principle of finance

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Chapter 1 Exercise 3 P.24 Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company. In the U.S., insider trading based on inside information is illegal. Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company. In various countries, insider trading based on inside information is illegal. This is because it is seen as unfair to other investors who do not have access to the information. The authors of one study claim that illegal insider trading raises the cost of capital for securities issuers, thus decreasing overall economic growth.[1] However, some economists have argued that insider trading should be allowed and could, in fact, benefit markets.[2] Trading by specific insiders, such as employees, is commonly permitted as long as it does not rely on material information not in the public domain. However most jurisdictions require such trading be reported so that these can be monitored. In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. Ch2 P2 2. Determine the size of the M1 money supply using the following information. Currency Money market mutual funds $700 billion $2,000 billion Demand deposits $300 billion Other checkable deposits $300 billion Traveler’s checks $10 billion The M1 money supply would be: $700 billion (currency) + $300 billion (demand deposits) + $300 billion (other checkable deposits) + $10 billion (traveler’s checks) = $? billion. Chapter 3 1. The following three one-year “discount” loans are available to you: Loan A: $120,000 at a 7 percent discount rate Loan B: $110,000 at a 6 percent discount rate Loan C: $130,000 at a 6.5 percent discount rate a. Determine the dollar amount of interest you would pay on each loan and indicate the amount of net proceeds each loan would provide. Which loan would provide you with the most upfront money when the loan takes place? Loan A: $120,000 x .07 = $8,400 $120,000 - $8,400 = $? Loan B: $110,000 x .06 = $6,600 $110,000 - $6,600 = $? Loan C: $130,000 x .065 = $8,450 $130,000 - $8,450 = $? Loan C would provide the largest upfront money at $121,550 b. Calculate the percent interest rate or effective cost of each loan. Which one has the lowest cost? Loan A: $8,400/$111,600 = 7.53% Loan B: $6,600/$103,400 = 6.38% Loan C: $8,450/$121,550 = ?% Loan B would have the lowest effective interest rate or cost at 6.38% Problem 5. Following are selected balance sheet accounts for the Third State Bank: vault cash = $2 million; U.S. government securities = $5 million; demand deposits = $13 million; nontransactional accounts = $20 million; cash items in process of collection = $4 million; loans to individuals = $7 million; loans secured by real estate = $9 million; federal funds purchased = $4 million; and bank premises = $11 million. a. From these accounts, select only the asset accounts and calculate the bank’s total assets. Vault cash $2 million Cash in process of collection 4 U.S. government securities 5 Loans to individuals 7 Loans secured by real estate 9 Bank premises 11 Total assets $38 million b. Calculate the total liabilities for the Third State Bank. Demand deposits $13 million Nontransactional accounts ? Federal funds purchased Total Liabilities ? $37 million c. Based on the totals for assets and liabilities, determine the amount in the owners’ capital account. Total assets Less: total liabilities Equals: owners’ capital $38 million ? $1 million Chapter 4: Problem 5. The Friendly National Bank holds $50 million in reserves at its Federal Reserve District Bank. The required reserves ratio is 12 percent. a. If the bank has $600 million in deposits, what amount of vault cash would be needed for the bank to be in compliance with the required reserves ratio? $600 million x .12 = $72 million required reserves $72 million - $50 million reserves at Federal Reserve Bank= $? million vault cash b. If the bank holds $10 million in vault cash, determine the required reserves ratio that would be needed for the bank to avoid a reserves deficit. ($10 million + $50 million)/$600 million $60 million/$600million = ?percent c. If the Friendly National Bank experiences a required reserves deficit, what actions can it take to be in compliance with the existing required reserves ratio? ?????
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