Instructor: Aiwu Zhao
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.
What is the issuing firm's out of pocket dollar transaction cost to issue the stock?
Immediately after the stock was issued, the stock price rose to $23. What is the issuing firm's opportunity cost?
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%
Weak form/semi-strong form/strong form market efficiency
Red herring prospectus
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?
A) NYSE Composite
Dow Jones Industrial Average
3. Common stocks typically have which of the following that bonds do not have:
Fixed cash flows
Set maturity date
Tax deductibility of cash flows to investors