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Investments and Portfolio Management Tutorial 3 - Questions 1.
You own 100 shares of Qantas Airlines and wish to sell them to make money for a deposit on
a new home. Assume there is absolutely no secondary market system in ordinary shares. How
would you go about selling the shares? Discuss what you would have to do to find a buyer, how long it might take and the price you might receive. 2.
Are bond market indices more difficult to construct and maintain than share market indices? Explain your answer. 3.
Discuss the rationale for expecting an efficient capital market. What factor would you look for to differentiate the market efficiency for two alternative shares? 4.
In an efficient capital market, what do you have to do to be a superior analyst? How would you test whether an analyst was superior? 5.
The initial margin requirement is 60 percent. You have $40,000 to invest in a stock selling for
$80 a share. Ignoring taxes and commissions, show in detail the impact on your rate of return
if the stock rises to $100 a share and if it declines to $40 a share assuming (a) you pay cash for the stock, and (b) you buy it using maximum leverage. 6.
Lauren has a margin account and deposits $50,000. Assuming the prevailing margin requirement is 40 percent, commissions are ignored, and The Gentry Shoe Corporation is selling at $35 per share: a.
How many shares of Gentry Shoe can Lauren purchase using the maximum allowable
margin? b.
What is Lauren’s profit (loss) if the price of Gentry’s stock i.
Rises to $45? ii.
Falls to $25? c.
If the maintenance margin is 30 percent, to what price can Gentry Shoe fall before Lauren will receive a margin call?
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Related Questions
An arrangement with a broker to borrow stocks from them and then sell it in the market, with the hope
that they earn a profit by buying the stock back again after it has fallen in price is called Select one: a.
smart money. Ob. short sales. Oc. behavioral finance. Od. random walk.
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Case Study #3: Chapter 6 Business Analysis -
A business can be valued by capitalizing its earnings stream (see example 6.15).
How might you use the same idea to value securities, especially the stock of large publicly held companies?
Is there a way to calculate a value that could be compared to the stock’s market price that would tell an investor whether it’s a good buy? (If the market price is lower than the calculated value, the stock is a bargain.)
What financial figures associated with shares of stock might be used in the calculation. Consider the per share figures and ratios discussed in chapter 3 including EPS, dividends, book value per share, etc.
Does one measure make more sense than the others?
What factors would make a stock worth more or less than your calculated value?
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6.
Bonds and stocks are two financial products. Prepare a briefing note on these two financial products that are the core offerings of a financial market. Provide a comparison of these products. What characteristics of bonds and stocks explain the valuation strategy of each of these financial products? How will you adapt the growth stages model to value stocks (i) in the very long run; and (ii) for a company with no history of dividend payments. Prepare a briefing note for your brokerage.
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What options does a firm have to spend its free cash flow (after it has satisfied all interest obligations)?
(Select the best choice below.)
A.
Use it to repurchase shares.
B.
Pay it out as dividends.
C.
Use it to make investments.
D.
All of the above.
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Reflection paper about this principle
Principle #2: Expect Volatility (unexpected changes) and Profit from itinvesting in stocks means dealing with volatility. Instead of running for the exits during times of market stress, the smart investor greets downturns as chances to find great investments. Graham illustrated this with the analogy of "Mr. Market," the imaginary business partner of each and every investor. Mr. Market offers investors a daily price quote at which he would either buy an investor out or sell his share of the business. Sometimes, he will be excited about the prospects for the business and quote a high price. Other times, he is depressed about the business's prospects and quotes a low price.
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Help me
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None
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• Choose a publicly traded company.
• Note: Be sure to choose a company that no other classmate has chosen.
• Determine its beta from a published source.
• Hint: Use Yahoo!Finance or NASDAQ to find the company's beta.
▪ Find the company's financial information by putting the company's name in the search bar.
. Calculate the company's cost of equity using the CAPM formula and the short-term risk-free rate assumptions.
▪ Use 8.5 percent as the market risk premium.
▪ Use the current 90-day yield (3-month yield) on U.S. Treasuries as the risk-free rate. Hint: Use the U.S. Department of the Treasury's
Resource Center to look up current 90-day (3-month) Treasury Yield Curve Rates.
▪ Provide your calculations in a table in your post.
▪ How Do I Insert a Table Using the Rich Content Editor? B
• Calculate the company's cost of equity using the CAPM formula and the long-term risk-free rate assumptions.
▪ Use 7.0 percent as the market risk premium
▪
Use the current 20-year yield on U.S.…
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Question 4
You are a financial investor who actively buys and sells in the securities market. Now you have a portfolio, including four shares: $7,500 of Share A, $4,800 of Share B, $5,700 of Share C, and $2,500 of Share D.
