Chapter 1: Question 2-7B (page 50)
What is meant by the LIBOR rate? The Federal funds rate?
The LIBOR Rate – Lending rate amongst banks of London
Federal funds rate - Rate of interest for financial institutions.
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Give an example of three financial intermediaries, and explain how they act as a bridge between small investors and large capital markets or corporations.
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.
Log on to finance.yahoo.com and enter the ticker symbol “RRD” in the Get Quotes box to find information about R.R. Donnelley & Sons.
a. Click on company Profile. What is Donnelly’s main line of business?
b. Now go to Key Statistics. How many shares of the company’s stock are outstanding? What is the total market value of the firm? What were its profits in the most recent fiscal year?
c. Look up Major Holders of the company’s stock. What fraction of total shares is held by insiders?
d. Now go to Analyst Opinion. What is the average price target (i.e., the predicted stock price of the Donnelly shares) of the analysts covering this firm? How does that compare to the price at which the stock is currently trading?
e. Look at the company’s Balance Sheet. What were its total assets at the end of the most recent fiscal year?
How do security dealers earn their profits?
Consider the three stocks in the following table. P t represents price at time t, and Q t represents shares outstanding at time t. Stock C splits two-for-one in the last period.
P0 | Q0 | P1 | Q1 | P2 | Q2 | |
A | 90 | 100 | 95 | 100 | 95 | 100 |
B | 50 | 200 | 45 | 200 | 45 | 200 |
C | 100 | 200 | 110 | 200 | 55 | 400 |
a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t 50 to t 51).
b. What must happen to the divisor for the price-weighted index in year 2?
c. Calculate the rate of return of the price-weighted index for the second period (t 51to t 52).
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