Solution Manual For Basic Finance An Introduction to Financial Institutions, Investments, and Management, 11th Edition By Herbert Mayo

Solution Manual For
Basic Finance: An Introduction to Financial Institutions, Investments, and
Management 12th Edition by Herbert Mayo




INSTRUCTOR'S MANUAL


BASIC FINANCE
11th Edition


Herbert B. Mayo
The College of New Jersey

, TABLE OF CONTENTS*


Preface..................................................
ANSWERS TO THE PROBLEMS IN THE TEXT


Part 1 Financial Institutions
Chapter 4 Securities Markets..........
Chapter 6 International Currency Flows................


Part 2 Financial Tools
Chapter 7 The Time Value of Money...........
Chapter 8 Risk and Its Measurement.........
Chapter 9 Analysis of Financial Statements.......


Part 3 Investments
Chapter 10 The Features of Stock..............
Chapter 11 Stock Valuation..............................
Chapter 13 Bond pricing and Yields................
Chapter 14 Preferred Stock.......
Chapter 15 Convertible Securities.........
Chapter 16 Investment Returns...........
Chapter 17 Investment Companies..........


Part 4 Corporate Finance
Chapter 18 Forms of Business and Corporate Taxation....
Chapter 19 Break-even Analysis and the Payback Period....
Chapter 20 Leverage........
Chapter 21 Cost of Capital................................
Chapter 22 Capital Budgeting..............................
Chapter 23 Forecasting...........

,Chapter 24 Cash Budgeting............
Chapter 25 Management of Current Assets..............
Chapter 26 Management of Short-term Liabilities......
Chapter 27 Intermediate-Term Debt and Leasing.........


Part 4 Derivatives
Chapter 28 Options: Puts and Calls..................
Chapter 29 Futures and Swaps.....




*Note: There is no Instructor Manual material for Chapters 1, 2, 3, 5, and 12


ANSWERS TO THE PROBLEMS IN THE CHAPTERS




This part of the Instructor's Manual provides the answers to the problems in the chapters.
Similar problems, which may be used for additional assignments or as test questions, are
provided in the test bank.


Chapter 4
SECURITIES MARKETS




Teaching Guides for Problems in the Text
1. If the stock rises from $50 to $60, the gain is $1,000 on the purchase of 100 shares.
The return on the individual's investment depends on the amount of margin.


a. If the margin requirement is 25 percent, the amount the investor must put up is
$1,250 (0.25 x $5,000), so the return is $1,000/$1,250 = 80%.


b. If the margin requirement is 50 percent, the return is 40 percent ($1,000/$2,500).

, c. If the margin requirement is 75 percent, the required margin is $3,750 and the return
is 26.7 percent ($1,000/$3,750).


Be certain to point out the $1,000 capital gain is the same in all three cases but that the
percentage return differs because the amount put up by the investor differs in each case.




2. If the stock declines from $50 to $40, the loss is $1,000 on the purchase of 100 shares.
The return on the individual's investment once again depends on the amount of margin.


a. If the margin requirement is 25 percent, the amount the investor must put up is
$1,250, and the return is ($1,000)/$1,250 = -80%.


b. If the margin requirement is 50 percent, the return is -40 percent [($1,000)/$2,500].


c. If the margin requirement is 75 percent, the percentage loss is -26.73 percent
[($1,000)/$3,750].


The generalization from problems (1) and (2) is that the percentage return is affected by
the amount of margin and that the lower the margin requirement, the greater is the
potential swing in the return on the investor's funds.


3. a. $41.50 - $45 = ($3.50)
b. $45 - $41.50 = $3.50
c. $54 - $45 = $9
d. $45 - $54 = ($9)


In each case, the sale price is subtracted from the purchase price to determine the profit or
loss. Be certain to point out that the sale may occur before the purchase, which is the case
in each of the short sales.