Dr. P.V. Viswanath



Economics/Finance on the Web
Student Interest

  Courses / MBA 648  

Assignments, Spring 2011


Problem assignments from: Jonathan Berk and Peter DeMarzo, Corporate Finance: The Core, Pearson Prentice-Hall.


Financial Markets and Institutions (Individual Assignment)

As explained in the slides, financial functions can be broadly divided into six categories:

  • To transfer economic resources across time, borders and among industries
  • To provide ways of managing risk
  • To provide ways of clearing and settling payments to facilitate trade
  • To provide a mechanism for the pooling of resources and for the subdividing of ownership in various enterprises
  • To provide price information to help coordinate decentralized decision making in various sectors of the economy
  • To provide ways of dealing with the incentive problems created when one party to a transaction has information that the other party does not or when one party acts as an agent for another

Choose a specific financial intermediary (e.g. Bank of America or Visa or FICO (formerly Fair Isaac Corporation)) and write two paragraphs explaining what financial function (of the ones described above) it performs and how. Do not write about a class of intermediaries, such as Investment Bankers; pick a specific one (e.g. JP Morgan Chase) and explain exactly how this institution performs one or more of the functions described above.

Betas (Team Assignment)

The Groupon company is discussed in the NY Times of Nov. 23, 2010. (http://boss.blogs.nytimes.com/2010/11/23/doing-the-math-on-a-groupon-deal/?ref=business).
In class, we noted that a stock's beta measures its sensitivity to market movements. We also spoke about the relationship between the nature of the product sold by a company, especially its price elasticity and its beta.
What would the beta of the Groupon company be, if it were traded on the stock market as a separate company?

Thoughts on an answer:

When would a company want to avail itself of Groupon's services? Would it be when the economy is doing well or when it's doing badly? My guess is that it would be when the economy is doing badly. If that is correct, then Groupon's sales would be high when the market is doing badly and low when the market is doing well. This suggests a low beta or maybe even a negative beta. As far as Groupon's costs are concerned (office costs, internet costs, personnel costs), they are probably going to move in sync with the economy. Hence that will reinforce the low beta.

Although Groupon may be a "tech" firm, does it make sense to classify it with tech firms like Google or Microsoft? Are the products that all the tech firms sell the same? Here's what one of the students in a previous class, Philipp Zahn, said -- right on the ball: The article states that many believe, that only “desperate” businesses cooperate with Groupon. If this is really the case, Groupon might be able to find more partners in a bad economic situation. Groupon woul profit from a beta. In bad economic times, consumers are more motivated to look for goods and services that can be purchased below market price. Therefore, more customers might be willing to purchase coupons at Groupon. Groupon would profit from a general bad economy, and return on assets would change in opposition to the companies of the benchmark. This would also cause the beta to be negative. However, consumers spend less in bad economic times. It is uncertain, if this decrease in spending has a stronger effect on Groupon, than the fact, that consumers are more interested in low price goods and services in bad economic times.