Chapter 1: Question 2-32I (page 52)
Find the after-tax return to a corporation that buys a share of preferred stock at \(40, sells it at year-end at \)40, and receives a $4 year-end dividend. The firm is in the 30% tax bracket.
After-tax rate of return = 9.10%
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In what circumstances are private placements more likely to be used than public offerings?
You’ve borrowed \(20,000 on margin to buy shares in Disney, which is now selling at \)40 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $35 per share.
a. Will you receive a margin call?
b. How low can the price of Disney shares fall before you receive a margin call?
If the offering price of an open-end fund is $12.30 per share and the fund is sold with a front-end load of 5%, what is its net asset value?
Discuss the advantages and disadvantages of the following forms of managerial compensation in terms of mitigating agency problems, that is, potential conflicts of interest between managers and shareholders.
a. A fixed salary.
b. Stock in the firm that must be held for five years.
c. A salary linked to the firm’s profits.
What are the major components of the money market?
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