1

FinanceFinance School of Management School of Management

FINANCEFINANCE

Reviews of Questions and Problems

Part I: Chapter 1-3

2

FinanceFinance School of Management School of Management

Part one which includes Chapter 1 to 3 Performance

Excellent homeworkUnclean and unclear writingComplete homework on time!Complete your homework independently!Team work: good!

Error correcting

3

FinanceFinance School of Management School of Management

Chapter 1: What is Finance?Chapter 1: What is Finance?

Finance, as a scientific discipline, is the study of how people allocate scarce resources over time under conditions of uncertainty.Problems of homework:

Express your opinions in terms of financeKeep your work clean and clearThe concept of Trade-Off (such as return/risk,

consumption/saving, study/work )

4

FinanceFinance School of Management School of Management

Chapter 2: The Financial SystemChapter 2: The Financial System

Problems of homework: Understand correctly the concepts of Limited-

Liability, Moral-Hazard, Adverse-Selection and

Principal-Agent Give examples besides those in book How to determine the investment weight in the

S&P-Type indexes

5

FinanceFinance School of Management School of Management

Limited LiabilityLimited Liability

Common stock has the feature of Limited Liability and also represents a Residual Claim on assets of a corporation. (page 35)You are equity investor and your partner is debt holder,

so lenders do share some of the business risk along with the equity investors .

6

FinanceFinance School of Management School of Management

Moral-Hazard, Adverse-Selection and Moral-Hazard, Adverse-Selection and Principal-Agent Principal-Agent

Definitions and examples are given from page 30 to page 32 on book .

Sample answer:

7

FinanceFinance School of Management School of Management

Stock IndexesStock Indexes

Market Weighted Stock Indexes (See appendix on page 61-62 ):DJI- benchmark portfolio consists of one share of

each stock.S&P- holds each stock in proportion to its total

market value.DJI-type index will give inaccurate answer in

some cases.

8

FinanceFinance School of Management School of Management

Chapter 3: Financial StatementsChapter 3: Financial Statements

Question 3.1--deal with following items properlyDepreciation/Accumulated DepreciationNote Payable/Accounts Payable/Current LiabilityAverage Total Assets/Receivables

Question 3.10--deal with following items properly Interest Expenses/ LiabilitiesChange in Retained Earnings/Retained EarningsAdditional Financing Needed/Decrease in Short-term

debt Difficult Questions and Problems

9

FinanceFinance School of Management School of Management

Assignments 3.1-3.8Assignments 3.1-3.8

10

FinanceFinance School of Management School of Management

11

FinanceFinance School of Management School of Management

12

FinanceFinance School of Management School of Management

Percent-of –sales method: Firstly, to determine some fixed ratios to sales; Secondly, determine the rate of growth in sales=15%; Thirdly, forecast those items that are assumed to maintain

a constant ratio to sales; Finally, fill in the missing items in the income statement

and balance sheet.

Solutions: to refer to Excel 3.10

Assignments 3.10Assignments 3.10