Investment Analysis Exam 1

Certificate of Deposit

A bank time deposit

Prospectus

A description of the firm and the security it is issuing

Net Asset Value (NAV)

Assets minus liabilities expressed on a per-share basis

Real Assets

Assets used to produce goods and services

Risk-return trade-off

Assets with higher expected returns entail greater risk

Active management

Attempting to identify mispriced securities or to forecast broad market trends

If the french home currency were to greatly appreciate in value compared to the English currency, what is the likely impact on the competitive position of the East Winery? (LO 12-1) a.) Make the firm less competitive in the English market. b.) No impact because the major market for East Winery is England, not France c.) Make the firm more competitive in the English market.

a. Foreign exchange rates can significantly affect the competitiveness and profitability for a given industry. For industries that derive a significant proportion of sales via exports, an appreciating currency is usually bad news because it makes the industry less competitive overseas. Here, the appreciating French currency makes French imports more expensive in England.

27. What options position is associated with: (LO 2-3) a. The right to buy an asset at a specified price? b. The right to sell an asset at a specified price? c. The obligation to buy an asset at a specified price? d. The obligation to sell an asset at a specified price?

a. Long call b. Long put c. Short put d. Short call

Income Statement

A financial statement showing a firm's revenues and expenses during a specified period

Two-Stage DDM

Dividend discount model in which dividend growth is assumed to level off only at some future date

How do you find net asset value given the shares and prices of multiple stocks? The fund has not borrowed any funds, but its accrued management fee with the portfolio manager currently totals $30000. There are 4 million shares outstanding. Q13 LO 4-3

Given that net asset value equals assets minus liabilities expressed on a per-share basis, we first add up the value of the shares to get the market value of the portfolio (add shares * price = 42,000,000), then use the NAV equation: Net asset value = (Market value of assets - Market value of liabilities)/Shares outstanding = 42,000,000-30,000/4,000,000=$10.49

Common Stocks

Ownership shares in a publicly held corporation. Shareholders have voting rights and may receive dividends

Fixed-Income (debt) securities

Pay a specified cash flow over a specific period

Plowback Ratio or Earnings Retention Ratio

The proportion of the firm's earnings that is reinvested in the business (and not paid out as dividends)

Price-weighted average

(DJIA) An average computed by adding the prices of the stocks and dividing by a divisor

Equally Weighted Index

(NASDAQ) An index computed from a simple average of returns

Market Value-Weighted Index

(S&P 500, better for stock performance than Dow Jones) Index return equals the weighted average of the returns of each component security, with weights proportional to outstanding market value

11.) If the nominal interest rate is 5% and the inflation rate is 3%, what is the real interest rate? (LO 12-1)

1+ Real Interest Rate = 1+ Nominal Interest Rate/ 1+ Inflation Rate Given nominal interest rate, R, is 5% and inflation rate, i, is 3%, we can solve for the real interest rate, r: 1 + r = 1.05/ 1.03 = 1.0194→ r = 1.94%

What are the differences b/t equity and fixed-income securities? LO 1-5

1. Equity is a lower-priority claim and represents an ownership share in a corporation, whereas fixed-income (debt) security is a higher-priority claim but does not have an ownership interest. Fixed-income (debt) security typically pays a specified cash flow at pre-contracted time intervals until the last payment on the maturity date. Equity has an indefinite life.

What is the difference b/t a primary asset and a derivative asset? LO 1-1

2. The primary asset has a claim on the real assets of a firm, whereas a derivative asset provides a payoff that depends on the prices of a primary asset but does not include the claim on the real assets.

What is the difference b/t asset allocation and security selection? LO 1-4

3. Asset allocation is the allocation of an investment portfolio across broad asset classes. Security selection is the choice of specific securities within each asset class.

What are agency problems? What are some approaches to solving them? LO 1-3

4. Agency problems are conflicts of interest between managers and stockholders. They can be addressed through corporate governance mechanisms, such as the design of executive compensation, oversight by the Board, and monitoring from the institutional investors.

