Finance Final

One year ago, you purchased 200 shares of SL Industries stock at a price of $18.97 a share. The stock pays an annual dividend of $1.42 per share. Today, you sold all of your shares for $17.86 per share. What is your total dollar return on this investment?

$62 Explanation: Total dollar return = ($17.86 − 18.97 + 1.42) (200) Total dollar return = $62

Two IPOs will commence trading next week. Scott places an order to buy 600 shares of IPO A. Steve places an order to purchase 600 shares of IPO A and 600 shares of IPO B. Both IPOs are priced at $21 a share. Scott is allocated 300 shares of IPO A. Steve is allocated 300 shares of IPO A and 600 shares of IPO B. At the end of the first day of trading, IPO A is selling for $23.30 a share and IPO B is selling for $17.75 a share. How much additional profit did Steve have at the end of the first day of trading as compared to Scott?

-$1,950 Explanation: Difference = 600($17.75 − 21) Difference = −$1,950

A stock had annual returns of 11.3 percent, 9.8 percent, −7.3 percent, and 14.6 percent for the past four years. Based on this information, what is the 95 percent probability range of returns for any one given year?

-12.5 to 26.7 percent Explanation: Average return = (.113 + .098 − .073 + .146)/4 Average return = .071, or 7.1% σ = {[1/(4 − 1)] [(.113 − .071)2 + (.098 − .071)2 + (−.073 − .071)2 + (.146 − .071)2]}.5 σ = .0981, or 9.81% 95% probability range = .071 ± 2 (.0981) 95% probability range = −12.5 to 26.7%

Last year, you purchased 400 shares of Analog stock for $12.92 a share. You have received a total of $136 in dividends and $4,301 in proceeds from selling the shares. What is your capital gains yield on this stock?

-16.78 Explanation: Capital gains yield = [($4,301/400) − $12.92]/$12.92 Capital gains yield = −.1678, or −16.78%

Jen owns 7,500 of the 480,000 shares of TC Inc. The company has just announced a rights offering whereby 75,000 shares are being offered at a subscription price of $12 a share. The current stock price is $16 a share. Assume she sells her rights and that all rights are exercised. What percentage of the firm will she own after the rights offering?

1.35 percent Explanation: New ownership percentage = 7,500/(480,000 + 75,000) New ownership percentage = .0135, or 1.35%

You own a portfolio that has $2,800 invested in Stock A and $3,250 invested in Stock B. The expected returns on these stocks are 14.7 percent and 9.3 percent, respectively. What is the expected return on the portfolio?

11.80 percent Explanation: E(Rp) = [$2,800/($2,800 + 3,250)](.147) + [$3,250/($2,800 + 3,250)](.093) E(Rp) = .1180, or 11.80%

The returns on the common stock of New Image Products are quite cyclical. In a boom economy, the stock is expected to return 23 percent in comparison to 14 percent in a normal economy and a negative 18 percent in a recessionary period. The probability of a recession is 18 percent while the probability of a boom is 22 percent. What is the standard deviation of the returns on this stock?

13.71 percent Explanation: E(r) = .22(.23) + .60(.14) + .18(−.18) E(r)= .1022 σ = [.22(.23 − .1022)2 + .60(.14 − .1022)2 + .18(−.18 − .1022)2].5 σ = .1371, or 13.71%

Mountain Mining requires $3.3 million to expand its current operations and has decided to raise these funds through a rights offering at a subscription price of $18 a share. The current market price of the company's stock is $24.70 a share. How many shares of stock must be sold to fund the expansion plans?

183,333 Explanation: Number of new shares = $3,300,000/$18 Number of new shares = 183,333

What is the standard deviation of the returns on a $30,000 portfolio that consists of Stocks S and T? Stock S is valued at $18,000.

2.80 percent Explanation: E(r)Boom=[$18,000/$30,000](.11) + [($30,000 − 18,000)/$30,000](.09)=.102 E(r)Normal=[$18,000/$30,000](.08) + [($30,000 − 18,000)/$30,000](.07)=.076 E(r)Bust=[$18,000/$30,000](−.05) + [($30,000 − 18,000)/$30,000](.04)=-.014 E(r)Portfolio= .05(.102) + .85(.076) + .10(−.014) E(r)Portfolio= .0683 σPortfolio= [.05(.102 − .0683)2+ .85(.076 − .0683)2+ .10(−.014 − .0683)2].5 σPortfolio= .0280, or 2.80%

New Education needs to raise $8.79 million to finance its expansion and has decided to sell new shares of equity via a general cash offering. The offer price is $31.40 per share, the underwriting spread is 7.32 percent, and the associated administrative expenses and fees are $517,600. How many shares need to be sold?

