Assignment
Problem 1. In late 2014, you purchased the common stock of a company that has reported significant earnings increases in nearly every quarter since your purchase. The price of the stock increased from $12 a share at the time of the purchase to a current level of $45.
Notwithstanding the success of the company, competitors are gaining much strength. Further, your analysis indicates that the stock may be over-priced based on your projection of future earnings growth. Your analysis, however, was the same one year ago and the earnings have continued to increase. Actions that you might take range from an outright sale of the stock (and the payment of capital gains tax) to doing nothing and continuing to hold the shares. You reflect on these choices as well as other actions that could be taken. Describe the various actions that you might take and their implications.
Problem 2. Which of the following securities is likely to be the most liquid according to these data? Explain.
Stock Bid Ask
R $39.43 $39.55
S 13.67 13.77
T 116.02 116.25
Problem 3. You purchased shares of Broussard Company using 50 percent margin; you invested a total of $20,000 (buying 1,000 shares at a price of $20 per share) by using $10,000 of your own funds and borrowing $10,000. Determine your percentage profit or loss under the following situations (ignore borrowing costs, dividends, and taxes). In addition, what would the percentage profit and loss be in these scenarios if margin were not used?
a. the stock price rises to $23 a share
b. the stock price rises to $30 a share
c. the stock price falls to $16 a share
d. the stock price falls to $10 a share
Problem 4. The Trio Index includes three stocks, Eins, Zwei, and Tri. Their current prices are listed below.
Stock Price at Time (t)
Eins $10
Zwei $20
Tri $40
a. Between now and the next time period, the stock prices of Eins and Zwei increase 10 percent while Tri increases 20 percent. What is the percentage change in the price-weighted Trio Index?
b. Suppose, instead, that the price of Eins increases 20 percent while Zwei and Tri rise 10 percent. What is the percentage change in the price-weighted Trio Index? Why does it differ from the answer to part a?
Problem 5. The four stocks below are part of an index. Use the information below:
a. Compute a price-weighted index by adding their prices at time t and time t + 1. What is the percentage change in the index?
b. Compute a value-weighted index by adding their market values at time t and time t + 1. What is the percentage change in the index?
c. Why is there a difference between your answers to (a) and (b)?
Stock # Of Shares Outstanding Price at Time (t) Price at Time (t + 1)
Eeny 100 10 15
Meeny 50 20 22
Miney 50 30 28
Moe 20 40 42
Problem 6. The Quad Index is comprised of four stocks: Uno, Dos, Tres, and Fore.
a. Given the data below on the number of shares outstanding and their share prices at time (t) and time (t + 1), what is the percentage change in the Quad Index if it is calculated as a price-weighted index? As a value-weighted index?
Stock # Of Shares Outstanding Price at Time (t) Price at Time (t + 1)
Uno 1000 $10 $11
Dos 500 20 21
Tres 250 40 42
Fore 100 50 60
b. Instead of the prices shown above, suppose we switch the prices for Uno and Fore. That is, Uno's stock price is $50 at time (t) and it rises to $60 by time (t + 1), and Fore's stock price rises from $10 to $11 over the same time frame. What is the percentage change in the Quad Index if it is computed as a price-weighted index? As a value-weighted index?
c. Explain similarities or differences in your answers to Parts (a) and (b).
Problem 7. A U.S. firm wants to raise $10 million of capital so it can invest in new technology. How much will it need to raise to net $10 million using the average costs of raising funds in the chapter?
Problem 8. A U.S. firm wants to raise $15 million by selling 1 million shares at a net price of $15. We know that some say that firms "leave money on the table" because of the phenomenon of underpricing.
a. Using the average amount of underpricing in U.S. IPOs, how many fewer shares could it sell to raise these funds if the firm received a net price per share equal to the value of the shares at the end of the first day's trading?
b. How many less shares could it sell if the IPO was occurring in Germany?
c. How many less shares could it sell if the IPO was occurring in Korea?
d. How many less shares could it sell if the IPO was occurring in Canada?
Problem 9. Below are the results of a Dutch auction for an IPO of Bagel's Bagels, a trendy bagel and coffee shop chain. Bagel's is offering 50 million shares.
Bidder Bid Price Number of Shares
Matthew $50.25 15 million
Kevin 49.75 20 million
Amy 49.45 20 million
Megan 49.00 10 million
a. What will be the clearing price?
b. How many shares will each bidder receive if Bagel's allocates shares on a pro rata basis to all the successful bidders?
Problem 10. Boneyard Biscuits' Dutch auction for an IPO was a great success. The firm offered 100 million shares. Bids appear below.
Bidder Bid Price Number of Shares
Manahan $25.25 25 million
Campbell 24.95 30 million
Maloney 24.75 25 million
Touma 24.40 10 million
Clark 24.40 30 million
Fry 24.25 15 million
a. What is the clearing price?
b. What options do Boneyard and its underwriters have for allocating shares? How many shares will each bidder receive under each option?