What are the differences b/t real and financial assets? LO 1-2

5. Real assets have productive capacity; they are assets used to produce goods and services. Financial assets are claims on real assets or the income generated by them.

How does investment banking differ from commercial banking? LO 1-5

6. Investment bankers are firms specializing in the sale of new securities to the public, typically by underwriting the issue. Commercial banks accept deposits and lend the money to other borrowers. After the Glass-Steagall Act was repealed in 1999, some commercial banks started transforming to "universal banks" which provide the services of both commercial banks and investment banks. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, Glass-Steagall was partially restored via the Volker Rule.

For each transaction, identify the real and/or financial assets that trade hands. Are any financial assets created or destroyed in the transaction? LO 1-2 a. Toyota takes out a bank loan to finance the construction of a new factory. b. Toyota pays off its loan. c. Toyota uses $10 million of cash on hand to purchase additional inventory of spare auto parts

7. Financial And Real Assets a. Toyota creates a real asset—the factory. The loan is a financial asset that is created in the transaction. b. When the loan is repaid, the financial asset is destroyed but the real asset continues to exist. c. The cash is a financial asset that is traded in exchange for a real asset, inventory.

15.) If you believe the U.S. dollar is about to depreciate more dramatically then do other investors, what will be your stance of investments in U.S. auto producers? (LO 12-1)

A depreciating dollar makes imported cars more expensive and American cars cheaper to foreign consumers. This should benefit the U.S. auto industry.

Constant Growth DDM

A form of the dividend discount model that assumes dividends will grow at a constant rate

Dividend Discount Model (DDM)

A formula for the intrinsic value of a firm equal to the present value of all expected future dividends

Open-end fund

A fund that issues or redeems its shares at net asset value

Primary Market

A market in which new issues of securities are offered to the public

Define each of the following in the context of a business cycle. (LO 12-2) a.) Peak. b.) Contraction. c.) trough. d.) Expansion

A peak is the transition from the end of an expansion to the start of a contraction. A trough occurs at the bottom of a recession just as the economy enters a recovery. Contraction is the period from peak to trough characterized by falling real GDP. Expansion is the period from trough to peak characterized by rising real GDP.

Hedge Fund

A private investment pool, open to wealth or institutional investors, that is largely exempt from SEC regulation and can pursue more speculative policies than mutual funds

Derivative Asset

A security with a payoff that depends on the prices of other securities

High-Frequency Trading

A subset of algorithmic trading that relies on computer programs to make very rapid trading decisions

What are the differences between bottom-up and top-down approaches to security valuation? What are the advantages of a top-down approach? (LO 12-1).

A top-down approach to security valuation begins with an analysis of the global and domestic economy. Analysts who follow a top-down approach then narrow their attention to an industry or sector likely to perform well, given the expected performance of the broader economy. Finally, the analysis focuses on specific companies within an industry or sector that has been identified as likely to perform well. A bottom-up approach typically emphasizes fundamental analysis of individual company stocks and is largely based on the belief that undervalued stocks will perform well regardless of the prospects for the industry or the broader economy. The major advantage of the top-down approach is that it provides a structured approach to incorporating the impact of economic and financial variables, at every level, into analysis of a company's stock. One would expect, for example, that prospects for a particular industry are highly dependent on broader economic variables. Similarly, the performance of an individual company's stock is likely to be greatly affected by the prospects for the industry in which the company operates.

Specialist

A trader who makes a market in the shares of one or more firms and who maintains a "fair and orderly market" by dealing personally in the market

14. Suppose that short term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Which gives you the higher after-tax yield if your combined tax bracket is: (LO 2-1) a. 0 b. 10% c. 20% d. 30%

After-tax yield = Rate on the taxable bond x (1 － Tax rate) a. The taxable bond. With a zero tax bracket, the after-tax yield for the taxable bond is the same as the before-tax yield (5%), which is greater than the 4% yield on the municipal bond. b. The taxable bond. The after-tax yield for the taxable bond is: 0.05 x (1 - 0.10) = 0.045 or 4.50%. c. Neither. The after-tax yield for the taxable bond is: 0.05 x (1 - 0.20) = 0.4 or 4%. The after-tax yield of taxable bond is the same as that of the municipal bond. d. The municipal bond. The after-tax yield for the taxable bond is: 0.05 x (1 - 0.30) = 0.035 or 3.5%. The municipal bond offers the higher after-tax yield for investors in tax brackets above 20%.