319,832 Explanation: Total value of issue = ($8,790,000 + 517,600)/(1 − .0732) Total value of issue = $10,042,727.67 Shares to be sold = $10,042,727.67/$31.40 Shares to be sold = 319,832

Kurt currently owns 4.2 percent of NT Co. The company has a total of 685,000 shares outstanding with a current market price of $19.20 a share. At present, the firm is offering an additional 15,000 shares at a price of $18 a share. Kurt decides not to participate in this offering. What will his ownership position be after the offering is completed?

4.11 percent Explanation: Number of shares owned =.042(685,000) Number of shares owned = 28,770 New ownership position = 28,770/(685,000 + 15,000) New ownership position = .0411, or 4.11%

It is common for venture capitalists to receive at least ___ percent of a start-up company's equity in exchange for the venture capital.

40

The common stock of Manchester & Moore is expected to earn 14 percent in a recession, 7 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 15 percent while the probability of a recession is 5 percent. What is the expected rate of return on this stock?

5.7 percent Explanation: E(r) = .05(.14) + .80(.07) + .15(−.04) E(r) = .057, or 5.7%

A stock had annual returns of 5.1 percent, 12.2 percent, −3.8 percent, and 9.4 percent for the past four years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent.

5.73, 5.55 Explanation: Arithmetic average = (.051 + .122 − .038 + .094)/4 Arithmetic average = .0573, or 5.73% Geometric return = [1.051 (1.122) (.962) (1.094)].25 − 1 Geometric return = .0555, or 5.55%

Miller Fruit wants to expand and needs $1.6 million to do so. Currently, the firm has 465,000 shares of stock outstanding at a market price per share of $32.50. The firm decided on a rights offering with one right granted for each share of outstanding stock. The subscription price is $28 a share. How many rights are needed to purchase one new share of stock in this offering?

8.14 Explanation: Number of new shares = $1,600,000/$28 Number of new shares = 57,143 Rights needed for each new share = 465,000/57,143 Rights needed for each new share = 8.14

Which one of the following events would be included in the expected return on Sussex stock? A. The chief financial officer of Sussex unexpectedly resigned. B. The labor union representing Sussex's employees unexpectedly called a strike. C. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated. D. The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. E. The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending.

C. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated

Which one of the following earned the highest risk premium over the period 1926-2016? A. Long-term corporate bonds B. U.S. Treasury bills C. Small-company stocks D. Large-company stocks E. Long-term government bonds

C. small company stocks

Which one of the following is most indicative of a totally efficient stock market? A. Extraordinary returns earned on a routine basis B. Positive net present values on stock investments over the long-term C. Zero net present values for all stock investments D. Arbitrage opportunities which develop on a routine basis E. Realizing negative returns on a routine basis

C. zero net present values on investments over the long term

Which one of the following had the least volatile annual returns over the period of 1926-2016? A. large company stocks B. inflation C. long term corporate bills D. U.S. treasury bills E. intermediate term government bonds

D. U.S. treasury bills

Which one of the following is represented by the slope of the security market line? A. Reward-to-risk ratio B. Market standard deviation C. Beta coefficient D. Risk-free interest rate E. Market risk premium

E. market risk premium

Which one of the following statements related to unexpected returns is correct? A. All announcements by a firm affect that firm's unexpected returns. B. Unexpected returns over time have a negative effect on the total return of a firm. C. Unexpected returns are relatively predictable in the short-term. D. Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term. E. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.

E. unexpected returns can be either positive or negative in the short term but tend to be zero over the long term

Evidence seems to support the view that studying public information to identify mispriced stocks is:

ineffective

If a stock portfolio is well diversified, then the portfolio variance:

may be less than the variance of the least risky stock in the portfolio

Equity financing of new, non-public companies is broadly referred to as:

private equity

All of the following are supporting arguments in favor of IPO underpricing except which one? A. Helps prevent the "winner's curse" B. Rewards institutional investors who share their market value opinions C. Reduces potential lawsuits against underwriters D. Diminishes underwriting risk E. Provides better returns to issuing firms

provides better returns to issuing firms

The excess return is computed as the:

return on a risky security minus the risk-free rate

The expected risk premium on a stock is equal to the expected return on the stock minus the:

risk free rate

Inside information has the least value when financial markets are:

strong form efficient

The market risk premium is computed by:

subtracting the risk-free rate of return from the market rate of return

Business Aid is funded by a group of wealthy investors for the sole purpose of providing funding for individuals and small firms that are trying to convert their new ideas into viable products. What is this type of funding called?

venture capital