In-class Exercise

 Дата канвертавання 24.04.2016 Памер 7.85 Kb.
FIN36058 Financial System

Instructor: Aiwu Zhao

Chapter 9

In-class Exercise

1. You buy a stock for \$14 per share and sell it for \$18 after you collect a \$1.00 per share dividend.

(a) What is your pre-tax capital gain yield? What is your pre-tax dividend yield?

(b) If your ordinary income tax rate is 28% and your capital gains tax rate is 20%. What is your after-tax rate of return?
(a) 28.57%; 7.14%; (b) 28%
2. A firm wants to sell stock to the public. The underwriter charges \$0.4 million in fees and offers to buy 6 million shares from the firm at a price of \$19 per share. In addition, registration and audit fees total \$145,000, and marketing and miscellaneous fees add up to another \$65,000. The underwriter expects to earn gross proceeds per share of \$21.

1. What is the issuing firm's out of pocket dollar transaction cost to issue the stock?

2. Immediately after the stock was issued, the stock price rose to \$23. What is the issuing firm's opportunity cost?

3. What is the total issuance cost, including opportunity costs, as a percentage of the total funds available to the issuing firm?

Out of pocket cost = \$400,000 + \$145,000 + \$65,000 = \$610,000

Opportunity cost = 6 million shares * (\$23 - \$19) = \$24,000,000

Actual funds available to firm: 6 million * \$19 = \$114 million - \$610,000 = \$113,390,000

Percentage cost = (\$24,000,000 + \$610,000) / \$113,390,000 = 21.7%

Definitions

Weak form/semi-strong form/strong form market efficiency

Concepts

1.In terms of volume of trading and market value of firms traded the ________ is the largest U.S. stock market. In terms of number of firms traded the ________ is the largest in the U.S.

A) NYSE ; NYSE

B) NASDAQ ; NYSE

C) NYSE ; AMEX

D) NYSE ; NASDAQ

E) NASDAQ ; AMEX

2. Which of the following index is NOT value weighted?

B) S&P500

1. NASDAQ Composite

3. Common stocks typically have which of the following that bonds do not have:

1. Voting rights

2. Fixed cash flows

3. Set maturity date

4. Tax deductibility of cash flows to investors

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