Question 1

Himmel Corp.wants to raise $100 million in a new stock issue.Its investment banker indicates that the sale of new stock will require 12 percent underpricing and a 7 percent spread.a.Assuming Himmel's stock price does not change from its current price of $50 per share,how many shares must the company sell and at what price to the public?
b.How much money will the investment banking syndicate earn on the sale?
c.Is the 12 percent underpricing a cash flow? Is it a cost? If so,to whom?

Accepted Answer

The answer of Himmel Corp.wants to raise $100 million in...

Question 2

Which of the following are the most likely reasons for why a stock price might not react at all on the day that new information related to the stock issuer is released?
I.Insiders knew the information prior to the announcement
II.Investors need time to digest the information prior to reacting
III.The information has no bearing on the value of the firm
IV.The information was anticipated

Accepted Answer

The information having no bearing on the value of the firm (III) and the information being anticipated (IV) are the most likely reasons for a stock price not reacting to new information. If the information is irrelevant to the company's value or if investors already expected the news, the stock price might not change.

Question 3

At the end of 2013,Crane Industries Inc.'s stock price was $30.75.A year later it was $34.88.Per share dividends over the year were $0.55,while earnings per share were $1.33.What was the percentage change in the share price in fiscal year 2014?

Accepted Answer

The percentage change in the share price is calculated as ((Final Price - Initial Price) / Initial Price) * 100. So, ((34.88 - 30.75) / 30.75) * 100 = (4.13 / 30.75) * 100 = 13.43%.

Question 4

At the end of 2013,Crane Industries Inc.'s stock price was $30.75.A year later it was $34.88.Per share dividends over the year were $0.55,while earnings per share were $1.33.What was the dividend yield in fiscal year 2014?

Accepted Answer

The dividend yield is calculated as the annual dividends per share divided by the price per share at the beginning of the year. So, for Crane Industries Inc., the dividend yield for fiscal year 2014 is ($0.55 / $30.75) * 100 = 1.79%.

Question 5

Chapter 5 presents evidence that the average annual rate of return on common stocks over many years has exceeded the return on government bonds in the United States,while returns on common stocks have also exhibited more volatility than returns on U.S.government bonds.Suppose that last year,the realized rate of return on government bonds exceeded the return on common stocks.Your colleague suggests that "last year shows us that investors are now willing to settle for lower returns on stocks than on bonds." How would you interpret this result?

Accepted Answer

The answer of Chapter 5 presents evidence that the average...

Question 6

Which of the following statements regarding junk bonds is true?

Accepted Answer

Junk bonds, also known as high-yield bonds, have a lower priority in the event of bankruptcy than secured debt, but they have a higher priority than equity instruments like preferred or common stock. This means that in the event of liquidation, junk bondholders are paid out after secured creditors but before shareholders.

Question 7

Which of the following statements are true?
i.Underwriters help private companies access public stock markets through IPOs.II.Shelf registrations and private placements are examples of seasoned security issues.III.Issue costs for debt are typically greater than issue costs for equity.IV.Bearer bonds make it easier for investors to avoid paying taxes on interest income.

Accepted Answer

i. True, underwriters play a crucial role in assisting private companies to go public via IPOs.ii. True, shelf registrations and private placements are methods used by companies for seasoned (secondary) offerings.iii. False, issue costs for equity are typically higher than for debt due to the more complex regulatory requirements and the risk premium demanded by equity investors.iv. True, bearer bonds, which do not record the owner's name and are thus owned by whoever holds them, historically made it easier for investors to evade taxes on interest income, although they are now largely obsolete in many markets due to regulatory changes.

Question 8

Which of the following variables does NOT affect the value of a stock option?

Accepted Answer

The value of a stock option is influenced by the current price of the underlying stock, the option's time to maturity, the option's strike price, and the interest rate, but not directly by predictions of the future price of the stock. Predictions may influence market behavior, but they do not directly factor into the mathematical models used for pricing options, such as the Black-Scholes model.

Question 9

What type of financial instrument is depicted in the position diagram shown below?