Asset Allocation

Allocation of an investment portfolio across broad asset classes

1. What is the difference between an IPO and an SEO (Seasoned equity offering)? LO 3-1

An IPO is the first time a formerly privately-owned company sells stock to the general public. A seasoned equity offering (or seasoned issuance) is the issuance of stock by a company that has already undergone an IPO.

Over-the-counter (OTC) market

An informal network of brokers and dealers who negotiate sales of securities

Limit buy (sell) order

An order specifying a price at which an investor is willing to buy or sell a security

What are the differences between a limit order and a market order? LO 3-3

An order that specifies price at which an investor is willing to buy or sell a security is a limit order, while a market order directs the broker to buy or sell at whatever price is available in the market.

Bankers' Acceptance

An order to a bank by a customer to pay a sum of money at a future date

Equity

An ownership share in a corporation

Security Analysis

Analysis of the value of securities

Passive management

Buying and holding a diversified portfolio without attempting to identify mispriced securities

Security Selection

Choice of a specific securities within each asset class

Financial Assets

Claims on real assets or the income generated by them

Types of financial intermediaries?

Commercial Banks. They act as intermediary between savers and users (investment) of funds. Savings and Credit Associations. ... Credit Unions. ... Pension Funds. ... Life Insurance Companies. ... Brokers. ... Investment Bankers.

1. What are the key differences b/t common stock, preferred stock, and corporate bonds? LO 2-1

Common stock is an ownership share in a publicly held corporation. Common shareholders have voting rights and may receive dividends. Preferred stock represents nonvoting shares in a corporation, usually paying a fixed stream of dividends. While corporate bonds are long-term debt issued by corporations, the bonds typically pay semi-annual coupons and return the face value of the bond at maturity.

What is typically true of corporate dividend payout rates in the early stages of an industry life cycle? Why does this make sense? (LO 12-4)

Companies tend to pay very low, if any, dividends early in their business life cycle since these firms need to reinvest as much capital as possible in order to grow.

Electronic Communication Networks (ECN)s

Computer networks that allow direct trading without the need for market makers

Agency Problems

Conflicts of Interest between managers and stockholders

Treasury notes or bonds

Debt obligations of the federal government with original maturities of one year or more

Margin

Describes securities purchased with money borrowed in part form a broker. The margin is the net worth of the investor's account

30.) Which of Smith's points effectively support the conclusion that customers have strong bargaining power over the industry? (LO 12-4)

Determinants of buyer power include buyer concentration, buyer volume, buyer information, available substitutes, switching costs, brand identity, and product differences. Point 1 addresses available substitutes, Point 2 addresses buyer information, and Point 4 addresses buyer volume and buyer concentration. Point 3, which addresses the number of competitors in the industry and Point 5, new entrants, may be factual statements but do not support the conclusion that consumers have strong bargaining power.

Eurodollars

Dollar denominated deposits at foreign banks or foreign branches of American banks

Dark Pools

Electronic trading networks where participants can anonymously buy or sell large blocks of securities

Why would it be challenging to properly compare the performance of an equity fund to a fixed-income mutual fund? LO 4-4

Equity funds and fixed-income funds contain different types of securities. Therefore, there are numerous differences that make comparison difficult. Equity funds invest primarily in the common stock of publicly traded firms. Fixed-income funds invest in corporate bonds, Treasury bonds, mortgage-backed securities, or municipal (tax-free) bonds. The risks associated with stocks are primarily related to economic conditions and the success of the business operations. The risks associated with fixed-income securities are primarily interest rate risk and credit risk.

