Solved by verified expert:Greeting all,Here are some questions that I need you to solve. Please use your own word to answer the short-answer question. I need very detail on each step. Please make it as detail as possible. I am looking forward to see your quality work!The best!
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1. Suppose a firm was expanding its operation by building a new factory and equipping it
with the latest machinery. This expansion would require the firm to issue $150,000,000
worth of new shares of stock to finance.
a. What are the financial assets and real assets in this transaction?
b. Who would the firm employ to issue the new shares? Why?
c. Is this issuance of shares a primary or secondary market transaction? How would
the firm know how many shares it would need to issue to raise the needed
funds?
d. How would a lack of efficient financial markets hinder this firms ability to expand
their operations?
2. Given the following table:
a.
b.
c.
d.
How many share of Rockwell could you purchase with $25,000?
What would be your annual dividend income from those shares?
What is the firm’s current earnings per share (EPS)?
What was the firm’s closing price yesterday?
3. Why would an investor want to buy/sell puts or calls? When would each of them have value
and when would they have no value?
a. Buy put
b. Sell put
c. Buy call
d. Sell call
4. What is the purpose of municipal bonds? How are they different from corporate bonds, i.e.
taxation and risk? Why would an investor accept a lower yield on a muni than an equally risky
corporate? If an investor (in a 34% tax bracket) could earn 3% on a municipal, how much would
she have to earn on an equivalent corporate to be equally compensated?
5. Suppose an investor initially pays $10,000 toward the purchase of $15,000 (200 shares
@ $75 per share) worth of stock and borrows the remaining $5,000 from a broker.
a. Complete the balance sheet
Assets
Value of Stock
$
Liabilities and Owners Equity
Loan from broker
$
Equity
$
b. What is the initial percentage margin?
c. If the share price falls to $60 per share, what will the percentage margin be?
d. Suppose the maintenance margin in 30%, how far could the stock price fall
before the investor would get a margin call?
e. If the interest rate on the loan is 10% and the stock price has risen to $100 one
year later, and the stock has paid a $1.50 per share dividend, what is the rate of
return on your investment?
6. How do investment companies (mutual funds) benefit investors, and particularly small
investors? What is the difference between a growth equity fund and an income equity fund?
What type investor might find each more attractive?
7. Consider the following table:
Stock
Tanger Inc
Lotus Industries
CarmineRagu
Jabsco Pools
Shares
200,000
300,000
500,000
1,000,000
Price
$30
40
50
20
a. If the fund has accrued management fees of $25,000 and there are 5 million shares
outstanding, compute the NAV of the fund.
b. If the fund sells for $11.58, what is the premium or discount as a percent of net asset
value?
8. What is the meaning of ‘load’ on a mutual fund? How do they differ?
9. Using the following table, compute the mean and standard deviation of the HPR on
stocks:
Purchase price = $100
T-bill rate = 4%
State of the
market
Boom
Normal
Recession
Probability
Ending price
.30
.40
.30
$130
105
75
Cash
Dividend
4.00
3.00
2.00
HPR
a. Mean
b. Standard deviation
c. Risk premium
10. If the nominal rate on a 1-year CD is 7.5% and the expected inflation rate is 3.5%, then
a. using the approximation formula, what is the expected real rate of interest?
b. using the exact formula, what is the expected real rate of interest?
11. How do changes in the market interest rate affect business spending and consumer spending?
12. How does the demand for real assets affect the equilibrium rate interest that exist in the
financial markets?
…
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