Accepted Answer

The position diagram shows a right to buy a security at a fixed price, which is characteristic of a call option. A forward sale and a forward purchase involve an agreement to buy/sell a security at a future date, but the fixed price is agreed upon at the time of the contract, and not based on the underlying asset's price at maturity. A put option would show a right to sell the security at a fixed price, which is not depicted in the diagram.

Question 10

You believe interest rates will soon fall.a.Would you rather own a three-year,6 percent coupon,fixed-rate bond or an equivalent-risk,three-year,floating-rate bond currently paying 6 percent interest?
b.Would your answer to (a)change if you were contemplating issuing a bond rather than owning one? If so,how?
c.Would your answer to (a)change if,as an investor,you believed interest rates would soon rise? If so,why?

Accepted Answer

The answer of You believe interest rates will soon fall.a.Would...

Question 11

What would be the carried interest (at 20%)on a private equity portfolio with an initial value of $500 million that was subsequently liquidated for $750 million?

Accepted Answer

Carried interest is calculated on the profit made. The profit here is $750 million - $500 million = $250 million. At 20%, the carried interest is 20% of $250 million, which equals $50 million.

Question 12

Carbon8 Corporation wants to raise $120 million in a seasoned equity offering,net of all fees.Carbon8 stock currently sells for $28.00 per share.The underwriters will require a fee of $1.25 per share,and indicate that the issue must be underpriced by 7.5%.In addition to the underwriter's fee,the firm will incur $785,000 in legal,administrative,and other costs.How many shares must Carbon8 sell in order to raise the desired amount of capital?

Accepted Answer

The price will be set at 7.5% below the current price,or at 0.925 × 28.00 = $25.90.The underwriters will take $1.25 per share,leaving $24.65/share for Carbon8.Carbon8 needs to earn $120,785,000 at $24.65/share,so it must sell 120.785mil/24.65 = 4.9 million shares.

Question 13

Which of the following statements related to market efficiency tends to be supported by current evidence?
i.Markets tend to respond quickly to new information.II.It is difficult for the typical investor to earn above-average returns without taking above-average risks.III.Short-run prices are difficult to predict accurately based on public information.IV.Markets are most likely strong-form efficient.

Accepted Answer

Current evidence supports the ideas that markets respond quickly to new information (I), it is difficult for the typical investor to earn above-average returns without taking above-average risks (II), and short-run prices are difficult to predict accurately based on public information (III). Strong-form efficiency, which suggests that all information (public and private) is already reflected in stock prices, is not widely supported by current evidence, making IV incorrect.

Question 14

At the end of 2013,Crane Industries Inc.'s stock price was $30.75.A year later it was $34.88.Per share dividends over the year were $0.55,while earnings per share were $1.33.What rate of return did the common stockholders earn in fiscal year 2014?

Accepted Answer

The rate of return for the stockholders can be calculated by adding the dividend received to the increase in stock price, then dividing by the initial stock price. The calculation is as follows: ((34.88 - 30.75) + 0.55) / 30.75 = 4.68 / 30.75 = 0.1522 or 15.22%.

Question 15

Individuals who continually monitor the financial markets seeking mispriced securities:

Accepted Answer

The constant monitoring and identification of mispriced securities by investors contributes to making the markets more efficient as prices adjust to reflect all available information. While some investors may earn excess profits in the short term, this is unlikely to persist over the long term as other investors will also identify and act on mispricings, bringing prices back in line with their true value. It is also unlikely that investors can rely solely on historical price information for successful investing as markets are constantly evolving and new information arises.

Question 16

If the stock market in the United States is efficient,how do you explain the fact that some people make very high returns? Would it be more difficult to reconcile very high returns with efficient markets if the same people made extraordinary returns year after year?

Accepted Answer

The answer of If the stock market in the United...

Question 17

Which of the following statements regarding preferred stock is true?

Accepted Answer

Option A is incorrect because preferred stockholders generally do not have voting rights, or if they do, they have limited voting rights. Option B is incorrect because preferred stock dividends are not tax-deductible expenses. Option C is incorrect because not all public corporations issue preferred stock for financing purposes.

Quiz 5: Financial Instruments and Markets