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. Show all of your work involved to solve problems. (Answer key on last pagesdont look yet!) Use the following information for problems 1-3. You have been asked to create a small index of North Carolina Stocks using Cree Research (CREE), Duke Energy (DUK), Bank of America (BAC ), and Goodrich (GR). Your manager asks you to prepare a price-weighted and a market-weighted index for comparison purposes.
Stock CREE DUK BAC GR Price, t=0 $30.73 $14.10 $11.41 $52.18 Price, t=1 $30.21 $14.08 $13.25 $48.25 Shares (million) 89 1287 8357 124
1. Calculate the percentage change in value from yesterday (t=0) to today (t=1) using a Price-Weighted Index. SHOW YOUR WORK.
2. Calculate the percentage change in value from yesterday (t=0) to today (t=1) using a Market-Weighted Index. SHOW YOUR WORK.
3. Suppose that after the market closes on t=1, GR does a 2-for-1 (2:1) stock split. Using the Price-Weighted Index approach, calculate the new divisor. SHOW YOUR WORK.
4. Suppose you are in the 15% tax bracket. Would you prefer to earn a 4% taxable return or a 3% tax-free yield? What is the equivalent taxable yield of the 3% tax-free yield? Answer both questions and SHOW YOUR WORK.
6. Allocation of an investment portfolio across broad asset classes is called __________________ ____________________.
7. _______________ ________________ is the conflict of interest between managers and stockholders. 8. A market in which new issues of securities are offered to the public is called ______________ _______________. 9. A __________________ _________________ is a primary offering in which shares are sold directly to a small group of institutional or wealthy investors. 10. Why does it make sense for shelf registration to be limited in time?
Price, t=0 30.73 14.1 11.41 52.18 PriceOld 27.105 MarketOld 122705.36 100
Price, t=1 30.21 14.08 13.25 48.25 PriceNew 26.4475 MarketNew 137522.9 87.92429279
Initial Price 30.73 14.1 11.41 52.18 PriceOld 27.105 MarketOld 122705.36 100
Final Price 30.21 14.08 13.25 48.25 PriceNew 26.4475 MarketNew 137522.9 87.92429279
Final Price 30.21 14.08 13.25 24.125 Change -2.43% Change 12.08%
Old New Shares (million) Shares (million) 89 89 1,287.00 1,287.00 8357 8357 124.00 248.00
Old New
1. 2. 3. 4.
-2.43% 12.08% 3.0878 A. 4% taxable equals (4% x (1-15%)) = 3.40% This is better than the 3% muni yieldtherefore accept the taxable. B. The taxable equivalent of 3% at the 15% tax bracket is (3%/(1-15%)) = 3.52% which is less than the 4% taxable yield.Accept the taxable!
5. Commercial paper 6. Asset allocation 7. Agency problem/theory/conflict 8. Primary market 9. Private placement 10. things change..elaborate on that theme.