13. A municipal bond carries a coupon rate of 4.25% and is trading at par. What would be the equivalent taxable yield of this bond to a taxpayer in a 35% combined tax bracket? LO 2-1

Equivalent taxable yield = Coupon Rate on municipal bond/(1-Tax Rate) = (r^m)/(1-t) = 0.0425/.65 = .0654 or 6.54%

What are the advantages and disadvantages of exchange-traded funds versus mutual funds? LO 4-2

Exchange-traded funds can be traded during the day, just as the stocks they represent. They are most tax effective, in that they do not have as many distributions. They have much lower transaction costs. They also do not require load charges, management fees, and minimum investment amounts. The disadvantage is that ETFs must be purchased from brokers for a fee. Moreover, investors may incur a bid-ask spread when purchasing an ETF.

Investment Companies

Firms managing funds for investors. An investment company may manage several mutual funds

Investment Bankers

Firms specializing in the sale of new securities to the public typically by underwriting the issue

Initial Public Offering (IPO)

First public sale of stock by a formerly private company

Federal Funds

Funds in the accounts of commercial banks at the Federal Reserve Bank

Money Markets

Include short term, highly liquid, and relatively low risk debt instruments

Financial Intermediaries

Institutions that "connect" borrowers and lenders by accepting funds from lenders and loaning funds to borrowers

Private equity

Investments in companies that are not traded on a stock exchange

In what circumstances is it most important to use multistage dividend discount model rather than a free cash flow model to value a firm?

It is most important to use multi-stage dividend discount models when valuing companies with temporarily high growth rates. These companies tend to be companies in the early phases of their life cycles, when they have numerous opportunities for reinvestment, resulting in relatively rapid growth and relatively low dividends (or, in many cases, no dividends at all). As these firms mature, attractive investment opportunities are less numerous so that growth rates slow.

The price of oil fell dramatically in 2014 and 2015. What sort of macroeconomic shock would this be considered? (LO 12-1)

It would be considered a supply shock which affects production capacity and costs.

Blocks

Large transactions in which at least 10,000 shares of stock are bought or sold

LIBOR

Lending rate among banks in the London market

10. What is meant by limited liability? LO 2-1

Limited liability means that the most shareholders can lose in event of the failure of the corporation is their original investment.

Corporate Bonds

Long-term debt issued by private corporations typically paying semiannual coupons and returning the face value of the bond at maturity.

How do margin trades magnify both the upside potential and downside risk of an investment portfolio? LO 3-4

Margin is a type of leverage that allows investors to post only a portion of the value of the security they purchase. As such, when the price of the security rises or falls, the gain or loss represents a much higher percentage, relative to the actual money invested.

Dealer Markets

Markets in which traders specializing in particular assets buy and sell for their own accounts

Leverage Ratio

Measure of debt to total capitalization of a firm

Venture Capital (VC)

Money invested to finance a new firm

12. Why are money market securities sometimes referred to as "cash equivalents"? LO 2-1

Money market securities are referred to as "cash equivalents" because of their great liquidity. The prices of money market securities are very stable, and they can be converted to cash (i.e., sold) on very short notice and with very low transaction costs.

3. What features of money market securities distinguish them from other fixed-income securities? LO 2-1

Money market securities are short-term, relatively low risk, and highly liquid. Also, their unit value almost never changes. Fixed-income (debt) security typically pays a specified cash flow at pre-contracted time intervals until the last payment on the maturity date

What are the benefits to small investors of investing via mutual funds? What are the disadvantages? LO 4-1

Mutual funds offer many benefits. Some of those benefits include: the ability to invest with small amounts of money, diversification, professional management, low transaction costs, tax benefits, and the ability to reduce administrative functions. The costs associated with investing in mutual funds are generally operating expenses, marketing, distribution charges, and loads. Loads are fees paid when investors purchase or sell the shares.

