Dr. P.V. Viswanath
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 Courses / MBA 648

## Assignments, Spring 2014

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

### Financial Markets and Institutions

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

Give the name of a specific financial intermediary (e.g. Bank of America or JP Morgan Chase or Visa) for the first five of the functions and write two or three sentences about each one, showing how it performs each of the functions.

### Betas

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).
We know that a stock's beta measures its sensitivity to market movements. We also know that the stock beta is related to the nature of the product sold by a company, especially its price elasticity.
What would the beta of the Groupon company be, if it were traded on the stock market as a separate company?

### Computation of Discount Rates for ANF

Go to this location and download the data. You will find daily data for about 15 years on ANF returns, the market risk premium, the risk-free rate and two factors (SMB and HML). These factors SMB and HML are described in your slides on Chapter 10. Use this information to estimate the required rate of return on ANF (Abercrombie and Fitch) using the CAPM and the two-factor Fama-French model (this one does not include the momentum factor described in your slides).