HM 2 Investment Managment

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Feb 20, 2024

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Assignment 2 Problem Sets- Chapter 2 BKM Sofia Pazmino Instructor Emmanuel D. Hatzakis

1. In what ways is preferred stock like long-term debt? In what ways is it like equity? Preferred stock has features like both equity and debt. It is like an infinite maturity bond. Also, we know that preferred stock doesn't precipitate corporate bankruptcy. Preferred shares are shares in which investors have a greater right to their dividends than common stockholders. Preferred stock is known as long-term debt that promises a fixed payment each year. For this reason, this is a perpetual debt. Also, preferred stock is known as long-term debt in which the holder is not granted voting rights of the company. Preferred stock stands for equity since both do not have any contractual obligation to pay the dividends of the preferred shares. Common equity is important but not as important as preferred stock. Bonuses are not as important as these two cases. 4. What would you expect to happen to the spread between yields on commercial paper and Treasury bills if the economy were to enter a steep recession? What we expect is that the difference between commercial papers is greater than Treasury bills. Investors take the option of commercial paper as a riskier investment option in times of recession due to fears of an environment of financial viability in the companies. Because of this, there is more demand for high yields in the form of interest rates on commercial paper where steps can be taken to reduce the perceived higher risk associated with commercial paper. Treasury bills are safer investment options since they are backed by the United States government. As a result, when investors prefer safer options, the yield on Treasury Bills tends to decline. And this causes their difference to increase. The yield of commercial paper increases compared to Treasury bills. In conclusion, the difference in the returns of commercial papers and treasury bills becomes greater. 6. Why are high-tax-bracket investors more inclined to invest in municipal bonds than low- bracket investors? Coupons paid on municipal bonds are exempt from federal and state income taxes in many states, but if you purchase a municipal bond, it depends on the state in which you reside. So, if the investor is in a higher tax bracket, they will see that he has more benefits in the form of tax exemption. High-tax investors invest more in municipal bonds because the interest earned on municipal bonds is exempt from federal and state income taxes in many states. For this reason, investors reduce their tax obligations and increase their after-tax returns. 8. Suppose investors can earn a return of 2% per 6 months on a Treasury note with 6 months remaining until maturity. What price would you expect a 6-month maturity Treasury bill to sell for? Price= Face value *(1-((interest rate*time remaining)/12)) Price = $10,000×(1−((0.02×6)/12)) = $9,900 9. 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 21% tax bracket. $4*70%=$2.80 Tax on dividend= Year-end-Dividend*Tax Bracket =$1.20*0.21= $0.25. $4-$0.25=$3.75 Percentage gain= $3.75/ $40= 9.38 or 9.4%

After tax rate of return= 9.4% 10. Turn to Figure 2.8 and look at the listing for Herbalife. a. How many shares could you buy for $5,000? Share price for Herbalife Nutrition is $57.94 Shares we can buy= Total investment value / Share price Shares we can buy= 5,000/57.94= 86.3 or 86 shares b. What would be your annual dividend income from those shares? Total dividend income= Investment amount * Dividend yield Total dividend income= $5,000*1.20% Total dividend income= $60 c. What must be Herbalife’s earnings per share? EPS= Share price/ (P/E ratio) EPS= $57.94/ 47.75 EPS= $1.21 d. What was the firm’s closing price on the day before the listing? Previous day closing price= x Today’s closing price= $57.94 Net change= -1.39 Formula of Net Change= Today’s closing price- Previous day close price -1.39= 57.94- x X= 57.94+1.39= $59.33 Or Closing Price= Last price- (net change) Closing Price= $57.94-(-1.39)= $59.33

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I pledge on my honor that I have not given or received any unauthorized assistance on this assignment/examination. I further pledge that I have not copied any material from a book, article, the Internet or any other source except where I have expressly cited the source. Signature: Sofia Pazmino Date: February 5, 2024

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Related Questions

Do #3

To increase the return on equity, a bank can (more than one answer) Question 15 options: retire stocks. sell stocks. decrease dividend. increase dividend. increase retained earnings. decrease retained earnings.

28 Which of the following is considered a debt equivalent? An investment in preferred stock Cash on hand Preferred stock Noncontrolling interest

Question 25 The following is not an example of an equity instrument: Preferred stock Stock Warrant Common Stock Bond

I need help with both questions

Question 10 Which of the following features of preference shares makes the security more like debt than an equity instrument Noncumulative Voting Participating Redeemable

______ is equity without priority for dividends or in bankruptcy. Multiple choice question. Common stock A debenture Preferred stock A convertible bond

Accounting 27

In what way is a preferred stock usually more similar to a bond than to a common stock? O a. Preferred stockholders are more risky than common stocks O b. Preferred stockholders elect the board of directors of the organization O c. Preferred bondholders participate in the growth of the company through increases in dividends and stock prices O d. Preferred stockholders are typical entitled fixed payments O e. If the company were to go into liquidation, preferred stockholders will be entitled to payments after common stockholders are paid-off

LO 1 7.4 Dividend Growth Model Under what two assumptions can we use the dividend growth model presented in the chapter to determine the value of a share of stock? Comment on the reasonableness of these assumptions. LO 1 7.5 Common versus Preferred Stock Suppose a company has a preferred stock issue ond

Section B B1 The Equity Premium Puzzle and the Stock Market Participation Puzzle. (a) Explain as best you can what is the Equity Premium Puzzle. (b) Explain as best you can what is the Stock Market Participation Puzzle. (c) Are both Puzzles connected? Why or why not?

Question 5In the absence of market imperfections and taxes, stock repurchases are same as cash dividends. How does this change in real world circumstances and what effect does a stock repurchase announcement have on stock price?

QUESTION 3 Which of the following sources decrease stockholders' equity? O retained earnings O common stock O preferred stock O treasury stock

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