Liquidation Value

Net amount that can be realized by selling the assets of a firm and paying off the debt

Present Value of Growth Opportunities

Net present value of a firm's future investments

Preferred Stock

Nonvoting shares in a corporation, usually paying a fixed stream of dividends

Futures Contract

Obliges traders to purchase or sell an asset at an agreed upon price at a specified future date

Exchange-Traded Funds

Offshoots of mutual funds that allow investors to trade index portfolios

Open end equity mutual funds find it necessary to keep a small fraction of total investments, typically around 5% of the portfolio, in very liquid money market assets. Closed end funds do not have to maintain such a position in "cash-equivalent" securities. What difference between open end and closed end funds might account for their differing policies? LO 4-2

Open-end funds must honor redemptions and receive deposits from investors. This flow of money necessitates retaining cash. Close-end funds no longer take and receive money from investors. As such, they are free to be fully invested at all times.

Dividend Payout Ratio

Percentage of earnings paid out as a dividends

Securitization

Pooling loans into standardized securities backed by those loans, which can then be traded like any other security

How to calculate the premium or discount of a fund as a percent of NAV given the price per share? Q14 LO 4-3

Premium(or discount)= (Price - NAV)/NAV ...if negative it's a discount

Secondary Market

Previously issued securities are traded among investors

PEG Ratio

Ratio of P/E multiple to earnings growth rate

Systemic Risk

Risk of breakdown in the financial system, particularly due to spillover effects from one market into others. Tools used to help prevent this were Passed in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act

Stock Exchanges

Secondary markets where already-issued securities are bought and sold by members

Derivative Securities

Securities providing payoffs that depend on the values of other assets

Closed-end fund

Shares may not be redeemed, but instead are traded at prices that can differ from net asset value

Commercial Paper

Short term unsecured debt issued by large corporations

Treasury Bills

Short-term government securities issued at a discount from face value and returning the face amount at maturity

Repurchase agreements (repos)

Short-term sales of securities with an agreement to repurchase the securities at a higher price

Municipal Bonds

Tax-exempt bonds issued by state and local governments

15. An investor is in a 30% combined federal plus state tax bracket. If corporate bonds offer 9% yields, what yield must municipals offer for the investor to prefer them to corporate bonds? LO 2-1

The after-tax yield on the corporate bonds is: 0.09 x (1 - 0.30) = 0.063 or 6.3%. Therefore, the municipals must offer at least 6.3% yields.

NASDAQ Stock Market

The computer linked price quotation and trade execution system

6. Why are high-tax-bracket investors more inclined to invest in municipal bonds than low-bracket investors? LO 2-1

The coupons paid by municipal bonds are exempt from federal income tax and from state tax in many states. Therefore, the higher the tax bracket that the investor is in, the more valuable the tax-exempt feature to the investor.

Bid-Ask Price

The difference between the bid and asked prices

Book value

The net worth of common equity according to a firm's balance sheet

Earnings Management

The practice of using flexibility in accounting rules to manipulate the apparent profitability of the firm

Intrinsic Value

The present value of a firm's expected future net cash flows discounted by the required rate of return

Bid Price

The price at which a dealer or other trader is willing to purchase a security

Ask Price

The price at which a dealer or other trader will sell a security

What is the difference between a primary and a secondary market? LO 3-3

The primary market is the market where newly-issued securities are sold, while the secondary market is the market for trading existing securities. After firms sell their newly-issued stocks to investors in the primary market, new investors purchase stocks from existing investors in the secondary market.

How do security dealers earn their profits? LO 3-3

The primary source of income for a securities dealer is the bid-ask spread. This is the difference between the price at which the dealer is willing to purchase a security and the price at which they are willing to sell the same security.

