Chapter 11

1) Suppose you buy one share of stock for $50 and sell it for $100. Your profit is $50. If that happens within a year, your rate of return is an impressive 100%! If it takes six years, what would be the average annual rate of return on your investment?

Market efficiency primarily concerned with how well the financial market reflects all the available financial information in the prices of the shares of listed companies. *   True or False?

Any company in the U.S. that plans to issue stocks or bonds is required by the Securities and Exchange Commission to provide its balance sheet and income statement to the public. Why is this requirement in place? What kind of information that would be useful to potential investors can be found in these financial statements?

13. ​If Ginger Rayle was offered $4,000 five years from now in return for an investment of $1,000 currently, what annual rate of interest would she earn if she took the offer?   14. ​When you complete your MBA, you will treat yourself to a new car. The car you want to buy costs $25,000 and you have enough to put 20% down in cash. You can take out a loan for the rest of the cost of the car. Calculate your monthly car payments assuming the auto finance department states that the annual interest rate on the car loan is 8% and you pay the loan over a 3-year period.

You are planning to open an internet business selling stock market analysis, and are offering two options to consumers: A: You charge $150 per year. This grants access to all of your basic financial literacy information, as well as 12 months of access to your stock market analysis memos, which you provide monthly. B: You charge $50 for access to your basic financial literacy information, then charge $10 each for your monthly stock market analysis memos. Which one is the best offer?

A company has no preferred stock outstanding and has 15,000,000 common shares outstanding. The company’s Net income is $30,000,000 and it pays a total of $7,500,000 in common dividends. Currently the shares trade for $20 per share. For this company, what is: (Round your answer to two decimal places, if necessary)   EPS?  $  DPS? $  Dividend yield?  % Dividend payout rate?  % Retention rate?  %

Dividends paid to policy holders on participating policies are treated by the IRS as a return of premium and are not subject to income tax. Dividends to shareholders in a stock company, however, are taxable income to the recipients. Do you believe this difference in treatment is justified? Why or why not?

How would each of the following actions be expected to affect shareholder wealth?a. Southern Company adopts fuel-switching technology at its largest power plants.b. Ford Motor Company pays $2.5 billion for Jaguar.c. General Motors offers large rebates to stimulate sales of its automobiles.d. Rising interest rates cause the required returns of shareholders to increase.e. Import restrictions are placed on the French competitors of Napa wineries.f. There is a sudden drop in the expected future rate of inflation.g. A new, labor-saving machine is purchased by Wonder Bread and results in the layoff of 300 employees.

Question 4 of the picture, please. :)

Membo Inc. just paid a dividend of $4.6 per share.  Dividends are expected to grow at 6%, 5%, and 3% for the next three years respectively.  After that the dividends are expected to grow at a constant rate of 2% indefinitely.  Stockholders require a return of 9 percent to invest in Membo’s common stock.  Compute the value of Membo’s common stock today. (SHOW ALL WORK IN WORD FORMAT PLEASE)

5. Suppose Alex and Spenser each invest $5,000 in the same stock. Alex invests directly and earns 5% a year. Spenser uses a retirement fund, which charges an administrative fee equal to 0.25% on managed assets, and earns 4.75%.a) At the end of one year, how much will Alex and Spenser have?b) If Alex and Spenser leave their investments in place for 30 years, with annual compounding ofthe interest, how much more will Alex have than Spenser at the end of the 30-year period?

Consider a bond and a stock. The bond will pay out 100,000 at the end of year five. It will pay nothing at the end of years 1, 2, 3, or 4. The stock is for a corporation that makes profits off a patent. It will pay dividends for the next 25 years, 5,000 dollars at the end of each year. After that, the patent expires and the dividends go to zero.  a) Suppose the interest rate is zero. What is the present value of each of these two assets? In other words, if you had to pay now, which is worth more? [Note: This requires calculating “present values”; you can use excel and if needed] b) The Fed’s monetary policy raises the interest rate to 2.5%. Which is worth more? c) The Fed’s monetary policy raises the interest rate to 5%. Which is worth more? d) What is the intuition for the different results in a), b) and c)? e) Do the above results suggest that, by raising the interest rate, the Fed can powerfully affect the price of assets like stocks?