Required:
A)Compute the weights of the assets in your portfolio?
B)If your portfolio has provided you with returns of 7.7%, 10.5%, - 8.7% and 14.2% over the past four years, respectively. Calculate the geometric average return of the portfolio for this period?
C)Assume that expected return of the stock A in your portfolio is 13.2%. The risk premium on the stocks of the same industry are 6.8%, beta of this stock is 1.3. Calculate the risk-free rate of return using Capital market pricing model (CAPM). ?
D)You have another portfolio that comprises of two shares only: $500 Tesla shares and $700 Eagle shares. Below is the data of your portfolio:
Tesla
Eagle
Expected…
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1. How do you think today's low interest rate environment is impacting the time value of money? How might this change the value of an asset or liability?
2. What is the relationship between the concepts of net present value and shareholder wealth maximization?
3. Offer some reasons that the intrinsic value that you might calculate with the methodologies learned might yield a price different than what the stock trades at in the stock market. You can reference any method of valuation models in offering thoughts on why there might be differences between intrinsic and market values.
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answer the questions as soon as possible
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3. Forecasting stock value
Understanding the returns from investing
When buying stock, you can expect to earn money through future current income (from ) and future capital appreciation (from ). Together, your total earnings from a given investment can be expressed in terms of the approximate yield. This value makes it easier for you to compare investment options.
Understanding the Approximate Yield Equation
The formula for the approximate yield of an investment can look intimidating, but it’s really just a function of three things: (1) average current income, (2) average capital gains, and (3) the average value of the investment. Based on the information in the table, compute each of these values for the two stocks over a 3-year period and enter the values into the bottom half of the table.
Stock 1
Stock 2
Expected average annual dividends (2012–2014)
$0.95
$2.65
Current stock price
$50
$119
Expected future stock price (2014)
$62
$149…
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Using the free cash flow valuation model to price an IPO Personal Finance Problem Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for
$7.41 per share. Although you are very much interested in owning the company, you are concerned about whether it is fairly priced. To determine the value of the shares, you have decided
to apply the free cash flow valuation model to the firm's financial data that you've accumulated from a variety of data sources. The key values you have compiled are summarized in the
following table, E
a. Use the free cash flow valuation model to estimate CoolTech's common stock value per share.
b. Judging by your finding in part a and the stock's offering price, should you buy the stock?
c. On further analysis, you find that the growth rate in FCF beyond year 4 will be 4% rather than 3%. What effect would this finding have on your responses in parts a and b?
a. The value of CoolTech's entire company is $. (Round to the…
arrow_forward
Using the free cash flow valuation model to price an IPO Personal Finance Problem Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered
for $4.61 per share. Although you are very much interested in owning the company, you are concerned about whether it is fairly priced. To determine the value of the shares, you have
decided to apply the free cash flow valuation model to the firm's financial data that you've accumulated from a variety of data sources. The key values you have compiled are
summarized in the following table,
a. Use the free cash flow valuation model to estimate CoolTech's common stock value per share.
b. Judging by your finding in part a and the stock's offering price, should you buy the stock?
c. On further analysis, you find that the growth rate in FCF beyond year 4 will be 3% rather than 2%. What effect would this finding have on your responses in parts a and b?
a. The value of CoolTech's entire company is $
Data table
(Click on…
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Investing in mutual funds allows an investor to achieve
O A. Diversification
B. Professional portfolio management
C. Guaranteed reservations at your favorite restaurant
D. Returns equal to the S&P 500
O E. Both A & B
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1. Suppose many investors are still interested in acquiring the shares of Company ABC after the initial public offering, what kind of Financial market should they go to from whom would they purchase this shares?
2. What would happen if there are no Financial market in the Financial system?
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Answer quickly
After making an investment, an investor learns that Intel stock is now undervalued. This is an illustration of
a.
Market Interruption
b.
Portfolio Management
c.
Security Analysis
d.
Asset Allocation
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Match the words with the term.
Question 14 options:
12345
venture capital
12345
quality of security to satisfy investors
12345
long term debt financing
12345
uncertainty
12345
share versus debt financing
1.
business risk
2.
instrument risk
3.
risk capital
4.
bond
5.