Price-Earnings Multiple

The ratio of a stock's price to its earnings per share

Call Option

The right to buy an asset at a specified price on or before a specified expiration date

Put Option

The right to sell an asset at a specified exercise price on or before a specified expiration date

Latency

The time it takes to accept, process, and deliver a trading order

Algorithmic Trading

The use of computer programs to make rapid trading decisions

Stop Order

Trade is not to e executed unless stock hits a price limit

What is the role of an underwriter? A prospectus? LO 3-1

Underwriters (Investment Banks) purchase securities from the issuing company and resell them. A prospectus is a description of the firm and the security it is issuing; it can be viewed as a marketing tool for the underwriter.

Underwriters

Underwriters purchase securities from the issuing company and resell them to the public

16. Find the equivalent taxable yield of the municipal bond in problem 14 (yield or rm or r municipal of 4%) for tax brackets of: LO 2-1 a. 0 b. 10% c. 20% d. 30%

Using the formula of Equivalent taxable yield (r) = rm/1-t , we get: a. 4% b. 4.44% c. 5% d. 5.71%

2. Why do most professionals consider the Wilshire 5000 a better index of the performance of the broad stock market than the Dow Jones Industrial Average? LO 2-2

While the DJIA has 30 large corporations in the index, it does not represent the overall market nearly as well as the more than 5000 stocks contained in The Wilshire index. The DJIA is simply too small. The Standard & Poor's 500 Index (S&P 500 Index) is comparable to the Wilshire Index in this respect.

A market order has: LO 3-2 a. Price uncertainty but not execution uncertainty b. Both Price uncertainty and execution uncertainty c. Execution uncertainty but not price uncertainty

a

Are the following statements true or false? If false, correct them. LO 3-4 a. An investor who wishes to sell shares immediately should ask his or her broker to enter a limit order. b. The ask price is less than the bid price. c. An issue of additional shares of stock to the public by Microsoft would be called an IPO. d. An ECN is a computer link used by security dealers primarily to advertise prices at which they are willing to buy or sell shares.

a. An investor who wishes to sell shares immediately should ask his or her broker to enter a market order. b. The ask price is greater than the bid price. c. An issue of additional shares of stock to the public by Microsoft would be called an SEO (Seasoned Equity Offering).

The new fund had average daily assets of $2.2 billion in the past year. They had an expense ratio of 1.1% and its management fee was 0.7%. a. What were the total funds paid to the fund's investment managers during the year? b. What were the other administrative expenses?

a. Fees paid to investment managers were: 0.7% = $2.2 billion = $15.4 million b. (included just as FYI) Since the total expense ratio was 1.1% and the management fee was 0.7%, we conclude that 0.4% must be for other expenses. Therefore, other administrative expenses were: 0.004 × $2.2 billion = $8.8 million.

You expect a tax-free municipal bond portfolio to provide a rate of return of 4%. Management fees of the fund are 0.6%. LO 4-4 a. What fraction of portfolio income is given up to fees? b. If the management fees for an equity fund also are 0.6%, but you expect a portfolio return of 12%, what fraction of portfolio income is given up to fees? c. Why might management fees be a bigger factor in your investment decision for bond funds than for stock funds? Can your conclusion help explain why unmanaged unit investment trusts tend to focus on the fixed-income market?

a. For the bond fund, the fraction of portfolio income given up to fees is: 0.6%/4.0%= 0.150 = 15.0% b. For the equity fund, the fraction of investment earnings given up to fees is: 0.6%/12%= 0.050 = 5.0% c. Fees are a much higher fraction of expected earnings for the bond fund, and therefore may be a more important factor in selecting the bond fund. This may help to explain why unmanaged unit investment trusts are concentrated in the fixed income market. The advantages of unit investment trusts are low turnover and low trading costs and management fees. This is a more important concern to bond-market investors.

For each pair of firms, choose the one that you think would be more sensitive to the business cycle. (LO 12-3) a.) General Autos or General Pharmaceuticals b.) Friendly Airlines or Happy Cinemas

a. General Autos. Pharmaceutical purchases are less discretionary than automobile purchases. b. Friendly Airlines. Travel expenditures are more sensitive to the business cycle than movie consumption.

