Chapter 1: Question 5 (page 79)
In what circumstances are private placements more likely to be used than public offerings?
When they have to avoid the time and cost involved in preparing public offering,
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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.
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).
What are the benefits to small investors of investing via mutual funds? What are the costs?
Turn back to Figure 2.9 and look at the Apple options. Suppose you buy an August expiration call option with exercise price \(355.
a. If the stock price in August is \)367, will you exercise your call? What are the profit and rate of return on your position?
b. What if you had bought the August call with exercise price \(360?
c. What if you had bought an August put with exercise price \)355?
Where would an illiquid security in a developing country most likely trade?
a. Broker markets.
b. Electronic crossing networks.
c. Electronic limit-order markets.
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