Financial reporting - benchmarking, annual returns and more
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Question 1
When analyzing a company, what is "benchmarking" and what are advantages and disadvantages of using this technique?
Disadvantages:
Advantages:
Question 2
What is mortgage securitization and how has it affected our economy?
Question 3
You want to have $750,000 in your retirement fund when you retire in 30 years. How much must you invest each month if you expect to earn an 8% annual return, compounded annually?
Question 4
Assuming you meet your goal in the above question and have $750,000 when you retire, what is the maximum that you can withdraw each year, if you anticipate living 25 years during retirement and earning 6% annually?
Question 5
Why is daily compounding better than annual compounding?
Question 6
An investment will pay $500/year for 5 years, then $1,000/year for the next 6 years. At a 6% return, what is today's value of this investment?
Question 7
An investment will return $100/year forever. If you desire an 8% return, what is the maximum price you would pay for this investment?
Question 8
In the above problem, what would cause someone to want a 6% return, while someone else might want a 7% return?
Question 9
What would be the price of a 9%, 10-year corporate bond, sold to yield 7%? Assume interest is paid annually.
Question 10
A stock has a beta of 1.3. The expected return on the market is 10% and the risk-free rate is 3%. What is the required rate of return on the stock?
Question 11
What type of risk do coupon bonds have that zero-coupon bonds do not have? Explain your answer.
Question 12
In our current economic situation, investors tend to be more conservative. How does this affect the Security Market Line and security prices?
Question 13
What concerns exist regarding beta and the CAPM?
Question 14
Please explain the 5 determinants of the market (or "quoted" or "nominal" ) interest rate.
Question 15
Please explain inflation's impact on bond prices, all else held constant.
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Solution Summary
Financial reporting for benchmarking, annual returns and more are examined.
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Question 1
When analyzing a company, what is "benchmarking" and what are advantages and disadvantages of using this technique?
Benchmarking is when companies compare its ratios to other leading companies in the same industry.
Disadvantages:
1) To set goals for high-level performance, it is best to benchmark on the industry leader's ratios rather than the industry average ratios.
2) Many large firms operate different divisions in different industries, and for such companies it is difficult to develop a meaningful set of industry averages. Therefore, industry averages are more applicable to small, narrowly focused firms than to large, multidivisional ones.
3) Companie's choices of different accounting practices can distort comparisons.
Advantages:
Some of the advantages of benchmarking are that it enables companies to outperform, it also opens business people's mind to new ideas and to perform changes.
Question 2
What is mortgage securitization and how has it affected our economy?
Mortgage securitization is defined as a technique that allows the mortgage issuers to access fresh funding and to transfer the market and credit risk imbedded with their existing loan. Here a mortgage originator sells its loan portfolio to an independent special purpose vehicle and the SPV in turn issues securities to capital market investors in order to buy that portfolio of mortgage loan. The cash generated from the interest and principal repayments of the loans is used to service the securities backed by mortgages issued to the investors.
It helps the economy as the banks reduce their NPAs and get the funds for issue of fresh loans and funding and this in turn increases the money supply in the economy.
Question 3
You want to have $750,000 in your retirement fund when you retire in 30 ...
Education
- MBA, Indian Institute of Finance
- Bsc, Madras University
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