8. Suppose that in a wave of pessimism, housing prices fall by 10% across the entire economy. LO 1-2 a. Has the stock of real assets of the economy changed? b. Are individuals less wealthy? c. Can you reconcile your answers to a & b?

a. No. The real estate in existence has not changed, only the perception of its value has.b. Yes. The financial asset value of the claims on the real estate has changed, and thus the balance sheet of individual investors has been reduced. c. The difference between these two answers reflects the difference between real and financial asset values. Real assets still exist, yet the value of the claims on those assets or the cash flows they generate do change. Thus, there is the difference.

18. Turn to Figure 2.8 and look at the listing for General Dynamics. (LO 2-1) a. What was the firm's closing price yesterday? b. How many shares could you buy for $5000? c. What would be your annual div income from those shares? d. What must be general Dynamics' earnings per share?

a. The closing price today is $194.55, which is $0.37 above yesterday's price. Therefore, yesterday's closing price was: $194.55 － $0.37 = $194.18. b. You would buy 25 shares: $5,000/$194.55 = 25.70. c. Your annual dividend income on 25 shares would be 25 x $3.36 = $84.00. d. Earnings per share can be derived from the price-earnings (PE) ratio:Given price/Earnings = 20.03 and Price = $194.55, we know that Earnings per Share = $194.55/20.03 = $9.71

You've borrowed $20,000 on margin to buy shares in Ixnay, which is now selling at $40 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $35 per share. a) Will you receive a margin call? b) How low can the price of Ixnay shares fall before you receive a margin call?

a. You will not receive a margin call. You invest in 1,000 shares of Ixnay at $40 per share with $20,000 in equity and $20,000 from borrowing. At $35 per share, the value of the stock becomes $35,000. Therefore, the equity decreases to $15,000: Equity = Value of stock - Debt = $35,000 - $20,000 = $15,000. Percentage margin = Equity in account/Value of stock= $15,000/$35,000 = 0.4286 or 42.86%. The percentage margin still exceeds the required maintenance margin. b. Solving (1,000P－$20,000)/1,000P= 0.35 or 35%, we get P = $30.77. You will receive a margin call when the stock price falls to $30.77 or lower.

17. Turn back to figure 2.3 and look at the treasury bond maturing in Feb 2043 [Asked price = 105.48, coupon = 3.125%] (LO 2-1) a. How much would you have to pay to purchase one of these bonds? b. What is the coupon rate? c. What is the current yield (i.e., coupon income as a fraction of bond price) of the bond?

a. You would have to pay the asked price of: 105.48 = 105.48% of par = $1,054.84 b. The coupon rate is 3.125%, implying coupon payments of $31.25 annually or, more precisely, $15.625 (= 31.25/2) semiannually. c. Given the asked price and coupon rate, we can calculate current yield with the formula: Current yield = Annual coupon income/Price = 3.125/105.4844 = 0.0296 = 2.96%

You are bullish on Telecom stock. The current market price is $50 per share, and you have $5000 of your own to invest. You borrow an additional $5000 from your broker at an interest rate of 8% per year and invest $10000 in the stock. LO 3-4 a. What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? (ignore the expected dividend) b. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.

a. Your initial investment is the sum of $5,000 in equity and $5,000 from borrowing, which enables you to buy 200 shares of Telecom stock: Initial investment/Stock price=$10000/$50 = 200 shares. The shares increase in value by 10%: $10,000 * 0.10 = $1,000. You pay interest of = $5,000 * 0.08 = $400. The rate of return will be: ($1000-$400)/$5000= 0.12 = 12%. b. The value of the 200 shares is 200P. Equity is (200P - $5,000), and the required margin is 30%. Solving (200P-$5000)/200P= 0.30, we get P = $35.71. You will receive a margin call when the stock price falls below $35.71.

Which one of the following firms would be described as having below-average sensitivity to the state of the economy? (LO 12-3) a.) An asset play firm. b.) A cyclical firm. c.) A defensive firm. d.) A stalwart firm.

c. A defensive firm. Defensive firms and industries have below-average sensitivity to the state of the economy.