WHAT CASH FLOWS ARE RELEVANT TO THE VALUE OF STOCK?

04 Jun WHAT CASH FLOWS ARE RELEVANT TO THE VALUE OF STOCK?

Question
What
cash flows are relevant to the value of stock?

Why
the Fed was initially established?

Suppose
a firm’s stock has a beta of 1.2. What will probably happen to the value of the
stock if the market decreases by 20 percent?

Describe the likely consequences for
GDP growth when the FOMC directs the trading desk at the New York Fed to sell
Treasury securities.

Explain
how STRIPs can be used to immunize portfolios against interest rate risk.

Why must the balance of payments
always balance?

Why might consumer groups support
government policies that maintain a “strong” U.S. dollar?

What
are the four types of secondary markets?

What are the tax advantages of
qualified private pension plans?

Why are life insurance and life
annuities often described as opposites?

What are the largest asset
categories on a life insurance company balance sheet?

If
you had a 6 percent, $100,000, 15-year mortgage and you paid it as scheduled,
how much interest would you pay in the first month of the sixth year on that
mortgage? How much principal would you pay?

MULTIPLE-CHOICE
QUESTIONS

Which of the following
is not an
example of capital market securities?

a.
common stocks

b.
convertible bonds

c.
commercial paper

d.
mortgages

In a board of director’s election
for five directors and straight voting, a majority group of shareholders will
elect

e.
four directors.

f.
five directors.

g.
four or five depending on how the
cumulative voters vote.

h.
the same proportional share of directors
as their ownership share.

Security exchanges provide a
valuable function in that they

i.
create interest in stocks.

j.
increase the marketability of
securities.

k.
provide a legal way to gamble.

l.
supply money to deficit spending units.

m.
both a
and d

Which of the following is not
true about American Depository Receipts (ADRs)?

n.
ADRs are claims issued by U.S. financial
intermediaries (FIs) against shares in foreign companies, with the shares held
in custody by the FIs for investors.

o.
ADRs are issued in the U.S. and are
denominated in U.S. dollars. All cash flows to the investor are in dollars.

p.
An ADR enhances a company’s visibility,
status and profile in the U.S. and internationally among investors.

q.
An ADR decreases the foreign firm’s U.S.
liquidity (and potentially total global issuer liquidity).

The Wall Street Journal
publishes T-bill price (bid/ask) based on the ___________ rate; with the
__________ rate provided as the quoted (ask) yield on the T-bill.

a.
bond equivalent; bank discount

b.
effective annual; bank discount

c.
bank discount; bond equivalent

d.
bank equivalent; bank discount

Federal Small investors are likely to
invest in the money market through ____.

a.
directly; commercial paper

b.
locally; their credit union

c.
indirectly; negotiable CDs

d.
indirectly; money market mutual funds

What is the bank discount rate on a
$100,000 face value T-bill priced at $97,500, maturing in 181 days?

a.
2.50%

b.
4.84%

c.
4.97%

d.
5.10%

e.
5.17%

TRUE-FALSE
QUESTIONS

For
large corporations, commercial paper is more expensive but is a more assured
alternative to bank borrowing.

Individual
investors most often have only indirect access to the money market through
commercial banks.

Federal
Reserve open market operations, reserve requirement changes, and discount rate
policy first impact the economy in the money market.

QUANTITATIVE QUESTIONS

Winters Hi-Hook Inc., a golf club
manufacturer, is currently paying dividends of $.50 per share. These dividends are expected to grow at a 20
percent rate for the next two years and at a three percent rate thereafter
(forever!). What is the value of the
stock if the appropriate discount rate is 14 percent?

You purchase 100 shares of Adams
Trading Company stock today for $22.50 per share. At the end of one year, you collect a
dividend of $2.75 and then sell the stock at $24.50 per share. What is your total return on the stock? What is the dividend yield? What is the capital gains yield?

Farrell Motors stock has a beta of
1.3. If the market risk premium is 8.5
percent and the risk-free rate is 4 percent, what is the expected return of the
stock according to the security market line?