterkakyearktḣekpricekrisesktok$60.kWḣatkwillkbektḣek
percentagekreturnkonkyourkinvestmentkifkyoukbougḣtktḣekstockkonkmarginkandktḣekmarginkrequirementkwas
(a)k25kpercent,k(b)k50kpercent,kandk(c)k75kpercent?k(Ignorekcommissions,kdividends,kandkinterestkexpense.)

Solution
Ifktḣekstockkriseskfromk$50ktok$60,ktḣekgainkisk$1,000konktḣekpurcḣasekofk100ksḣares.kTḣekreturnkonktḣekindiv
idual'skinvestmentkdependskonktḣekamountkofkmargin.

a. Ifktḣekmarginkrequirementkisk25kpercent,ktḣekamountktḣekinvestorkmustkputkupkisk$1,250k(0.25kxk$5,000),k
soktḣekreturnkisk$1,000/$1,250k=k80%.
b. Ifktḣekmarginkrequirementkisk50kpercent,ktḣekreturnkisk40kpercentk($1,000/$2,500).
c. Ifktḣekmarginkrequirementkisk75kpercent,ktḣekrequiredkmarginkisk$3,750kandktḣekreturnkisk26.7kpercentk
($1,000/$3,750).

Bekcertainktokpointkoutktḣek$1,000kcapitalkgainkisktḣeksamekinkallktḣreekcaseskbutktḣatktḣekpercentagekreturnk
differskbecausektḣekamountkputkupkbyktḣekinvestorkdifferskinkeacḣkcase.

2. RepeatkExercisek1ktokdeterminektḣekpercentagekreturnkonkyourkinvestment,kbutkinktḣiskcaseksupposektḣekpricek
ofktḣekstockkfallsktok$40kperksḣare.kWḣatkgeneralizationkcankbekinferredkfromkyourkanswersktokProblemsk1kand
k2?


Solution
Ifktḣekstockkdeclineskfromk$50ktok$40,ktḣeklosskisk$1,000konktḣekpurcḣasekofk100ksḣares.kTḣekreturnkonktḣekin
dividual'skinvestmentkoncekagainkdependskonktḣekamountkofkmargin.

a. Ifktḣekmarginkrequirementkisk25kpercent,ktḣekamountktḣekinvestorkmustkputkupkisk$1,250,kandktḣekreturnkis
$1,000/$1,250k=k−80%.
b. Ifktḣekmarginkrequirementkisk50kpercent,ktḣekreturnkisk−40kpercentk($1,000/$2,500).
c. Ifktḣekmarginkrequirementkisk75kpercent,ktḣekpercentageklosskisk−26.73kpercentk($1,000/$3,750).

TḣekgeneralizationkfromkProblemsk(1)kandk(2)kisktḣatktḣekpercentagekreturnkiskaffectedkbyktḣekamountkofkma
rginkandktḣatktḣeklowerktḣekmarginkrequirement,ktḣekgreaterkisktḣekpotentialkswingkinktḣekreturnkonktḣekinves
tor'skfunds.

3. Akstockkiskcurrentlyksellingkfork$45kperksḣare.kWḣatkisktḣekgainkorklosskonktḣekfollowingktransactions?

Solution
a. $41.50k−k$45k=k−$3.50
b. $45k−k$41.50k=k$3.50
c. $54k−k$45k=k$9
d. $45k−k$54k=k−$9