financial risk
arrow_forward
SEE MORE QUESTIONS
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Related Questions
- An arrangement with a broker to borrow stocks from them and then sell it in the market, with the hope that they earn a profit by buying the stock back again after it has fallen in price is called Select one: a. smart money. Ob. short sales. Oc. behavioral finance. Od. random walk.arrow_forwardCase Study #3: Chapter 6 Business Analysis - A business can be valued by capitalizing its earnings stream (see example 6.15). How might you use the same idea to value securities, especially the stock of large publicly held companies? Is there a way to calculate a value that could be compared to the stock’s market price that would tell an investor whether it’s a good buy? (If the market price is lower than the calculated value, the stock is a bargain.) What financial figures associated with shares of stock might be used in the calculation. Consider the per share figures and ratios discussed in chapter 3 including EPS, dividends, book value per share, etc. Does one measure make more sense than the others? What factors would make a stock worth more or less than your calculated value?arrow_forward6. Bonds and stocks are two financial products. Prepare a briefing note on these two financial products that are the core offerings of a financial market. Provide a comparison of these products. What characteristics of bonds and stocks explain the valuation strategy of each of these financial products? How will you adapt the growth stages model to value stocks (i) in the very long run; and (ii) for a company with no history of dividend payments. Prepare a briefing note for your brokerage.arrow_forward
- What options does a firm have to spend its free cash flow (after it has satisfied all interest obligations)? (Select the best choice below.) A. Use it to repurchase shares. B. Pay it out as dividends. C. Use it to make investments. D. All of the above.arrow_forwardReflection paper about this principle Principle #2: Expect Volatility (unexpected changes) and Profit from itinvesting in stocks means dealing with volatility. Instead of running for the exits during times of market stress, the smart investor greets downturns as chances to find great investments. Graham illustrated this with the analogy of "Mr. Market," the imaginary business partner of each and every investor. Mr. Market offers investors a daily price quote at which he would either buy an investor out or sell his share of the business. Sometimes, he will be excited about the prospects for the business and quote a high price. Other times, he is depressed about the business's prospects and quotes a low price.arrow_forwardHelp mearrow_forward
- Nonearrow_forward• Choose a publicly traded company. • Note: Be sure to choose a company that no other classmate has chosen. • Determine its beta from a published source. • Hint: Use Yahoo!Finance or NASDAQ to find the company's beta. ▪ Find the company's financial information by putting the company's name in the search bar. . Calculate the company's cost of equity using the CAPM formula and the short-term risk-free rate assumptions. ▪ Use 8.5 percent as the market risk premium. ▪ Use the current 90-day yield (3-month yield) on U.S. Treasuries as the risk-free rate. Hint: Use the U.S. Department of the Treasury's Resource Center to look up current 90-day (3-month) Treasury Yield Curve Rates. ▪ Provide your calculations in a table in your post. ▪ How Do I Insert a Table Using the Rich Content Editor? B • Calculate the company's cost of equity using the CAPM formula and the long-term risk-free rate assumptions. ▪ Use 7.0 percent as the market risk premium ▪ Use the current 20-year yield on U.S.…arrow_forwardQuestion 4 You are a financial investor who actively buys and sells in the securities market. Now you have a portfolio, including four shares: $7,500 of Share A, $4,800 of Share B, $5,700 of Share C, and $2,500 of Share D. Required: A)Compute the weights of the assets in your portfolio? B)If your portfolio has provided you with returns of 7.7%, 10.5%, - 8.7% and 14.2% over the past four years, respectively. Calculate the geometric average return of the portfolio for this period? C)Assume that expected return of the stock A in your portfolio is 13.2%. The risk premium on the stocks of the same industry are 6.8%, beta of this stock is 1.3. Calculate the risk-free rate of return using Capital market pricing model (CAPM). ? D)You have another portfolio that comprises of two shares only: $500 Tesla shares and $700 Eagle shares. Below is the data of your portfolio: Tesla Eagle Expected…arrow_forward
- 1. How do you think today's low interest rate environment is impacting the time value of money? How might this change the value of an asset or liability? 2. What is the relationship between the concepts of net present value and shareholder wealth maximization? 3. Offer some reasons that the intrinsic value that you might calculate with the methodologies learned might yield a price different than what the stock trades at in the stock market. You can reference any method of valuation models in offering thoughts on why there might be differences between intrinsic and market values.arrow_forwardanswer the questions as soon as possiblearrow_forward3. Forecasting stock value Understanding the returns from investing When buying stock, you can expect to earn money through future current income (from ) and future capital appreciation (from ). Together, your total earnings from a given investment can be expressed in terms of the approximate yield. This value makes it easier for you to compare investment options. Understanding the Approximate Yield Equation The formula for the approximate yield of an investment can look intimidating, but it’s really just a function of three things: (1) average current income, (2) average capital gains, and (3) the average value of the investment. Based on the information in the table, compute each of these values for the two stocks over a 3-year period and enter the values into the bottom half of the table. Stock 1 Stock 2 Expected average annual dividends (2012–2014) $0.95 $2.65 Current stock price $50 $119 Expected future stock price (2014) $62 $149…arrow_forward
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Recommended textbooks for you
- Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning

Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning